Interview With Li Feng, Vice President Of HSBC In China: Building An ESG Evaluation System With Chinese Characteristics

"Double carbon" target contains huge investment opportunities. However, to achieve the goal of "double carbon", government funds can only cover a small part, and the gap mainly depends on the market. From the process of low-carbon transformation of global economy, we can see that ESG investment can not only create wealth, but also help sustainable development.

According to the survey conducted by HSBC Investment Management in the mainland of China, Hong Kong, Singapore and the United Kingdom in January and February 2021, an average of 64% of the investors interviewed in the Asian market (mainland China, Hong Kong, China and Singapore) said that the epidemic has improved their understanding of factors such as ESG and prompted them to re evaluate their investment methods. Half of the Asian market investors interviewed believe that 100% of the portfolio in the next three to five years will include sustainable investment.

China's ESG investment is in its infancy. At present, commercial banks, public funds and other financial institutions are constantly exploring the idea of ESG through the risk management and decision-making process of the company. At the same time, the domestic ESG investment has gradually expanded from the early bank credit business to the securities industry, equity investment and industrial fund practice, and the bank's ESG financial products, pan ESG public funds and other responsible investment products are constantly emerging.

In the international arena, an organic convergence process of disclosure, evaluation and investment has gradually formed, and the number of international and domestic institutions participating in ESG rating is growing. There are consistency and differences among various ESG indicators and evaluation systems.

Is there a unified ESG evaluation system? Will differentiated ESG evaluation system be normal? What international investment experiences and products are worth learning from China? What else should China do to guide ESG investment?

Recently, Li Feng, vice president of HSBC in China, was interviewed by the 21st century economic report.

Li Feng believes that in order to facilitate the adoption of regulatory agencies and capital markets, it is necessary to standardize information disclosure and evaluation through a relatively unified system and indicators. Green finance needs a unified standard and definition, strengthen the collection and application of green data, improve the data certification, rating, monitoring process and information disclosure mechanism, so that investors can understand whether bonds or projects are really "green", and provide reference for financial institutions to price products and investors, so as to facilitate related products to be traded in the market.

Li Feng. Information map

Global ESG assets exceed $35 trillion

21st century: what is the difference between ESG investment and ordinary investment? How hot is overseas investment in ESG?

Li Feng: ESG is a concept first proposed by UN Global Compact in 2004. It believes that in the process of investment, in addition to the consideration of financial returns, environmental, social and corporate governance factors should also be included in the evaluation and decision-making of investment. In order to bring ESG into investment decision-making, index system, enterprise data and evaluation criteria are indispensable. At the same time, enterprise data greatly depends on the information disclosure requirements of regulators and investors.

With the increasing attention of overseas regulators, investors and enterprises to ESG. We have noticed that more and more institutional investors are combining ESG with its investment strategy. The global alliance for sustainable investment (GSIA) estimates that global ESG assets exceed $35 trillion. In addition, the number of signing partners of the United Nations principle of responsible investment (PRI) has also continued to grow, to more than 3500.

21st century: if China wants to achieve the goal of "double carbon", government funds can only cover a small part, and the gap mainly depends on the market. What are the advantages of guiding ESG investment?

Li Feng: to achieve the goal of "double carbon" and promote large-scale low-carbon transformation needs a lot of financial support.

According to the report of the United Nations Intergovernmental Panel on climate change (IPCC), it is estimated that between 2021 and 2050, an average of US $830 billion will be needed to control global warming within 1.5 degrees Celsius.

According to the estimation of the United Nations Trade and development organization, the global investment demand for sustainable development goals is as high as 5 trillion to 7 trillion US dollars every year.

Although the amount is huge, the funds needed are actually there, and the financial industry plays an important role in making up the funding gap: it can provide financing for green projects and promote capital to enter the green industry field; It can also allocate financial resources effectively through daily financial decision-making.

What we want to achieve is how to create a suitable environment of standards, policies and rules so that funds can flow.

To achieve this goal, we need to link these funds with green projects, so that the market has a consensus on the definition of green and low-carbon projects. Green finance needs a unified standard and definition, strengthen the collection and application of green data, improve the data certification, rating, monitoring process and information disclosure mechanism, so that investors can understand whether bonds or projects are really "green", and provide reference for financial institutions to price products and investors, so as to facilitate related products to be traded in the market.

At the same time, the promotion of policy tools is also very important.

For example, we understand that the central bank is studying the establishment of direct carbon emission reduction support tools, which will be put into the market in due course. By providing low-cost funds to eligible financial institutions, financial institutions are supported to provide preferential interest rate financing for projects with significant carbon emission reduction effect. This will help to guide and leverage the flow of financial resources to low-carbon, green transformation, green innovation and other projects and industries.

China's ESG investment is in its infancy

21st century: what opportunities does the "double carbon" target bring to the financial industry? What international ESG investment experience and products are worth learning from China?

Li Feng: compared with the hot international market, the development of ESG investment in China is still in its infancy or primary stage. With the gradual clarity of China's carbon neutral roadmap and the introduction of a series of specific policies, ESG investment, as an important driving force of carbon neutralization, will be full of vitality. It is of great significance to support the strategic deployment of carbon peak and carbon neutralization and accelerate the optimization of resource allocation.

