@WikimediaCommons.
ESG engagement in the China property and real estate sector has received new attention in recent months. As efforts to engage with ESG risks increase, sectors that partake are becoming more appealing to foreign investors looking for new global opportunities.
Because the property sector played a critical role in the development of China’s twenty-first century economic expansion, it is now the largest component of the country’s still-growing economy.
This also means that buildings – as both work and residential sites – account for a large portion of the country’s energy consumption and CO2 emissions. The climate implications, alone, are staggering.
Whilst the country’s CO2 emissions fell by a record 8% in the second half of 2022 and it is home to the world’s second largest solar power plant – Huanghe Hydropower Hainan Solar Park, which has an installed solar capacity of 2.2 gigawatts – its coal power pipeline is not slowing any time soon. The amount of new coal power projects given government permits in the first six months of 2022, for example, reached 21 gigawatts – the largest it’s been since 2016.
For investment teams at insurance organisations, these changes could mean a rethinking of the country’s investment viability more broadly. As the transition to a net-zero, energy-efficient economy solidifies worldwide, at least in theory, shrewd ESG strategies open compelling new routes for growth and investment potential.
These changes, whilst gaining steam in recent months, have been under consideration since 2020.
China maintains a goal of carbon neutrality by 2060 – along with a Green Deal. Dual Carbon Goals were released in September 2020, with President Xi Jinping announcing China’s climate goal to peak carbon emissions by 2030 and hit neutrality by 2060.
Additionally, in June 2022, the local industry regulator, the China Banking and Insurance Regulatory Commission (CBIRC), published “Issuing the Green Finance Guidelines for the Banking and Insurance Industries”, which required banks and insurers to promote green finance at a strategic level, reduce the carbon intensity of their asset portfolios in a gradual and orderly manner, and eventually achieve carbon neutrality of asset portfolios.
“The number of ESG or impact products will rise and sustainable
strategies will accelerate even further.”
An autumn 2022 report from Deloitte on “Creating sustainable value: Real Estate and ESG” found that there was a market shift in demand for ESG or impact products in the property and real estate sector, with more conventional funds seeing new pressures as the selection of so-called “green” funds increase globally.
“Our expectation is that the number of ESG or impact products will rise and that sustainable strategies will accelerate even further,” the report said. To account for this market shift, it added, real estate investment managers must define and then implement sustainable strategies to futureproof their business and make them attractive to investors. Otherwise, they could see reputational damage and longevity risks.
However, not all approaches to ESG engagement are created equal. In the race to establish themselves as key ESG players, many in the real estate market are labelling products as green without a long-term strategy in place to follow through on those claims and involve an entire organisation in real business restructuring.
The Deloitte report added that because regulatory compliance is often the priority for companies, operationalising a long-term strategy in some cases falls out of sight. “It seems as if some players in the industry dedicate a large part of their efforts to extinguish fires caused by new regulatory requirements and a long-term denial of the topic’s importance,” it said.
As trends continue to develop in the wake of the Covid-19 pandemic reopening, Green Deal, and Green Finance Guidelines issuance, investors will need to carefully distinguish between those companies that fully understand and embed their ESG claims – and those that do not.
According to James Chan, Associate Director at global ratings agency AM Best, insurance investment teams should adjust and enhance their strategies to better support energy saving, carbon emission and waste reduction, green growth, and disaster prevention. They should also, he said, promote the implementation of low-carbon technologies.
“Ping An, China Life Insurance, China Pacific Insurance, [amongst others], have
incorporated ESG factors into their investment analysis.”
Some Chinese insurers have been quicker on the uptake. “According to their own ESG reports,” said Chan, “Ping An, China Life Insurance, China Pacific Insurance, China Taiping Insurance Holdings, and New China Life Insurance have incorporated ESG factors into their investment analysis and decision-making processes.”
These organisations have also developed industry preference products that invest in low-carbon economy opportunities, and issued new portfolio products that invest in ESG, dual carbon, and other underlying assets, he added.
Chan was overall optimistic about the trajectory of more sustainable growth in the economy – noting that as of year-end 2022 cumulative green investments in stocks exceeded ¥430 billion, whilst bonds exceeded ¥230 billion.
Recently, Ping An’s Board Secretary, Richard Sheng noted that climate change – as well as poverty alleviation and access to education – were key areas of focus for the major insurer when it came to ESG engagement. “[There are] investment opportunities that support environmental enhancements,” he said, “[especially] those that address climate change and those that economise and efficiently use resources.”
Whilst Ping An appears to be one of the companies following through on its promises, it remains to be seen if the majority of others will follow suit.
Nearshoring trends could also be a part of new, greener investment opportunities.
“[Companies] are becoming more local in how they get their raw supplies;
we will continue to see more localised trading patterns.”
As China continues to reopen post-pandemic, supply chains are increasingly sourcing locally, said Tim Smith, Global Practice Leader, Trade Credit at Marsh. “[Companies] are becoming more local in how they get their raw supplies,” he said, adding that “we will continue to see more localised trading patterns, which could be a very positive thing.”
This is because investment teams at insurers are “increasingly considering ESG country risk and sector risk, built into overall risk assessments”, which means supply chain management – touching on the E, S, and G simultaneously – could take centre stage going forward.
Investors are also looking more at corporate behaviour, Smith said – especially with the 2060 net-zero target looming on the horizon.
The other side of the nearshoring trend would indicate that global manufacturers could move their supply chain production away from China. “There is inevitably some de-risking underway in global supply chains as manufacturers seek to diversify their production away from China,” said Rob Brewis, Investment Manager at the Edinburgh-based Aubrey Capital Management.
He added that this shift would be better for the global economy in the long-run, and especially positive for emerging markets.
A recent report from M&G, titled “Public Fixed Income – ESG engagement in the China property sector”, noted that ESG engagement was a helpful metric, used to gain a more comprehensive picture of the risks affecting a particular security.
The analysis found that increased ESG engagement, especially from companies that are significant bond issuers, would ultimately help to “enhance risk-adjusted returns for long-term bondholders”. This was thought to be especially the case given recent scrutiny of the sector’s rapid, debt-fuelled growth patterns.
“Any exposure to this sector needs to be carefully balanced with an
understanding of the material ESG challenges.”
However, the report also mentioned a “lack of transparency and ESG reporting standardisation” within the Chinese real estate sector – which it said could hinder sustainable growth.
“The Chinese property market has grown to a size that makes it too big to ignore,” the report continued. “Any exposure to this sector needs to be carefully balanced with an understanding of the material ESG challenges, a process that requires increased interaction to gain understanding of embedded investment risk.”
A cautious approach will likely be necessary for those hopeful about investing opportunities correlated with ESG engagement. For one, the country’s appetite for coal – which accounted for 58.4% of total power generation in 2022 – is seeing no significant slowdown.
If the lofty ‘green’ promises fail to come to fruition – abetted by a lack of regulatory oversight, a flipflopping attitude toward ESG, and reliance on coal – investing in the sector could be a substantial headache for insurers.
