Greenwashing Risk Grows in China ESG Funds
Chinese asset managers are improving ESG awareness, but weak regulation means green claims often don’t match reality, says Greenpeace.
Greenwashing is a growing risk in the Chinese fund management sector, as marketing of ESG products runs ahead of standards and regulatory oversight, a new report by Greenpeace has found.
The environmental campaign group’s study of 16 major Chinese asset managers found they had improved their awareness of climate risk since last year’s survey.
But this had not translated into deep changes to investment strategy and risk management. The report said there was “an urgent need for these asset managers to translate their awareness into concrete actions”.
Meanwhile, regulatory oversight remained weak. As a result, the NGO warned greenwashing – whereby funds make sustainability claims that are not backed up by the performance or impact of their investments – was a rising concern in the world’s second-largest economy.
“Unclear definitions and lack of disclosure of sustainability-themed investment products present greenwashing risks for ‘carbon neutral’ funds,” said Yuan Yuan, Climate and Energy Campaigner at Greenpeace East Asia.
She said regulations on disclosure “would provide critical oversight for sustainable and green assets”, adding: “Benchmarking against international standards will also become more necessary as international investors become more important for China’s asset managers as the demand for sustainable and green capital grows.”
The report urged Chinese asset managers to improve the quality of their climate risk disclosures, adopt more ambitious emissions targets, step up stewardship activities, and adopt clear strategies for deploying capital to low-carbon sectors.
China falls behind
Greenwashing has emerged as a major problem in developed countries over the last decade with the rise of ESG-labelled funds. Regulators took a while to catch up, but now authorities in the US, the UK, the EU, and Australia, among others, are cracking down on misleading or vague sustainability claims.
While China has been far behind more developed markets on this issue, it is slowly improving, Greenpeace said.
In 2018, the Asset Management Association of China, a self-regulatory body set up by the sector, released Green Investment Guidelines for trial implementation.
The guidelines define the concept of green investment, and set out basic objectives, principles, and methods of supervision. But its provisions are voluntary and impose no quantitative standards on managers.
Government-run regulators include China Securities Regulatory Commission and the People’s Bank of China, while the Shanghai, Beijing and Shenzhen stock exchanges also have regulatory functions, including oversight of sustainability reporting.
Shenzhen, home to six of the asset managers covered in the survey, stood out as a progressive jurisdiction where financial institutions are required to disclose environmental information, Yuan said.
But green finance policies across China tend to be more effective for commercial banks than other financial sectors, Yuan added. “The gaps in policies and regulations for the asset management sector are still large,” she said.
She said that, beyond the largest firms, the asset management sector was opaque, making it hard for NGOs like Greenpeace to communicate with them.
Biggest emitter has far to go
China is by far the top global emitter of greenhouse gases, producing nearly 30% of the world’s total, and its emissions continue to rise. But at the same time the country has been a relatively stable proponent of global cooperation on climate action, and its government has not flirted with climate scepticism or denial. In 2020, President Xi Jinping committed to reaching carbon neutrality by 2060, and he played a decisive role in the success of the 2015 Paris Agreement, alongside then-US president Barack Obama.
Of the 16 asset managers covered in Greenpeace’s survey, all but one are signatories of the UN Principles of Responsible Investment (UN PRI).
In a report on the state of ESG in China, released last December, the PRI drew similar conclusions to Greenpeace, finding Chinese investors were making progress on ESG-related issues, including through “explicit references to climate change in sustainable investment policies, the use of climate stress testing, setting portfolio decarbonisation targets and transition plans, engaging with investee companies on climate change and specific climate-related disclosures”.
But it said challenges remained, including “varying interpretations of current energy/carbon policy, lack of quality ESG and climate data, lack of standards and technical guidance, lack of expertise and lack of clear regulatory guidance on stewardship”.
Greenpeace warned addressing these challenges may be difficult given the lack of interest from Chinese mutual fund customers, who are predominantly domestic retail investors, Yuan said.
“They [retail investors] have limited high-quality information sources and maybe also limited interest in what asset managers are doing for the climate. So it’s uncommon that individual investors demand they improve their climate risk management,” Yuan told ESG Investor.
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