CICC: The Rise, Status, and Prospects of ESG

The rise and status quo of ESG investment: the concept is gradually recognized, and the scale growth rate far exceeds the overall growth rate of the global asset management industry.

The concept of ESG investment can be traced back to the ethical and moral investment originated from religious church investment in the 1920s. Since the concept of ESG was first put forward by the United Nations Global Compact (UN GlobalCompact) in 2004, the ESG principle has been paid more and more attention by governments and regulatory departments, and ESG investment has also been gradually favored by mainstream asset management institutions, from Europe and the United States to the world.

In the past decade, the growth rate of ESG investment has far exceeded the overall growth rate of the global asset management industry. In terms of regional distribution, the US market accounted for 48% of the market in 2020, surpassing the European market, which has always been ranked first, to become the largest market for ESG investment. Japan's market share has increased rapidly in recent years, reaching 8% in 2020, ranking third.

The aspects of ESG investment: ESG will affect the operation and value of enterprises, "reserving differences" but difficult to "seek common ground" in rating, the integration of ESG on the strategic side becomes the mainstream, supervision attaches importance to information transmission and policy capital guidance.

Listed companies:With the increase of ESG investment, the changing trend of corporate profits may show an "inverted S" curve that first decreases and then increases and then decreases. From the empirical results, ESG has a significant impact on short-term stock prices and long-term market capitalization, and listed companies committed to ESG practice have higher long-term growth. For the enterprises in the relatively primary stage of ESG governance, the improvement process of "evaluation and calculation-project governance-active disclosure" can be adopted to rapidly improve the level of ESG governance, while for excellent enterprises, we should sum up lessons, lead the industry and the upstream and downstream industrial chain to continuously improve environmental and social responsibility, and further enhance the company's influence and voice in the industry.

Rating system:Although the global ESG investment concept has formed more consistent principles and guidelines, but in the ESG rating system, there are obvious differences, and we think that the ESG rating system is very difficult to "find common ground". For example, the elimination of differences between rating methods and index system depends on the further development of ESG investment concept and practice. On the other hand, the differences caused by the different stages of social development, political economy and culture in different countries and regions are reasonable and can hardly be eliminated.

Strategy products:ESG investment strategies are mainly divided into seven categories, among which negative screening, ESG integration and participation in corporate governance are relatively widely used. in recent years, ESG integration strategy has gradually replaced negative screening to become the ESG investment strategy with the highest market share. Based on the analysis of the development of ESG investment products in Europe, the United States and Japan, we believe that the factors that affect the strategic choice and scale change of ESG investment products mainly include development path, investor awareness, policy promotion, capital guidance and capital market depth.

Regulatory policies:Regulatory policy plays a very important "top-down" role in the development of ESG investment. The United Nations is the most influential promoter in the formulation of regulatory policy. The regulatory route of ESG in each region has its own characteristics, but all attach importance to the information transmission of ESG and the guidance of policy funds; according to the characteristics of regional regulatory policy, we divide the ESG regulatory model into two dimensions, namely "mandatory-voluntary" and "integrated-single factor".

The prospect of China's ESG investment under the background of carbon neutralization: carbon neutralization will accelerate the development of China's ESG investment, and the investment scale is expected to reach 20-30 trillion yuan in 2025.

Carbon neutralization will accelerate the development of China's ESG investment:On the one hand, following the principle of carbon neutralization and sustainable development will not necessarily reduce the potential return of investors; on the other hand, carbon neutralization will have a greater medium-and long-term impact on industries, industrial institutions and regional economy. Under the background of carbon neutral era, the rapid development of capital market brought about by the transfer of residents' asset allocation will rapidly promote the development of ESG investment in China in many aspects.

Calculation of the potential scale of ESG investment in China:With reference to the scale of asset management and ESG investment in Europe, the United States and Japan, we expect China's ESG investment to reach 20-30 trillion yuan in 2025, accounting for 20% of the total size of the asset management industry. Drawing lessons from the development speed of the global ESG public offering fund, we estimate that the size of China's ESG public offering fund will reach about 750 billion yuan in 2025, which has more than twice the growth space compared with the current scale.

The construction of ESG investment ecology in China can be divided into two levels:At the strategic level, first, the ESG supervision mode of "mandatory disclosure + bottom-up" is more in line with China's development stage and national conditions; second, it is necessary to pay special attention to the organic integration of international standards and Chinese characteristics, reflecting China's "common but differentiated" responsibilities as a developing country. At the tactical level, it is suggested that we should enrich the data and improve the rating with the information disclosure mechanism as the core, and complete the construction of ESG infrastructure as soon as possible; in terms of capital guidance, we should effectively guide China's ESG investment through social security, pension and other policy funds, and at the same time gradually guide other asset management institutions to implement the principle of "double (investment income, ESG) bottom line".