In the past few years, ESG products for individual investors in the domestic market have been constantly emerging. For example, China bond valuation center compiled and released the first carbon neutral green bond index in China in March this year. The index is composed of carbon neutral bonds publicly issued in China. There are also domestic commercial banks that have issued structured deposits linked to the index, which investors can purchase directly.

ESG investment covers a wide range of fields and products. From the perspective of our bank, the following are some common ESG investment products:

One of the most common investment products is green bond. The issuance document of green bond specifies the use of funds to support specific green projects. The issuance of RMB green bonds in the domestic market is also normal. However, at present, bonds are mainly traded between institutions. Individual investors can not invest directly and can only indirectly hold them through investment in asset management products.

Another common type of ESG investment is green certificates of deposit issued by banks. After individual investors buy, it is not very different from ordinary large amount certificates of deposit, but in the bank, a green asset will be used to match the issued large amount deposit certificate. Through this way of asset liability matching, investors can obtain income and support the development of green investment.

In addition to fixed income products, large overseas asset management companies have also designed and developed fund products using ESG investment strategy for individual investors. These overseas funds can also be purchased directly by domestic investors through QDII investment.

"21st century": the national carbon trading market has been running for a period of time, guiding financial institutions to enter to improve their activity has become a hot topic. In what ways can commercial banks help the carbon trading market? What are the risks and challenges?

Li Feng: the national carbon emission trading market is an institutional innovation that uses market mechanism to control and reduce greenhouse gas emissions and promote green and low-carbon development. It is also an important policy tool for China to strive to achieve the goal of "carbon peak, carbon neutral".

According to the current carbon market system, financial institutions can not directly participate in the national carbon market transactions, but with the gradual development and maturity of the market and system, the participation of financial institutions can effectively promote the role of carbon market in price discovery, guidance and risk management, which is expected in the future. As commercial banks, we hope to gradually participate in it in the future. On the one hand, it can help to increase the liquidity of the carbon trading market, on the other hand, we can help the carbon market to carry out hierarchical management, improve efficiency, and further expand and strengthen the market.

As a new thing, one of the main challenges facing the carbon trading market is how to jointly maintain the stable development of the market. As a commercial bank, we are also willing to actively cooperate with relevant market policies and regulatory measures, give full play to the role of financial institutions, promote the gradual improvement and maturity of the national carbon market, and look for and seize opportunities for the future development of banks and customers.

Construction of ESG evaluation system with Chinese characteristics

"21st century": an organic convergence process of disclosure, evaluation and investment has gradually formed in the international community, and the number of international and domestic institutions participating in ESG rating is growing. There are consistency and differences among various ESG indicators and evaluation systems. Do you think that there is a unified ESG evaluation system, and will differentiated ESG evaluation system be normal?

Li Feng: the starting point of ESG is to implant environmental, social and governance factors into the capital market from the perspective of investment and financing, so as to make it have good commercial significance, bring more sustainable market to society, and promote better economic and social development. Therefore, in order to facilitate the implementation of regulatory agencies and capital markets, it is necessary to standardize information disclosure and evaluation through a relatively unified system and indicators.

Of course, in different industries or regions, ESG issues will also have their own different priorities, which will lead to certain differences in ESG indicators and rating system.

For China, it is reasonable to localize and differentiate the indicators and evaluation system according to the importance level of specific topics and the statistical caliber of information on the basis of the internationally accepted system framework.

21st century: China is committed to building an ESG evaluation system with Chinese characteristics and unifying ESG standards. HSBC has rich investment experience. What are the suggestions for comparing the overseas ESG rating with China's current rating?

Li Feng: internationally, the most widely used ESG information disclosure indicator system is the Global Reporting Initiative guidelines (GRI guidelines) issued by the global reporting initiative.

Many regulators and exchanges have also put forward mandatory or guiding requirements for ESG information disclosure.

In addition, some investment institutions and ESG rating companies, such as MSCI, Dow Jones, Thomson Reuters, FTSE, Morningstar, etc., have developed their own evaluation criteria and rated them to meet the market demand.

Taking MSCI as an example, it compiles more than 100 ESG indexes based on more than 5500 listed companies in the world every year. But generally speaking, there are differences among various ESG indicators and evaluation systems in the world, so far there is no unified standard in the world.

In mainland China, ESG related information disclosure started late.

Except for the mainland enterprises listed on the Hong Kong Stock Exchange which need to implement "explanation without disclosure" as required by the HKEx, it was not until this year that the guidelines on the management of investor relations of listed companies (Draft for comments) made it clear that the contents of communication between listed companies and investors include environmental protection, social responsibility and corporate governance (ESG) information.

We believe that in the process of building an ESG evaluation system, China can appropriately refer to the relatively mature index system and evaluation standards abroad, and combine with China's reality, and try to help enterprises meet the needs of different stakeholders with a set of standards.

(Intern Dai Haoran also contributed to this paper.)