Green Finance in China

On 5 September 2017, I was invited to speak at the International Green Finance Forum in Beijing and was joined by Yin Yong, Deputy Governor of PBOC; Zhang Hongli, Vice President of ICBC; Elliott Harris, Assistant Secretary General of the United Nations, among others. The forum was co-hosted by the Green Finance Committee of China, ICBC, the United Nations, and CFA Institute. Below are my remarks from that speech about the role CFA Institute plays in sustainability and on China’s growing force in green finance, where there is much to pay attention to, and much that others can learn.

Thank you to our esteemed guests and speakers today.  Ying Yong, Deputy Governor, PBOC, Dr. Ma Jun, Chief Economist, PBOC, Co-Chair of G20 Green Finance Study Group, and Chair of China Green Finance Committee. My name is Paul Smith, President & CEO of CFA Institute, and I am honored to speak at today’s conference.

Before I begin, I’d like to acknowledge the stewardship of the G20 GFSG and PBOC. Their work and leadership on behalf of the G20 Green Finance Study Group has been ground-breaking.

It has also been an extraordinary opportunity for CFA Institute to participate in China’s green finance and ESG policy discussions. We are humbled to be invited to join the China Green Finance Committee as an International Institutional member.

CFA Institute aims to be the voice of the investment management industry.

Our 150,000+ members are concentrated in the biggest global economies and are investors either direct through asset owners or as asset manager intermediaries. We help develop future professionals who are technically proficient and committed to ethical principles. We help build market integrity around the world and work with regulators to shape policies that benefit investors and society at large. As an organization, our view counts. And we are pleased to be part of the conversation.

When I read the G20 Green Finance Study Group progress report, Erik Solheim was prescient. He said: “We will not be able to reshape society without throwing the weight of the global financial system behind our ambitions and find better and greener ways of doing business”

I believe it’s irrefutable: green finance is necessary. It is here to stay. It is what investors want and China can dominate this market. 

There is no shortage of topics and activities when it comes to green finance. Globally, regionally, and in China.

In preparing this speech, I decided to focus on green finance as way of making finance relevant to investors and practitioners. We are in a world where we have lost the trust of our clients and relevance as investment advisers. If we don’t solve these long-term problems, none of us has a future.

So, let me begin. First, a question: what role does CFA Institute play in sustainability? Second, investor perceptions are changing. Asia is both ahead of and behind ESG practices compared to Europe, the Middle East and Africa, and the Americas. Finally, China is a growing force in green finance. There is much to pay attention to, and much that others can learn from China.

When I last spoke on the topic of green finance, it was at a roundtable event in Beijing at the NAFMII Conference Center.

Since then, there have been new policies and regulations, new mandates and guidelines. There are new asset classes; new players; thousands of reports by third parties and companies reporting on ESG and green finance, and trillions have been invested in equities, bonds and ETFs, by public and private institutions.

It is because of our mission and our members that CFA Institute is deeply involved with ESG. 

Our mission is to lead the investment profession globally by promoting the highest standards of ethics, education, and professional excellence for the ultimate benefit of society.

Every CFA charterholder upholds a code of ethics and standards of professional conduct, because our fiduciary duty puts us in a position of earning trust of our clients, and acting in the best interest of them.

This fiduciary duty is equally aligned with the UN Principles of Responsible Investing, whose mission says:  “… an economically efficient, sustainable global financial system is a necessity for long-term value creation …  a system that will reward long-term, responsible investment and benefit the environment and society as a whole.” UN PRI signatories, in turn, align their fiduciary role and ESG, through analysis, ownership, and disclosure.

For CFA Institute, the ESG investing ethos personifies our efforts to promote a fiduciary culture and a more sustainable form of capitalism.

This broad topic falls within our Future of Finance initiative—a global effort to shape a more trustworthy, forward-thinking financial industry that better serves society.

We are dedicated to advancing the practice and integrity of ESG investing through outreach programs, collaboration with other organizations, and thought leadership.

Earlier this year in London, I was invited to participate in an Accounting for Sustainability (A4S) event sponsored by His Royal Highness, The Prince of Wales. It was a small group of securities regulators, investors, and industry leaders who were brought together to explore a framework to enable action on climate change and other sustainability-related financial risks. My contribution was focused on ensuring that ESG risks and opportunities are sufficiently considered in investment decision making and analysis. Some of the recommendations and actions put forth, included: incentivizing better disclosure; and building communication and capacity around ESG.

In support of adopting an integrated reporting approach, I met with Richard Howitt, CEO of the International Integrated Reporting Council (IIRC). The IIRC’s goal is to ensure that ESG key performance indicators under development are reported in the same format and the same way as financial metrics. We discussed the role of self-regulated organizations in the industry and the IIRC’s reporting framework to improve communications, including sustainability disclosures.

