Responsible Investment in China

Abstract

China, officially the People's Republic of China, includes Mainland China and two special administrative regions, Hong Kong and Macao. The political, legal and economic systems of Mainland China are different from those of the special administrative regions. The development stage of responsible investment (RI) in Hong Kong is more advanced than that in Mainland China, while RI in Macau is still under-developed and has rarely been discussed. Therefore, this chapter uses data from Mainland China to avoid ambiguity and maintain clarity.RI in China differs from the conventional definition that incorporates financial objectives with additional considerations of environmental, social and corporate governance (ESG) criteria into the investment process. In the Chinese context, RI signifies the adoption of four selection criteria – economic indicators, ethics, sustainability and legal issues; hence these criteria represent preferences towards government policy, tax and legal requirements in portfolio selection. RI mutual funds in China can be ESG inclusive, fully integrating ESG criteria into investment, or ESG themed, such as environmentally-friendly funds, low-carbon funds and sustainable investment funds. Besides RI mutual funds, institutional and individual investors can also invest in ESG-themed pension funds, life and property insurance, renewable energies, green projects, etc. Compared with RI mutual funds, RI applied to other asset classes, such as venture capital, hedge fund and private equity, are relatively insignificant. This chapter seeks to provide an overview of RI in China. It begins with a statistical overview of China’s social and economic background in order to provide some thoughts on the driving forces of RI. It is followed by reporting the historical progress and state of the RI market in China and showing the rapid growth of the RI mutual funds industry. It then discusses the practices of RI institutions, aiming to provide a deeper understanding of support and engagement activities in China. It further briefly discusses the most urgent ESG risks, the most risk-exposed industries and the most controversial companies in China. In the end, it provides suggestions to promote the development of RI from both policy and investment perspectives.