China-based insurance company Ping An announced the results of a study conducted by its macroeconomic research arm, Ping An Digital Economic Research Center (PADERC), indicating significant growth in ESG investing in China. According to the results of the study, ESG-themed funds are growing in number and issuance size and are outperforming the China market average.

Some of the key findings from the report include:

• Capital flow into ESG-themed exchange-trade fund (ETF) investment in China increased 464% between 2018 and 2019. ESG-themed ETFs saw record inflows of $20.5 billion in 2019.
• ESG equity funds are outperforming the China market average, with annualized returns in 2020 for pure ESG funds at 47.1%, environmental-based funds 70.0%, pan-ESG concept funds 56.4% and corporate governance funds 47.91%, compared with 42.2% for the overall equity fund market.
• The number of ESG indices in China increased to 19, compared to only 4 prior to 2019.
• Investment strategies of pure ESG indices mainly focus on positive screening. ESG indices are evolving, though as all 9 indices released in 2020 so far include positive/negative screening.
• Capital flows have been strong into ESG thematic concept funds. The total size of ESG thematic concept funds has increased by 36% compared with the end of 2019, and nearly double levels as of the end of 2018.
• Actively managed ESG funds are significantly outperforming passives. So far this year, the annualized return of actively managed ESG products is 50.4%, compared to the average return of passive ESG funds of 33.5%.

According to Ping An, the opening of China’s capital market is attracting more and more international capital seeking ESG investments, which is raising awareness and increasing interest in ESG investment principles in China.

Chenxi Yu, Deputy Director of PADERC, said:

“With the rapid growth in ESG-linked investments, we are seeing an increase in the quantity and quality of ESG disclosures from Chinese companies. Domestically, there is also an increasing level of stringent regulatory requirements for ESG disclosures and broader guidance on governmental initiatives aiming to build a ‘green financial system’.”

The PADERC report concludes with a series of insights and suggestions for the future development of ESG investment in China, including:

• Improve data and rating coverage within the domestic stock markets to support the development and enrichment of ESG-themed investment products.
• Use alternative data and technology, such as Natural Language Processing, to help investors distinguish between truly ESG-compliant companies from “greenwashing” ones, whose disclosures do not reflect their actual performance.
• Establish ESG ratings and data for bonds and their issuers to accelerate the integration of ESG in fixed income investment.
• Develop more diversified ESG products, such as passive funds, quantitative funds and investment products for the primary market, to provide more options for investors.
• Innovate and develop financial products focused on climate risk mitigation and the transition to a low-carbon economy, as China increases its emphasis on climate change transition measures.