Investor duties and ESG integration in China

Policy framework and sustainable investment guidance

• The China Securities Regulatory Commission (CSRC) and the Asset Management Association of China (AMAC) should publish sustainable investment guidance that articulates how institutional investors and investment managers should implement the Guidelines for Establishing the Green Financial System. Among other things, the guidance should recommend that investors have a process in place to implement sustainable investment, and that they disclose against it.
• The CSRC and the AMAC should publish a stewardship code setting out investors’ stewardship responsibilities. Such a code should include requirements for investors to monitor corporate ESG performance, to engage with companies with the aim of improving ESG performance, and to report on how they are doing so.
• The CSRC, the AMAC and stock exchanges should support the adoption of sustainable investment guidance and the stewardship code through publishing and disseminating examples of implementation best practices; one area of focus could be on how sustainable investment strategies and corporate policies can effectively address long-term, climate and sustainable development-related issues while also delivering satisfactory investment returns.

Regulation on ESG integration and disclosure for pension funds and their investment managers

• The relevant Chinese government branch is recommended to issue regulations that require pension funds and their investment managers to ensure that material ESG issues are systematically and explicitly integrated in their decisionmaking and engagement practices, and to report on how they implement these requirements. Such regulation would help align investors’ duties with the wider policy objectives defined in the GEGFS.
• In addition, the government should require pension funds and their investment managers to report on how they integrate ESG issues in their investment practice and processes, and on how they engage with companies and other stakeholders. Widely recognised voluntary and specific frameworks, such as that developed by the Financial Stability Board’s Task Force on Climate-related Financial Disclosures (TCFD), should be further promoted to encourage investors to disclose on the climate performance of their portfolios.
• The National Social Security Fund (NSSF) should lead by example, showcasing how ESG integration has been implemented in its investment processes and decision-making.

Disclosure requirements for companies on ESG integration and performance

• The government and the CSRC should continue to enhance disclosure requirements for companies on ESG integration and performance, in alignment with international standards while taking into account the present Chinese circumstances. In the process of implementing a mandatory environmental disclosure framework, the CSRC and the Ministry for Environmental Protection (MEP) should consider the following principles:
  • ESG factors should be disclosed in the annual report and the other outputs of conventional accounting practice, with clear links between ESG factors and the company’s business model and risk factors;
  • ESG factors should, over time, be subject to assurance in a similar manner to financial data. We suggest a phased introduction of this requirement; and
  • Companies should report using common performance metrics to allow for comparability, in particular by industry, portfolio and across time-series.
• The government and the CSRC should expand the mandatory environmental disclosure framework to include all material ESG issues, and ensure alignment with international standards to allow for comparability.
• The government should continue to promote and enhance the adoption of forward-looking and scenario-based frameworks on climate change with companies, including the recommendations set out by the TCFD. 
• Stock exchanges should require companies to disclose all financially material ESG factors as part of their listing requirements, in support of the mandatory environmental disclosure framework.

Sustainable and green finance products, labels and tools for investors

• Investment managers, with support from the AMAC and regulators, should develop a supply of green and sustainable investment products for institutional investors, focusing on long-term sustainability goals, and building on the development of the green bond market.
• Regulators should standardise taxonomies for green finance and ESG integration. The development of indicators and standards in green finance should be aligned with the current efforts underway to harmonise standards across the Chinese financial system. Other material indicators and standards on ESG information should be integrated in this process. A similar approach should be adopted when designing green and sustainable labelling for investment products.
• Stock exchanges should further promote and develop their green finance capabilities, alongside the Green Finance Action Plan published by the Sustainable Stock Exchanges (SSE) initiative.
• NGOs and service providers should develop tools to support ESG integration in investment decision-making; these tools could include, for example, environmental scenario analysis, the assessment of corporate performance on ESG issues, and ESG ratings.

Investor education and ESG investment research

• The AMAC should promote the integration of ESG issues in investor education and should support the development of appropriate professional education, analytical tools and training for the investment industry.
• The AMAC, with support from investment managers and service providers, should promote the integration of material ESG issues in investment research and ratings. It should encourage China-specific academic research into the relationship between ESG factors and investment performance, and should support efforts to address the practical barriers to such research (such as weaknesses in corporate disclosures, and lack of disclosures from investors on how ESG issues affect their portfolios and performance).
• Investment managers should provide appropriate education, analytical tools and professional training on ESG issues to their investment teams and operational staff.
• In connection with this report, the PRI, UNEP FI and The Generation Foundation will provide complimentary access to the trustee module of the PRI Academy for selected trustees or directors at pension funds across China. This practical response to some of the training, capacity and awareness challenges identified in this report directly supports our recommendations.