Author: Duoguang Bei, President, Chinese Academy of Financial Inclusion at Renmin University of China
China Finance, Issue 12, 2021
Under the guidance of the 13th Five-Year Plan, China has been promoting inclusive finance and achieved significant results. People are paying more and more attention to social value investing, socially responsible investing, social impact investing, sustainable development investing, and ESG investing in a bid to achieve business values and promote harmonious social and economic development under the framework of sustainable development. Despite some nuances, these concepts share almost the same fundamentals. This article takes“socially responsible investing (SRI)”as a summarized concept and elaborates on it. As proposed in the 14th Five-Year Plan, China's path forward is to pursue high-quality economic and social development. Promoting SRI is consistent with the new development philosophy, and will exert great impacts on China's coordinated development.
SRI's strategic significance
SRI is in line with our social values. It has now become an advanced investment concept at home and abroad involving a wide range of fields including environmental governance, energy conservation, emission reduction, social development, employment promotion, education and culture, poverty alleviation, vulnerable group support, rural revitalization, innovation and entrepreneurship, elderly care, and sustainable development. To sum up, SRI plays a strategic role in China's economic, social and environmental development in the long run.
First, promoting social values of investment can steer high-quality development. As China has entered the stage of high-quality development, the pursuit of coordinated economic, social, environmental, and cultural development requires us to make SRI’s social values more prevalent.
Second, SRI can serve as an important entry point for SOE reform. By developing principles and measurement indicators for SRI, SOEs can be guided to better serve coordinated development, thereby achieving both economic and social benefits.
Third, SRI is conducive to guiding the private sector to participate in China’s coordinated development in the future. In addition to state-owned capital, China has accumulated large-scale private capital, so it is a pressing task for civil society and the government to bring into play the positive social effects of private investment.
Fourth, SRI helps balance social, economic, environmental, and cultural development. SRI can mitigate huge urban-rural disparities, income inequity, environmental degradation, and other problems caused by the one-sided investment model in the past. It can also be an important element to strategies such as rural revitalization and green development.
Fifth, SRI facilitates China’s “going global” strategy based on global consensus. As the name suggests, SRI reflects the social responsibility of investment and is closely related to the vision of“building a community with a shared future for mankind”, the new development philosophy, and traditional values and culture of China.
SRI as a global trend
Currently, both developed and developing countries are actively promoting SRI. At the same time, more and more mainstream financial institutions are taking the initiative to participate in SRI.
Fast-growing SRI
SRI has different definitions and statistical standards across the world, so it is quite difficult to fully understand its scale and effects. However, according to incomplete statistics and estimates of representative institutions and countries, SRI is growing rapidly.
According to the Global Impact Investing Network (GIIN), a representative international organization, the global market of SRI was worth $715 billion in 2019. Questionnaires-based statistics of GIIN showed that the total SRI assets of 79 global investment institutions grew from $52 billion in 2015 to $98 billion in 2019, showing a compound annual growth rate of 17 percent.
SRI policies across countries
Over the years, the UN has been a strong supporter of SRI. In 2006, the UN launched the UN Principles for Responsible Investment (PRI) to guide socially responsible investments worldwide. In 2019, the number of PRI signatories reached 2,500.
The UK was an early adopter of SRI. In 2000, the HM Treasury set up a taskforce to explore how entrepreneurship could be applied to gain social as well as financial returns. In 2013, the UK established the Social Impact Taskforce and National Advisory Board during its presidency of the G8 group. In 2014, the UK government introduced the Social Investment Tax Relief (SITR), which was designed to provide a 20 percent tax reduction on qualifying investment in a social enterprise. Some social investment policies concerning pensions were also made the same year.
Others that have incorporated SRI into national policies include Canada, the Netherlands, Japan, Thailand, and South Africa. The Canadian government introduced the Social Innovation and Social Finance Strategy in 2018 to support innovative solutions to social and environmental challenges. Japan developed the Principles for Responsible Institutional Investors in 2014. De Nederlandsche Bank NV, the central bank of the Netherlands, signed the Principles for Responsible Investment (PRI) in 2019 and has integrated six ESG Principles of PRI into its investment practices. In 2011, South Africa launched the Code for Responsible Investing in South Africa (CRISA) to give guidance on how the institutional investor should execute investment analysis and investment activities and exercise rights so as to promote sound governance. The Thai government established the Thai Social Enterprise Office (TSEO) in 2010 to stimulate the development of social enterprises in the country and passed the Royal Decree on Tax Exemption in 2016 to provides tax incentives for social enterprises and investors in these enterprises.
SRI mainstreaming
SRI and other similar concepts were initially marginal social enterprise concepts. In recent years, however, mainstream financial institutions on Wall Street began to embrace these concepts and attached greater importance to SRI. According to a report by US SIF: The Forum for Sustainable and Responsible Investment, sustainable investments in early 2020 amounted to $17.1 trillion in the U.S., one-third of the total investments over the same period. Among them, $16.6 trillion of U.S. domestic assets, held by 530 institutional investors, 384 fund managers, and 1,204 community investment organizations, have introduced ESG criteria. SRI is becoming, if not already become a“mainstreaming”investment trend among large international financial and investment institutions. Leading institutions such as Morgan Stanley and Goldman Sachs have increased the proportion of SRI in their portfolios.
