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View | Zhang Bohui: ESG Funds in Developing Countries Have Lower Risks and Higher Yields
Release time:2021-09-27Views:

The General Office of the CPC Central Committee and the General Office of the State Council have recently issued the “Opinions on Deepening the Reform of the Ecological Protection Compensation System”. The “Opinions” propose to study and develop financing tools based on carbon emissions and other resources and environmental rights, establish green stock indexes, develop carbon emission futures trading, and accelerate the construction of a national energy use  and carbon emissions trading market, which will incorporate certified emission reduction  projects of greenhouse gas in the fields of forestry, renewable energy, methane utilization and other fields with ecological and social benefits into the national carbon emissions trading market. Prof. Zhang Bohui, Executive Associate Dean of the School of Management and Economics, The Chinese University of Hong Kong, Shenzhen (CUHK-Shenzhen), and Director of the Center for FinTech and Social Finance, Shenzhen Finance Institute, said in an interview that China’s ESG development still has a long way to go, and the school has already integrated ESG, green finance and responsible investment into the curriculum to reserve talents for sustainable financial development. He then elaborated on the problems in China's ESG market, how different parties can participate, and green innovation practices.

Prof. Zhang Bohui

Executive Associate Dean, School of Management and Economics, CUHK-Shenzhen

Associate Dean, Shenzhen Institute of Data Economy

Director of the Center for FinTech and Social Finance, Shenzhen Finance Institute

The Carbon Market Provides Humanized Regulatory

Prof. Zhang pointed out that the launch of the carbon trading market in Shanghai is of strategic significance to the realization of the dual carbon goal of the entire China. The carbon market aims to achieve a mechanism to control total emissions, through the issuance of carbon emission permits, specifically through issuing carbon emissions to the enterprises. The government relies on the market to establish a mechanism, which can urge enterprises to reduce greenhouse gas emissions through innovative steps, such as energy conservation and process improvement. The carbon market not only forms a mechanism and platform for high-efficiency emission reduction, but also transforms government functions, abandoning the old “one size fits all” regulatory approach, and building a trading platform to allow another “invisible hand” to urge carbon-intensive companies to reduce carbon emissions, so as to stimulate the initiatives of the enterprises. This also reflects the determination of China and 196 countries around the world to work together to achieve carbon reduction targets. Meanwhile, as the largest developing country, China has also provided practical experience for other countries. A carbon tax is a direct increase in costs by the government towards companies, and the cost might be a fixed percentage. Compared with the carbon market, the flexibility of carbon tax is lacking. The carbon market can reflect the information of carbon prices, so that when companies improve processes, save energy and reduce emissions, there is real-time price transmission, and the efficiency will be higher. The carbon market actually provides a buffered, resilient, and humanized regulation for the government to restrain high-carbon emission companies.

There are still many unsolved problems in domestic ESG investment

The concept of ESG investment is becoming more and more popular, but China still faces many challenges in the development of ESG investment. Prof. Zhang said that compared with developed countries in Europe and North America, the development of ESG funds in China has been relatively slow. The earliest pan-ESG funds in China were established around 2005, and it developed rapidly after 2015, reaching around 349 by the end of last year. At the end of 2020, the scale of domestic ESG funds has exceeded 500 billion, but it is still relatively small compared to the global scale. According to data released by the PRI (United Nations Agency, Principles for Responsible Investment) at the end of last year, there are a total of 3,000 signed institutions, of which only 52 are in China. This shows that China's ESG participation has a lot of room for improvement. On the whole, there are many problems with ESG investment in the country: the concept of the funds at the initial stage; the undeveloped construction of an ESG evaluation system, and the institutional ratings causeing troubles for investors; lacking of corresponding talent reserves. Therefore, it is difficult to figure out what opportunities ESG can bring from the perspective of fund investors since the corresponding culture has not yet been formed. Talking about the performance of ESG investment returns, Prof. Zhang explained that from this perspective, there are controversies in the industry and academia around the world. According to research conducted by Morningstar, a U.S. investment research institution, the return rate of ESG funds is not overwhelmingly high compared to other traditional funds. The research is based more on data from developed countries. The research results of Prof. Zhang's team show that the performance of ESG funds in developing countries will have lower risks and higher returns than similar funds. In the long run, ESG-based funds cannot be measured in the same way as traditional funds. The evaluation system also needs to be further changed, requiring a longer time to judge. For investors, ESG funds should have higher yields and lower risks for long-term investments over two or three years.

China will aim to hit peak emissions before 2030 and achieve carbon neutrality by 2060, and multi-level participation from different parties is needed including financial institutions, enterprises, and the media

Prof. Zhang said that the carbon market is an open and transparent market, and its flexibility and effectiveness cannot be achieved without the participation of financial institutions, because they are both information diggers and information contributors. Guiding financial institutions to participate in the carbon emission market can increase the liquidity of related financial products in the market and increase price effectiveness. The participation methods of financial institutions are diversified. On the one hand, indirect financing and direct financing can be used to provide financial support for the low-carbon circular development of the real economy. In this process, companies that meet carbon emissions and green standards can enjoy preferential financing policies. On the other hand, we should actively promote green financial innovation, such as designing related green loans, launching low-carbon credit products, or helping companies design low-carbon emission reduction bonds. Furthermore, securities companies also need to consider some proactive equity funds, such as public equity funds and private equity funds. China should also expand financing through the issuance of ESG-related fund varieties, invest them in companies that can achieve low-carbon emission, and guide funds from the equity market to these listed companies, so as to promote the real economy to complete the goal of green development. In addition, the direct shareholding of financial institutions, especially equity-based financial institutions, may affect the board of directors. Therefore, in the operation of the company, these financial institutions need to play their role in supervision and suggestions, guiding the executives and board of directors of listed companies to implement the carbon emission reduction and achieve green development goals.

So how should companies conduct green innovation practices and participate more deeply in the carbon trading market? Prof. Zhang suggested that, first of all, companies need to have digital technologies to conduct internal carbon accounting to reflect the company's carbon emissions during the entire operation. Trading on the carbon market requires accurate measurement methods and precise pricing of the overall carbon trading. Secondly, enterprises should form overall measures at the management level to form a phased strategy for short-term, mid-term and long-term development. Third, companies need to increase investments in research and development, especially in technology research and development related to environmental protection and low-carbon energy conservation, to promote corporate transformations. Fourth, companies need to interact well with financial institutions and regulatory agencies. Specifically, in the process of participating in the market, companies need to provide internal carbon emission information and data to regulators and financial institutions more openly and transparently, so as to make the entire supervision and transaction process more effective.

In the action taken by China to hit peak emissions before 2030 and achieve carbon neutrality by 2060, the media should also take responsibilities. Prof. Zhang suggested that under this concept, the media can first use news to make investors gradually form the concept of environmental protection, green and sustainable development, and then encourage investors to pay attention to ESG standards or products that meet ESG standards, with an aim to leverage ESG development through investor channels. Second, the media can organize and report information to enable decision-makers to further understand green development, sustainable development and responsible investment. The media can also point out the challenges, opportunities and problems China faces during the process of green development, and help make relevant policies more efficient and more powerful. Furthermore, relevant media reports can put pressure on companies with high carbon emissions. For example, some media previously published rankings of high-polluting companies, or exposed high-carbon emission companies, under the pressure of corporate brands, prompting them to change their business strategies and assume long-term responsibilities for social development.