China has witnessed a significant rise in discussion of environmental, social, and governance (ESG) investing over the past few years, driven by globalization and regulatory support. Local asset managers have started to gradually build in-house ESG capabilities and launch sustainable investment products. However, the actual level of such investments is still low, due to limited understanding of ESG issues and lack of standardized investment practices.

The foundation for sustainable investments in China was laid in 2016, when the Guidelines on Establishing the Green Financial System were issued by several government bodies. In 2018, the Insurance Asset Management Association of China and the Asset Management Association of China (AMAC) also published guidelines to help insurers and asset managers incorporate ESG principles into their businesses.

Moreover, the inclusion of China A-shares into MSCI indices for the first time in 2018 significantly enhanced ESG awareness among Chinese regulators and listed companies that intend to attract capital and build global brand awareness. Since 2006, both the Shanghai and Shenzhen Stock Exchanges also encouraged ESG information disclosure.

Local managers told Cerulli that it is hard to push ESG products to Chinese retail investors, because ESG awareness is still insufficient, and people care more about returns. Nevertheless, asset managers in China are developing ESG strategies using various product structures, including mutual funds, exchange-traded funds (ETFs), wealth management products (WMPs) and private funds. As of June 2020, there were 47 ESG mutual funds and ETFs in China. Their combined assets under management (AUM) grew to US$7.3 billion by June, up by 32.3% compared to end-2019. Besides fund management companies, banks and banks’ wealth management subsidiaries are also keen to develop ESG strategies.

Current ESG demand in China is driven by large institutional investors and high-net-worth investors (HNWIs). Ping An Insurance Group is one of the two asset owners in China which has signed the Principles for Responsible Investment (PRI) as of November 2020, while other onshore insurers have conducted socially responsible investments and issued green insurance products.

Besides insurers, China’s state-run first-pillar pension fund, the National Social Security Fund (NSSF), has expressed interest in ESG investing. In August 2020, among its fifth batch of offshore requests for proposal (RFPs) was for global responsible investing aggressive equities. Cerulli believes this development, along with the Chinese government’s efforts in ramping up its green finance and responsible investing, will lead to more institutions embracing ESG investments.

“With continued regulatory support, the gradual opening of domestic capital markets, and an increasing number of product launches by various asset management players, we see good prospects for China’s ESG integration journey in the long run,” said Ye Kangting, senior analyst with Cerulli. “However, asset managers and service providers that want to cultivate the ESG business in China need to be patient, as it takes time to raise awareness, understand asset owners’ expectations, improve ESG data quality, and examine various ESG incorporation methodologies to build trusted performance records for sustainable growth.”