International experience for reference
The focus of the capitalist economy has shifted from its traditional“maximization of shareholders' interests”and“profit maximization”to SRI which seeks to consider both financial return and social/environmental good. This is a major advancement in human understanding and practice. People are increasingly aware that long-term business interests can only be realized on the premise of sustainable social and environmental growth. In the development of SRI, the international community has gained some experiences worthy of reference for China.
First of all, SRI marks a breakaway from the traditional concept of economics, so government support and incentives are imperative. As abovementioned, governments of many countries such as the UK have introduced a series of incentives, including tax cuts, etc. In order to mainstream SRI, it is also imperative to involve mainstream financial investment institutions. At present, major international financial investment institutions have embraced it. Finally, although SRI does not aim to maximize economic benefits, it does not mean that the economic returns need to be reined in. In fact, some investments have higher economic returns than the market average. According to an assessment of international investments by the International Finance Corporation (IFC) of the World Bank Group, SRI has generated more economic returns in emerging markets and developing countries than in developed countries.
Problems in the Development of SRI in China
At present, there are mainly three types of SRI-related institutions in China: first, nonprofit social enterprises such as some investment institutions under the Ministry of Civil Affairs and of social welfare organizations. They are tagged with such concepts as“social enterprises”and“social value investment”. Second, the capital market and fund companies. They are providing some index funds with ESG labels to promote ESG concepts introduced from the West. Third, listed companies and state-owned enterprises. They offer social welfare services such as poverty alleviation and publish social responsibility reports annually.
So, we can see that China is facing some challenges in promoting SRI.
Firstly, without a relatively uniform definition of SRI, different institutions apply different concepts in a rather confusing state. Secondly, SRI carried out by the private sector is not properly guided by macro policies, making it limited and marginalized. Even among mainstream organizations, SRI remains marginal. Secondly, except for various indicators put forward by some organizations, there are no widely recognized uniform indicators to measure social performance, let alone those serving national development. Last but not least, we call for an SRI theoretical framework compatible with Chinese cultural values. At present, there is no well-developed SRI theoretical system globally, and what guides China’s SRI practice is mostly some fragmented concepts introduced from abroad. In essence, SRI is highly consistent with the values of“harmony between man and Nature”and“upholding justice while pursuing shared interests”observed by China's traditional culture, as well as with the“new development philosophy”proposed by the CPC Central Committee. However, a theoretic integration is needed.
Policy recommendations
With huge potential in China, SRI is of strategic importance to the coordinated development of China's society, economy, environment, and culture.
China needs to form an SRI theoretical framework. A complete SRI theoretical framework is yet to be formed, as the theory is currently falling behind the practice. Therefore, it is necessary to integrate traditional cultural values, the new development philosophy, the vision of building a community with a shared future for mankind, and other philosophical systems so as to understand the value of SRI from a theoretical perspective. In this way, we can put forward a theoretical framework that is in line with China's realities and can clarify core elements such as investors, responsibilities, and objectives while facilitating smooth communication with the international community.
China needs to set goals and strategies for SRI. SRI should uphold the principle of “government guidance and market operation”. The most critical guidance the government can provide is to integrate SRI with the 14th Five-Year Plan and Long-Range Objectives through the Year 2035 and write it into guiding documents. In this way, the government can set SRI development goals and strategies and guide capital to take into account both social and financial performance. Consistent with the goal to improve the well-being of the Chinese people, this will help achieve sustainable development.
China needs to establish norms and incentives for SRI. As today's SRI is not fully developed, the government should first develop industry norms, clarify access and certification standards, and establish accountability and information disclosure mechanisms to protect and encourage responsible investment that is truly beneficial to social development. Secondly, the government should enact incentive policies and make them well-steered and consistent. In this aspect, the government needs to explore ways of incorporating external social values into economic values and policy incentives that are of great interest to enterprises and come up with targeted tax incentive policies for products and activities to enhance market players' investment enthusiasm. More importantly, the government needs to guide funds to fill the funding gaps in start-up and growth investing, and implement the concept of SRI and related policies in PPP projects. Considering China's conditions, the government needs to mobilize SOEs and mainstream financial institutions to take the lead in guiding more private enterprises to engage in SRI.
China needs to develop quantitative indicators and evaluation systems for social performance. We need to explore quantitative indicators and evaluation systems that can help disseminate the concept, advocate the idea and encourage market players to practice. Based on accumulated practices, an internationally recognized, quantitative evaluation system with Chinese characteristics will be established to solidify the foundation of industry integrity and prevent“mission drift”.
China needs to establish a management and coordination body. As SRI matters to the coordinated development of economy, society, environment, and culture, it requires unified leadership and coordination from a higher level. It is recommended that a State Council-led special committee be established by relevant departments including the National Development and Reform Commission, the Ministry of Finance, People’s Bank of China, China Banking and Insurance Regulatory Commission, China Securities Regulatory Commission, and the State-owned Assets Supervision and Administration Commission to lead, supervise and coordinate the development of SRI and formulate related policies.
■(Editor: Zhi Fengyin)
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