Infusing investment with sustainability

In order to receive the ESG label or other relevant high marks, companies usually need to persuade auditors and rating agencies that they have sustainable development strategies that are environmentally friendly, assure better corporate governance and pro-employee practices. They also have to prepare detailed ESG reports to comply with frameworks issued by financial regulators.

To improve the ESG information disclosure framework and bring the ESG investment rules closer to the global standards, China's central bank, the People's Bank of China, teamed up with the National Development and Reform Commission and the China Securities Regulatory Commission to issue a new version of a catalog of projects that were supported by green bond issuance. The catalog was published on July 7 to elicit public opinions. The previous edition dates back to 2015.

To ensure the catalog is advanced and in line with the global standards, the new edition excluded projects of "the clean utilization of fossil energy". It also expanded the investment scope to include relative trade and consumption financing activities, according to a PBOC statement.

Shao Huan, China Programme Manager of the CBI, called the new catalog a "big step" for China's green bond market development. As more global investors are interested in China's green bond market, the changes to green standards have boosted investor confidence.

The country has shown determination to limit the usage of fossil energy and paid much attention to climate change, she said.

Ma Jun, a member of the central bank's monetary policy committee and chairman of the China Green Finance Committee, said Chinese financial regulators will likely release new policies in the coming months. Listed companies and debt issuers may be required to commit to compulsory execution of projects that are part of their environment information disclosures.

That means, data integrity and quality will be further improved, which can benefit domestic as well as overseas investors, said Ma.

"Expected introduction of ESG disclosure requirements to the exchanges on the mainland is a positive signal," said a research note from JLL, a real estate services group.

Such disclosures are beneficial to transparency in general and will also serve to attract foreign investment, leading firms increasingly to strive to meet sustainability and social responsibility benchmarks, it said.

Brian Cahill, a managing director of Moody's Investors Service, said that financial factors like margins, leverage and liquidity are no longer the only matrix to define how vulnerable debt issuers' financial profiles are as they entered the pandemic crisis. Management of ESG risks will also influence how they will navigate through and out of such crises.

The trend is likely to encourage governments and corporates to undertake additional planning for the ESG-related risks and ponder increasing spending to mitigate potential adverse influences, so it may result in tighter governmental regulations, changing consumer preferences and bringing about stricter investor scrutiny of current business models, Cahill said.

"Since institutions are in varying stages of implementing ESG integration, we view the potential addressable market for ESG products as more than half of the asset management industry," he said.

"An increase in these products could eventually affect the cost of capital and market access for companies not adequately conveying their sustainability strategies or demonstrating appropriate engagement with stakeholders."