Investing in China to Generate Returns and Tackle Climate Change

Spotlight: New Considerations in ESG Investment Investors and consumers alike are increasingly making decisions with reference to environmental, social and governance (ESG) issues. For investment managers this has practical implications for risk allocation and portfolio construction. The inclusion of ESG criteria into investment decisions broadens the concept of alpha beyond simply financial performance. There is a range of approaches being used by investors and managers to pursue ESG objectives, ranging from negative screening (exclusions) to avoid exposure to particular industry segments, to more active and targeted strategies linking key performance indicators (KPIs) to incentivize desired behaviors and achieve specific outcomes. The spectrum and evolution of approaches reflects the market’s role in transitioning“brown” or polluting assets and managing the risks around that journey as we move towards a more sustainable global economy. Over time managing investments to achieve financial returns and improve E, S, or G KPIs may become common practice and companies may be seen through the lens of the trade-off between their financial performance and specific ESG parameters.Companies that score well against ESG-related metrics, and also provide a strong financial return might be considered “green chip” companies. “Brown chips” might have a strong financial outlook, but have work to do to improve their ESG performance. “Grey chip” stocks may be better candidates to deliver on non-financial goals, but could be currently less attractive from a financial returns perspective. The evolving evaluation framework could have a significant impact on how we assess and compare companies in the future, and could see a move away from products only benchmarked against financial indices. For more on ESG and Sustainable Investing, please see Citi Business Advisory Services’ ESG Considerations Beginning to Re-Shape Investment Management 6 Asian Investor 7 TradingPlatforms.com 8 Forbes One investment management theme which is, as yet, less commonplace than in other parts of the world is sustainable investment; however, both investor appetite and sustainable product development is increasing. For example, in 2020, Chinese companies issued more than 200 green bonds, raising $38 billion 6 . Sustainable investment is an area for potential greater co-operation between China and the West, particularly around climate change, as emphasized during the recent US-China declaration during Cop 26, which could accelerate China’s existing commitment to become carbon neutral by 2060. A nationwide carbon trading market was established recently, alongside ongoing improvements in data and disclosure standards which will build investor confidence in sustainable investments. International investors can consider sustainable investments in China from two main angles: first, by switching asset allocation to increase portfolio resilience to sustainability-related risks, or second, through additional active investment in sustainable assets that offer alpha generation opportunities. China offers significant opportunity for sustainable technologies: China is the world’s largest installer of renewable energy capacity 7 , and the largest market for electronic vehicles 8 . In summary, while geopolitical tensions will continue, China is in the midst of an exciting period for investors. The financial markets are opening up, offering diversification and yield benefits, while the potential to make a meaningful impact on reducing climate change is making China one of the world’s most dynamic and attractive growth opportunities for the years ahead. What does sustainable investment in China look like? 4