Yao Jiajun, ESG Director of Xirong Shandao, contributed to this article.
On the eve of the COP28 climate conference, the Global Sustainable Investment Alliance (GSIA), which aims to promote the development of global ESG investment, published the long-awaited Global Sustainable Investment Review 2022 (hereinafter referred to as the "report") on November 29 this year”）。
Why is this long-awaited report so popular for constructing a sustainable development logic that conforms to business rules?
This is the sixth biennial report released by GSIA, which provides a relatively complete analysis of the scale of ESG investment management in developed regions such as the United States, Europe, Australia & New Zealand, Canada and Japan. Therefore, due to its data integrity, the retrospective report released by GSIA has been cited by major institutions to reflect the global ESG investment development trend.
Since the release of the GSIA report two years ago, the global ESG investment market has changed dramatically. In June this year, the International Sustainability Standards Board (ISSB) released its first standards, IFRS S1 and IFRS S2, to promote the harmonization of global ESG disclosure; Financial regulators in the European Union, the United States and other countries and regions have stepped up supervision to crack down on ESG "greenwashing"; and partisanship in some countries, which has affected investors' confidence in ESG investment, and so on.
Amid the controversy and skepticism, what will be the performance of ESG investment in developed countries and regions? This is the question that the report can answer.
One of the report's key findings is that there are significant regional differences in the scale of ESG investment management in developed regions. The global ESG investment management market size is 30$3 trillion; In addition to the U.S. market, the scale of ESG investment management in other countries and regions has increased by 20% since 2020; Australia, New Zealand and Japan are the regions and countries where the proportion of ESG investment assets under management to total assets under management continues to grow. Corporate engagement and shareholder action (also known as stewardship) is the most commonly used ESG investment strategy, beyond ESG integration.
From the perspective of investment scale, compared with the global ESG investment management scale listed in the report35With $3 trillion in data, the global ESG investment management scale mentioned in the report is about 30$3 trillion, 14% of the size**.
There are two reasons for this, the first of which is that the Global Alliance for Sustainable Investment has adjusted the ESG investment size statistics for the U.S. market, and the revised party will not count asset managers that ostensibly use ESG integration but do not provide further ESG criteria (e.g., biodiversity, human rights) that they are concerned about. The second reason is that due to the macro environment, the scale of ESG ** managed by some U.S. asset management institutions is declining by billions or even trillions.
In order to ensure the comparability of data, the Global Alliance for Sustainable Investment will separately list the ESG investment management data of the United States in the data presentation. For example, if the U.S. data is excluded, the ratio of ESG investment management to total management in other countries and regions will be compared to 35 in the 2020 Retrospective Report9% gradually increased to 379%。
And if you take into account the data on the size of ESG investment in the United States, then the data will start from 359%** to 244%。
Figure 1 Overview of global ESG investment assets in 2016 and 2020 (in billions of dollars).
It is worth noting that the data of the report is as of the end of December 2021, except for the data used in Japan as of March 31, 2022. This means that the report does not include changes in the scale of global ESG investment in 2022 and 2023. According to Morningstar's statistics, the scale of ESG investment in the United States in 2022 and 2023 is on a downward trend. Therefore, if this trend continues, the next edition of the Report is expected to see the possibility of a further reduction in the scale of ESG investment in the US market.
Figure 2 Change in the size of U.S. ESG** from Q4 2020 to Q3 2023 (Information**: Morningstar).
In other markets, the scale of ESG investment management in Europe, Australia & New Zealand and Japan has increased to varying degrees, among which the scale of ESG investment in Japan, Australia & New Zealand has shown a significant upward trend, with growth rates of 59% and 30% from 2020 to 2022, respectively, and compound growth rates of 30% and 15% in 2014 and 2022, respectively.
The growth of ESG investment is inseparable from the efforts of policy and regulation, as well as the attention of investors to ESG investment.
For example, in terms of policy regulation, regulators in Australia & New Zealand have issued guidance on how to avoid the "greenwashing" of ESG financial products in the promotion process. In addition, New Zealand** has put forward requirements for savings pension schemes, requiring them to exclude investments in the fossil fuel industry from their portfolios, and requiring pension plans to have an ESG investment policy. And in terms of customer demand, according to data cited in the report, 83% of Australians want their bank accounts and superannuation to be invested responsibly and ethically. And in New Zealand, 62% of respondents said it was important for their investments to have a positive impact on the world.
Figure 3 Growth of ESG investment assets in local currency by region in 2014 and 2022.
