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The challenges of integrating ESG into Chinese A-shares

The challenges of integrating ESG into Chinese A-shares

26-02-2019 | Insight
Growing interest in sustainability investing is driving changes in markets – but it faces distinct challenges in China.
  • Jie Lu
    Jie
    Lu
    Head of Investments China

Speed read

  • Tailored ESG integration methodology for Chinese A-shares
  • Powerful tool to spot the winners and losers in domestic market
  • ESG profile coverage for 100% of portfolio and 70% of universe

Stricter regulation on issues such as climate change, or due to changing consumer preferences with respect to food and electric cars, are changing the entire investing environment. Sustainability concerns are subsequently directly affecting companies and investors, a trend that is particularly relevant for the A-share market of domestic Chinese equities.

Against the backdrop of China’s slowing economic growth and the government’s shift of focus from seeking GDP growth in absolute terms to a higher quality of it, there is increasing spotlight on the environmental impact and social implications of this growth. Corporates are being steered towards pursuing sustainable growth, both for the national interest and their own good. At the same time, their corporate governance mechanisms are under increasing international scrutiny, as the A-share market opens up to more foreign capital.

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Structured approach needed

A structured approach to assessing the risks and opportunities that come with these changes can help investors make better-informed decisions and spot risks and opportunities at an early stage. This is becoming increasingly more important, as the pace of opening up China’s stock market has accelerated in the past 12 months. MSCI and FTSE Russell, two of the world’s leading index providers, have stepped up A-share inclusion into their mainstream indices.

This will drive a long-term fundamental change in the participation dynamics of the A-share market. Unlike its counterparts in developed markets, the Chinese A-share market is dominated by local funds, and by domestic retail investors in particular. Overseas investors tend to have better ESG investment discipline, which will push local institutional investors to follow suit. It means that ESG use in China has become an irreversible trend, and companies or investors who fail to embrace it will get left behind.

Integrating ESG as standard

As a pioneer in sustainability investing, Robeco has long believed in the usefulness of applying ESG principles to fundamental equity investments. We have integrated ESG into the investment process for choosing stocks for the Chinese A-shares strategy from the very beginning.

We have ESG profile coverage for 100% for our portfolio holdings, and for more than 70% for our broader Chinese stock universe. We do much more than just scratch the surface by only looking at ESG scores from external data providers. Our ESG analysis is based on Robeco’s global framework and tailored to the specific characteristics of the Chinese stock market.

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