Summary
In this joint white paper, Harvest and DWS compare and contrast the drivers of responsible investing in China and Europe. We explore the pros and cons of the approaches adopted and provide our recommendations to support the market’s growth.
One could call Europe’s historical approach to responsible investing as decentralised or laissez-faire. This market-led approach has had many benefits since it has created a fertile industry focusing on the many aspects of ESG. However, it has also led to confusion and slowed what might have occurred in an environment of more central planning. But, when compared to China, the obligations on asset owners and asset managers have diverged.
China’s legislative agenda of green financing has been mainly targeting the banking sector. This has meant the progress of raising responsible investing awareness and stewardship in the country has been relatively slow with only 16% of Chinese asset managers having ESG investment policies, processes of initiatives in place[1]. In Europe, the decentralised approach has placed more onus on asset owners and asset managers, which has meant a more mature industry has developed.
Each system has its strengths. Implementation in China has been fast, but not all investors agree with the taxonomy. For example, the categorisation of clean coal as green in China has been one of the major hurdles for global investors to allocate into Chinese green bonds. The pluralism is Europe’s strength, but action has been slow. Pluralism has delayed the path to a common standard, which has created confusion amongst consumers, policymakers and asset owners and managers. This has meant high entry costs, a barrier to small and medium assets owners and managers. The ambiguity of meanings may also lead to greenwashing, a detriment to sustainability.
Current frameworks have also placed a heavy burden on investors, who have significant expertise on financial markets, but little awareness of science and sustainability. The lack of a science-based sustainable accounting standard, for example, means that investors need to rely on unregulated ESG datasets for their decision-making. Such information may help them understand their risks, but, there is no standard on how providers interpret risks. Still, the centralised approach in China to forcing disclosure in China has also met with concerns and pushbacks. This is important for investors looking for data consistency and comparability.
Our analysis shows that each model has in the end its strengths and a unique best approach will not be easy, but a healthy comparative analysis is useful in understanding the way to take it forward. Both regions also need to do more to enhance disclosure to encompass the concept of double materiality. Better classifications for ESG investment products and more forceful engagement are also required to satisfy a community of more impact-focused investors
The first section of this white paper examines the benefits and shortcomings of the EU and Chinese responsible investment markets. The second examines the steps being taken to remedy obstacles which are restraining the market’s growth and the third how these new emerging frameworks have, at their heart, a focus to help drive both regions to a net zero carbon future.
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