In terms of strategy, due diligence that leverages investor power and influence to enhance long-term returns for clients and stakeholders is currently the most commonly used ESG investment strategy. This reflects the limitations of exclusionary screening in driving business transformation.
This is because even if an investment institution that adopts the exclusion method does not invest in coal, natural gas, or enterprises involved in arms manufacturing, there are always investors in the market who are willing to invest in such enterprises to earn investment returns. Moreover, such investors do not necessarily attach importance to ESG concepts and do not promote the sustainable transformation of enterprises and society. As a result, there are a growing number of market initiatives such as the Net Zero Asset Managers Initiative and Climate Action 100+, which are committed to promoting corporate engagement and shareholder action by asset managers, requiring asset managers to use their shareholder rights to drive the climate transition of portfolio companies.
Figure 4 ESG investment asset strategy size in 2016 and 2022.
Although the report does not systematically collect data on the scale of ESG investment in China, it is still possible to cite other market reports to understand the changes in the size of China's ESG investment market.
According to the statistics of "2023 China's ESG Development***", as of the third quarter of 2023, the cumulative management scale of domestic ESG public offerings** reached 265 billion yuan, a decrease of about 10% compared with the same period last year. The scale of ESG public offerings accounts for less than 1% of the total public offerings, and the number and scale of ESG public offerings account for only 4% compared with domestic and hybrid public offerings. The reason for the decline is inseparable from the changes in the macroeconomic situation and the problems that ESG investing has been facing, including the lack of comparable and consistent ESG data, the need for ESG ratings**, and the lack of long-term funding.
Figure 5 Changes in the scale of ESG-themed public offerings** (2005-2023).
In recent years, domestic regulators have made efforts from the regulatory and capital side to steadily help domestic ESG investment become bigger and stronger. At the regulatory level, in May 2022, the State-owned Assets Supervision and Administration Commission (SASAC) issued the Work Plan for Improving the Quality of Listed Companies Controlled by Central Enterprises, which clearly mentions "promoting more listed companies controlled by central enterprises to disclose ESG special reports, and striving to achieve full coverage of relevant special report disclosures by 2023, so as to further promote the number of ESG information disclosures by domestic listed companies;
In June of the same year, the former China Banking and Insurance Regulatory Commission (CBIRC) issued the Guidelines on Printing and Distributing Green Finance in the Banking and Insurance Industries, requiring large banks, insurance asset management companies and other institutions to pay attention to the ESG performance of customers in the investment and financing process. On the capital side, the "Industrial Investment Guidelines of the National Social Security Council" issued by the National Social Security ** in September 2022 clearly mentions "practicing the concept of sustainable investment, increasing investment in ESG themes** and projects, and incorporating environmental, social, governance and other factors into the industrial investment due diligence and evaluation system". In November of the same year, the national social security ESG portfolio was bidding for domestic public offerings, with more than 20 domestic leading public offerings participating.
In terms of investment strategy, a number of advocacy documents calling on investment institutions to carry out due diligence management have also emerged in China. In September 2022, the Insurance Asset Management Association of China (IAMAC) issued the ESG Due Diligence Management Initiative for China's Insurance Asset Management Industry, which proposes that institutional investors "supervise and actively participate in ESG management of investee companies, pay attention to environmental, climate and social risks that affect the business strategies of investee companies, and establish a response mechanism". In July 2023, the China Climate Cooperation Platform (CCEI) was officially announced, which aims to promote the green, low-carbon and high-quality transformation of Chinese enterprises by promoting institutional investors to participate in the invested companies and due diligence influence, and currently has 26 large institutional investors such as Aberdeen Group, Bosera ** and Dacheng ** joining the CCEI platform as members.
For the first time, the Global Alliance for Sustainable Investment (GSIP) mentioned a series of policy recommendations to scale up ESG investment in its report, including:
Introduce more ESG-friendly policies to channel more public and private finance to climate and biodiversity conservation; strengthening the consistency of global ESG investment regulation; Enhance the transparency, availability and comparability of ESG data. The above policy recommendations reflect that despite the introduction of a global benchmark for ESG disclosure by the ISSB in the past two years, regulators still have some distance to implement the standards issued by the ISSB, and market participants are not ready to carry out substantive climate analysis and disclose Scope 3 greenhouse gas emissions data. The financial regulator's crackdown on ESG "greenwashing" has also led to supervision due to different regulatory measures issued by different regulators, thereby increasing the compliance cost of financial institutions.