ESG With Chinese Characteristics
Trump 2.0 could see more green investors look towards China, says Cary Krosinsky, President of the Sustainable Finance Institute.
A few years ago, the Sustainable Finance Institute (SFI), developed a new ESG+ index for the China Securities Index Company – “ESG with Chinese characteristics”, as Cary Krosinsky, the SFI’s Co-Founder and President, calls it.
ESG+ enjoyed some success, but interest from international investors was a bit more subdued than Krosinsky would have liked. However, with Donald Trump settling into the White House, there might be renewed interest in tapping into emerging sustainability opportunities in China.
“There’s been a lot of attempts to promote ESG investment in China, but if you look at where the money is actually going, there’s not all that much happening,” said Krosinsky. “It might be a really interesting time now to figure all of this out and, if you’re an investor, create a product that looks at where China is heading.”
A lot of this could depend on what President Trump does over the next few months.
With the current US administration rowing back on key parts of ESG legislation, global sustainable investors may be tempted to put their money elsewhere. China, with its keen focus on green technology (such as renewable energy and electric vehicles), could provide exactly that opportunity.
At the same time, the US has just imposed an extra 10% tariff on Chinse goods, taking the cumulative duty on Chinese goods to 20%. Beijing says that it will retaliate. The outcome of this trade war is likely to affect how comfortable investors feel parking their money in China, but Krosinsky is optimistic.
“Hopefully in the next few months there will be a deal struck, and this should create opportunities for Chinese companies looking to attract investors,” said Krosinsky. “Trump is a dealmaker. If he can strike a deal and take credit for it, and benefit from it, then that’s what he will do. In some ways, Trump is more realistic than [Joe] Biden was.”
Krosinsky is also a Lecturer and Faculty Advisory Committee Member at Yale University, specialising in energy, climate and investing. The Sustainable Finance Institute is based in Connecticut in the US and has offices around the world, including in Shanghai and Singapore.
ESG China-style
When it comes to sustainable investment, ESG parameters used in China look very different to what investors in Europe and the US might be familiar with. The creation of the ESG+ index was an attempt to define sustainability characteristics in a way that works for China.
“We went through a normal ESG framework and pulled a few things out, so that we ended up with core ‘E’, ‘S’ with Chinese characteristics and ‘G’… well, ‘G’ is challenging everywhere,” said Krosinsky.
Krosinsky pointed out that, for instance, the phrase ‘human rights’ doesn’t really work in China, but the word ‘people’ does – i.e., how company behaviour impacts workers and those within the local community.
Beijing has been widely criticised for repression of the Uyghur Muslims in Xinjiang Region, but partly through forced labour, but Krosinsky argues that how people are treated by companies in different categories is the more “face saving” way of considering what the West calls “human rights”, rather how are people treated in different categories.
Diversity, equity and inclusion (DEI) policy is another social investment element that the ESG+ index was not able to include within its parameters – or at least not in the way that it is understood in Europe or the US.
“For all the conversations that we have about DEI in the West, this is not really an issue in China. They don’t have the same sexism issues that exist in other countries. So what is DEI in China? It’s a totally different thing,” said Krosinsky.
Governance in China can also look very different from how it is perceived elsewhere.
“Everyone sits on everyone else’s boards in China, which in the West would be seen as poor governance. So every country needs its own ‘G’ framework. We pulled out the intangibles so that ‘G’ could be its own thing in China,” said Krosinsky.
Emerging opportunities
Krosinsky recognises that a lot has been happening, and continues to happen within the ESG space in China. He notes that investment in the net zero transition is also an investment in China’s future economic leadership.
“For me sustainability isn’t really a word that resonates in China, because that’s not what the country is trying to do. They are trying to improve the conditions, not sustain what they already have. There’s a lot going on in China,” said Krosinsky.
China’s net zero commitments are enshrined in a set of goals known as the ‘dual carbon paradigm’. Krosinsky says that, “unlike many actors”, the country is doing its best to meet these commitments, which includes peak carbon emissions by 2030 and carbon neutrality by 2060.
“China isn’t perfect, but it is trying. How do you affect change in the country? You build a relationship, you establish trust, you find ways to work together, and ultimately you encourage progress where it is needed on the ground. This is far better than sitting back and simply pointing fingers,” said Krosinsky.
However, China’s environmental revamp has faltered as its economy struggled to bounce back from the impact of the Covid-19 pandemic. In 2019, China’s GDP was growing at more than 6%, according to data from the World Bank. Following the draconian anti-Covid measures imposed by the authorities, growth slid to 2.2%.
It has since picked back up, rising to 5% at the end of last year, which exceeded the expectations of many analysts. However, with the threat of a trade war looming, many anticipate further disruption to the economy.
“If you want a country to transform, it needs the economic wherewithal to do so. Those of us who want to see climate progress in China want the country to have a vibrant economy,” said Krosinsky.
China’s Achilles heal
One core sticking point for China is its reliance on coal.
“China is not getting off coal as fast as many of us would like, or indeed as they themselves might like,” said Krosinsky. “For the country to go carbon neutral by 2060, it is going to have to do transformational things like ditching coal, but this is going to be hard. China has long faced the conundrum of knowing that just switching off coal would cause economic challenges for multiple municipalities.”
According to recently-introduced regulations, China will require large listed corporations to begin mandatory ESG reporting by the start of next year. This includes companies listed on domestic stock indexes as well as those listed on other markets like Hong Kong. Many state-owned enterprises have been reporting their ESG performance since 2024.
Earlier this month, authorities in the countries issued guidelines to establish a framework for voluntary disclosure of greenhouse gas emissions by companies.
Whether China pushes ahead with the planned introduction of new disclosure rules may depend on where Europe and the US end up.
“We are seeing a slowdown in Europe from a disclosure standpoint,” said Krosinsky, referring to the omnibus framework proposal put forwards by the European Commission last week. “I don’t think any region wants to act in isolation, so it remains an open question as to whether China will push ahead with greater ESG disclosure on their own. Maybe they will follow the EU’s example.”
China and the EU launched a common green taxonomy in 2020.
International investors have the capacity to push things forward in China, even as things are sliding in Europe and the US.
“A lot of people have been waiting to see what will shake out with the anti-ESG stuff in the US, and I haven’t seen too much curiosity about what investment opportunities maybe emerging in China, but I do think that this is the time when things will start to change,” says Krosinsky.
“After all, China has the second largest pool of wealth in the world, and every financial institution wants access to that. If the right deal is struck, there is every chance that things will change.”
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