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Supplements » China Report Nov 2021

China roundtable: ESG opens new doors for diversification

 

Funds Europe – Beijing has set a carbon neutrality target of 2060. When the Chinese leadership announce a goal so publicly, they tend to throw their full support behind it. From an investor perspective, what are some of the key steps needed to achieve this goal, and what are you taking to bring this to fruition? What role do you think foreign institutional investors or asset owners will play in helping to raise the standards of ESG in China, as well as learning from them?

Yin – First of all, net-zero transformation is a global challenge, not just for China, but of course China’s challenge is compounded by the fact that its energy system is still heavily reliant on coal and its desire to maintain relatively high economic growth while making this gigantic economic machine net-zero-compatible. This requires truly collective efforts from all of us – policymakers, corporations, investors and individuals.

From an investor perspective, of course, we have become increasingly aware of the risks of climate change on investment portfolios. The journey of an asset owner normally starts from collecting emissions data on their investment holdings and then moves on to understanding the climate risk exposures across various asset classes and geographies.

Many of them set up a goal to decarbonise investment portfolios in a way that is consistent with net-zero goals. I think portfolio decarbonisation is a great start, but on its own it doesn’t solve all the problems. Shifting to a portfolio that has lower carbon intensity does not necessarily mean investors contribute meaningfully to addressing climate change; you can simply achieve it by replacing stocks of an oil company with those of a tech company, but the oil company will continue to dig oil out of the ground and burn it, regardless of your trading activities.

In that regard, I think there are more effective tools. One is being a very active owner and also working with other owners, engaging with your investee companies, using your collective power to effect change, to make a real-world difference. Our belief is that shareholders who own and profit from corporations that pollute are not just bystanders. They are active participants in the system and they need to accept the responsibility that role brings.

The second tool is to invest in climate solutions. Net-zero transformation is a huge undertaking, the International Renewable Energy Agency estimates that to transform the global energy system, we need investments of over $110 trillion before 2050. Who is going to fund that? Investors are no doubt an important source, in addition to governments and corporations.

The investment industry, I would argue, in its current form is not yet capable of delivering that. There is an important difference between managing portfolios of securities, trading those securities in a secondary market, and providing direct funding to, say, a renewable company to increase its solar capacity.

The simple truth is that the current industry infrastructure is really set up to do the former, and new primary investment is just a tiny part of our collective activities.

So, we as an industry need to massively up our game in deploying primary capital. And China is among leaders of the world in developing climate solutions and that increases the attractiveness of investing in this market for global investors.