We have partnered with The Principles for Responsible Investment (PRI) to hold over 15 ESG-related workshops around the world in the coming months that will result in a global study of ESG investing with the aim of identifying best practices. The publication of regional reports will begin the summer of 2018.

CFA Institute is firmly behind supporting and enhancing ESG and sustainability reporting and will remain at the forefront of this issue.

CFA Institute also brings insight about how investors think and are investing their AUM to improve sustainability.

Two years ago, we conducted a survey of our members to gain insight about attitudes and actions when it comes to ESG investing. And by the end of September we will publish the follow-on survey conducted earlier this year.

There are some interesting trends taking place, around the world. And some compelling trends here in Asia.

The new survey found evidence that the ESG market is maturing, but with significant variation by region. Risk assessment and client demand dominate the reasons practitioners undertake ESG analysis and the desire for more and better ESG data remains strong.

We asked what the #1 reason PMs would consider ESG in an investment/analysis decision? The answer? Demand from clients. The second most cited reason was ‘a proven link between ESG matters and financial performance, which for Asian asset managers was higher than peer regions.’

Seventy-three percent of global survey respondents integrate ESG into their investment/analysis process. When we asked why ESG issues are taken into consideration, respondents said ‘to help manage investment risks’ followed by ‘clients demand it.’

When we asked what top three factors limited an ability to use ESG information in investment decisions, the top three responses were: 1) lack of quantitative metrics; lack of comparability across firms; and 3) lack of quality assurance

 75% of respondents want employees at their firm to be trained on ESG issues.

More than 60% agree that public companies should be required to report at least annually on a cohesive set of sustainability indicators. With Asia-Pacific respondents agreeing with this statement more than other regions.

And nearly 70% think ESG disclosures should have some level of independent verification, with half of those saying ESG verification should be similar to an audit.  

Across 20 questions, almost every response from institutional and private wealth managers placed a higher value on ESG as a consideration when investing.

This leads us to conclude that the case for ESG as a core element of investment analysis, is not only compelling, but growing.

On Green Finance 

Like others, we believe that developing countries are where the climate challenge will be won or lost, and green finance products could be a game-changer.

Stimulating investor interest is: improved access by foreigners to China’s interbank bond market; an encouragement of cross-border green bond issuance, and investment by the Chinese government.

And the potential for scaling up is tremendous. Globally green bonds account for <0.2% of all bonds, China 2%. 

China today is the only G20 nation to progress across all 7 areas outlined by the G20 Green Finance Study Group.  

It has emerged as a global leader in green finance, especially green bonds. And is the fastest-growing market in the region for sustainable investing.

According to S&P, green bond issuances totaled US$93 billion at the end of 2016, 40% from China.

In the past two years, NDRC published guidelines for SOEs, including requirements for bond issuance approval, and CSRC released new green bond guidelines; Shenzhen and Shanghai stock exchanges have mandated ESG disclosures  and ESG reporting is required for listed companies in Hong Kong; Shanghai Stock Exchange and Shenzhen Stock Exchange have run pilot programs listing green bonds; seven ministries and regulators have released Green Financial System guidelines; seven green bond indices have been launched since mid-2016, along with 19 green equity indices; and the Luxembourg Stock Exchange has signed agreements with Shenzhen and Shanghai to further develop green bond indices. These actions send a strong statement that China is willing to share more information.

While the Chinese green bond market today is impressive, there are two sides of the story. Investors are concerned about growing default rates. Foreign investors are skeptical about the accuracy of local corporate bond ratings; and some regulatory guidelines not only differ from international standards, but can have subtle differences in standards from one Chinese bond market regulator to another. That said, 76% of all bonds issued by Chinese issuers are in line with international definitions of green climate bonds, according to the Climate Bonds initiative.

These factors require greater due diligence from investors. 

China’s bond market is the world’s third largest. Banks are the largest issuers (82%) followed by corporates (16%). The green bond market spreads across clean energy, clean transport, resource conservation and recycling, pollution prevention, and energy saving. Seventy-four percent are AAA rated and 72% are onshore, of which 62% are on the China interbank market (source: China Bonds Initiative).

Interest in sustainability-themed assets are attracting interest in China and can be attributed to policy commitments to curtail carbon emissions by 2030.

In the coming year, China is expected to make further advances in climate change and environmental policy, including drafting a climate change law and establishing a cap and trade system.

While access to environmental data is still a challenge, according to the Global Sustainable Investment Alliance, solid data could be provided soon by institutions such as the Institutes of Science and Development and the Chinese Academy of Sciences.

Sustainable investing is a game changer with an opportunity to positively impact future generations. These are exciting times and work underway today, that will have lasting impact on future generations.

At CFA Institute, we work to build an industry in which investors’ interests come first, financial markets function at their best, and economies grow. 

We are pleased to offer our voice and be a partner with China.

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