English | 中文
ESG investment and financing on the rise
source:goldencsr date:2021-09-30 16:50:51
From the global economic recovery and inclusive growth in the post COVID-19 period, to the achievement of the Sustainable Development Goals (SDGs) by 2030, with the introduction of the China's “30·60” decarbonization goal, sustainable development has become the mainstream of global development. In China, the ESG investment philosophy and the transformation of company management are being further developed with the participation of stakeholders such as regulators, investors, listed companies, research institutions, rating agencies, media, etc.
As a well-known player in China's booming ESG, GoldenBee’s ESG team has released the annual ESG Progress Watch Report for the third year. In this report, we hope to help readers quickly capture major changes in the development of ESG in China, and we will also focus more on how to improve ESG practices of enterprises.
ESG is well known to investors as foreign capital pours into China's capital markets. Since 2021, 21 foreign institutions have submitted applications for the qualification of foreign institutional investors.
It is expected that in 2021, the amount of foreign capital flowing into the A-share market will reach 200 billion yuan to 280 billion yuan, exceeding that of 2020. The ESG preference of foreign investors is more pronounced than that of domestic investors. It can be expected that with the opening of the Chinese market to international investors and the inclusion of Chinese stocks and bonds in global benchmarks, ESG factors will be further integrated into investment research and decision-making.
Dollar LPs, represented by sovereign funds, university endowments and pensions, have introduced clearer and stricter ESG requirements for GPs this year. Driven by the ESG concept of overseas LPs as well as domestic policies, ESG factors will be considered more in domestic LPs’ investment processes.
A growing number of institutional investors are pushing ESG's investment strategy towards mainstreaming. The market continues to show an "institutional" trend in 2020. The combined free-flow market capitalization of A-share institutional investors is close to 50%. The proportion of foreign institutional investors in A-shares continues to rise, and these long-term funds are expected to bring more demand for ESG strategies.
The number of investors signing up for the Principles of Responsible Investment (PRI) is growing rapidly around the world.
On June 3, 2021, Taikang Insurance Group officially joined the United Nations Principles of Responsible Investment (UN PRI), becoming the 4,000th signatory to PRI, reaching a new milestone.
In 2020, the number of PRI signatories witnessed the largest annual increase since its inception in 2006, particularly from emerging markets, with a 50 percent year-on-year increase. The fastest-growing asset owners are insurance, endowments/foundations and corporate pensions, with the insurance industry up 30 percent year-on-year in 2020.
PRI has the first 1,000 signatories within six years, while the recent growth of 1,000 signatories was achieved in just one year. The rapid growth can be seen as a commentary on the long-term growth trend of responsible investment.
PRI is also working hard to support emerging market signatories, with three of the four fastest growing regions of PRI in 2020-2021 being emerging markets: Latin America, Central and Eastern Europe, the CIS countries and China. As of July 2021, there are 68 Chinese mainland-based PRI signatories, including 50 asset managers, 3 asset owners and 15 service providers. The widespread practices of ESG concept in developed markets in Europe and the United States are rapidly penetrating into different markets around the world. ESG investment in emerging markets is about to flourish.
The collaborative development of ESG concept and financial products is particularly evident in debt financing instruments. ESG issues and bond themes are producing a more flexible and innovative convergence.
In the environment (E) sector, green bonds are becoming increasingly versatile and asset-rich. Emerging issues such as carbon neutrality, river conservation and biodiversity are beginning to attract the attention of issuers and investors around the world.
In terms of the nature of the issuer, the key position of non-financial enterprises is becoming more prominent, accounting for more than 80% of the 153 entities in 2020. In the social (S) sector, small micro-debt and "three issues of agriculture, the countryside and farmers" special financial debt keep growing. Meanwhile, in order to "mitigate" the impact of COVID-19 on business operations, "pandemic prevention and control debt" emerged.
At the same time, integrated thematic bonds combining multiple ESG issues are also booming.
ESG information disclosure rules are gradually complete, supporting the data analysis for the early investment in primary markets. Non-financial information such as environment and governance of pre-IPO companies is much more disclosed, so that the primary market investment institutions can accurately learn about the potential risks on environmental issues, social contributions and internal governance of the invested companies, in order to judge the long-term investment value of them.
HKEX Guidance Letter HKEX-GL86-16 updated in July 2020 pointed out that it is important for applicants to put in place mechanisms that enable them to meet the Exchange’s requirements on corporate governance (“CG”) and environmental, social and governance (“ESG”) well in advance so that they are in compliance upon listing. Additional disclosure is necessary to promote sustainable development, corporate governance and diversification.
NYSE IPO Guide requires that companies contemplating an IPO need a strategy in place for communicating with investors and other stakeholders around environmental, social and governance (ESG) matters. An ESG program should be developed before listing and fully integrated into the registration statement and prospectus. Potential disclosures and risk factors are also required in the prospectus.
GoldenBee says
As ESG investments become mature, ESG management in domestic and foreign markets is also ushering in changes driven by the establishment of rules.
This change has prompted companies to re-examine investor relations and focus on ESG capacity-building as an inevitable trend. Listed companies cannot only rely on "information disclosure" to improve ESG performance, but should combine ESG concept with ’corporate strategy and business as early as possible. On this basis, ESG performance as an important part of communication can win the trust and favor of investors.
The change has also extended to pre-IPO companies. Domestic and foreign regulators, exchanges and market feedback have imposed strong constraints on ESG disclosure of pre-IPO companies. It is suggested that the pre-IPO companies should make a good preparation, start to carry out ESG management and practice, and establish a sound ESG information disclosure management mechanism.
On the one hand, a more comprehensive display of a company's ESG capabilities and its behind-the-scenes growth attributes as well as potential investment value can attract primary market equity investors; on the other hand, ensuring ESG compliance can avoid emergencies hindering the listing process or causing legal risks, and prepare for continued ESG information disclosure to meet the requirements of regulators and exchanges.
More information on ESG Progress Watch Report comes soon.