On December 10th, 2013, the China Social Investment Forum (China SIF) released its first report, Socially Responsible Investment Survey on Chinese Funds 2013 during the first Responsible Chinese Capital Market Annual Conference. The report reveals the progress of socially responsible investment (SRI) in China from three aspects: awareness, strategy and practices.
SRI is a sustainable investment strategy that focuses on corporate social responsibility in addition to financial performance. According to the report Universal ownership: Why environmental externalities matter to institutional investors, published by the UN Principles of Responsible Investment (UN PRI) in 2010, the portfolios of institutional investors are inevitably exposed to growing and widespread costs from environmental damage caused by companies.
Of the 73 Chinese mutual funds which were sent the questionnaire by China SIF, 27 mutual funds (37%) responded. Respondents, with assets under management beyond 1.7 trillion RMB, accounted for 48% of the total assets of the 73 Chinese funds.
Corporate social responsibility (CSR) is the major reason for implementing SRI. The survey finds that more than half (56%) of the respondents regard SRI as their corporate social responsibility. 41% of the respondents agree that SRI can lower their investment risk. 37% of the respondents consider SRI as a tool of product differentiation, and 33% think that SRI is in line with the policy trend of the Chinese government. Only 7% hold the view that there is pressure for improved corporate social responsibility from the public and trustees.
Mutual funds generally agree that good CSR performance leads to better financial returns. More than half the respondents agree that there is certain positive correlation between a company’s CSR performance and financial returns. 22% of the respondents give great significance to the positive link between CSR performance and long-term returns, and none of them believe that there is negative link. Thus mutual funds generally agree that SRI is of lower risk, relatively more stable, with better long-term returns.
Product safety, corporate governance and fraud are the most risky non-financial factors recognized by mutual funds. Sustainable development is closely related to the following social and environmental trends: resource scarcity, increasing labor cost, stricter product quality standards and growing costs of environmentally friendly operations. Legal risks and reputational risks are inevitable if companies cannot properly manage their environmental, social and governance (ESG) performance, resulting in harm to their competitiveness. The returns those companies generate for investors will also be damaged in the long term. Product safety (100%) is recognized as the most significant ESG risk, followed by corporate governance (93%), fraud (93%), environment pollution (78%), bribery and corruption (74%), supply chain management (59%) and work safety (59%).
Extractive industries, agriculture, forestry, animal husbandry and fishery industries, as well as the municipal public utility industry are the sectors that are most exposed to ESG risks. Different sectors are exposed to different ESG risks. Extractive industries (70%), agriculture, forestry, animal husbandry and fishery industries (63%) as well as the municipal public utility industry (63%) are recognized by surveyed mutual funds as sectors that are most challenged on their extra-financial issues.
Based on the findings, China SIF has four suggestions to stakeholders in the Chinese capital market:
- Differentiate the concept of CSR and SRI and further understand the significance of SRI. SRI is not charity, nor is it a tool for public relations. Implementing SRI can bring long-term stable returns to mutual funds. It can also promote a harmonious development of economy, society and environment by positively influencing listing companies to better perform their social responsibilities.
- Positively engage with listed companies, encourage information disclosure and transparency. As shareholders of listed companies, mutual funds can have a say on a company’s ESG risk management, and can improve their CSR performance using positive engagement. In addition, it is of vital importance that the data disclosed by listed companies is of high transparency and quality, as only material ESG information disclosure can help responsible investors with decision making.
- Key risks and key sectors are priorities for responsible investors. As China has not established an “ecosystem” of responsible investment, investors can begin their practices on responsible investment by focusing on the issues which are considered important by the general public (e.g. product safety, air emissions), and on industries that are under policy pressure (e.g. highly polluting, energy intensive, and overcapacity).
- Efforts from government, regulators, industry association and media are needed to promote SRI. Apart from investors and listed companies whom are the major players in the market, other parties need to be included in the SRI movement. Support and guidance from the government and regulators, promotion and monitoring from the media and the general public, initiatives from industry associations, and involvement of other third parties (e.g. index producers, research institutions) are essential in building a complete SRI ecosystem.
The general manager of SynTao Co. Ltd., Dr. Guo Peiyuan says that SynTao has been actively involved in promoting the development of SRI in China since the company was established in 2005. The development of SRI in western economies reveals that SRI is an inevitable part of a functioning mature financial market. By encouraging long-term and value-oriented investment, SRI will generate financial returns and enhance the elegance of the capital market. The survey suggests that SRI is still at an infant stage in China, with more support and attention needed for future development.
Securities Times, as an important and established part of the Chinese capital market, conducts active research in the CSR field, according to the Director of the Social Responsibility Research Center for Chinese Listed Companies, Mr. Zhang Wang. Mr. Zhang calls for more institutional investors to implement a SRI strategy. Securities Times and SynTao, as the initiators of China SIF, wish to share the report Socially Responsible Investment Survey on Chinese Funds 2013 with all stakeholders of China’s financial market to promote the progress of SRI in China.
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