Sustainable Investment in China 28 May 2010

Brief History of

Modern China’s Financial Market

Three Phases of China’s Financial Market

Phase I (1979-1989)

Establishment of Banking Market

Phase II (1990-1997)

Establishment ofCapital Market

Phase III (1998-Present)

Establishment of Legal System

1949

People’s Bank of China (PBOC), served as both the central bank and a commercial bank

1979

Four state owned banks established and took over PBOC’s commercial business

1982

Foreign banks were permitted to set up branch offices in SEZ 1985

Govn’t legalized the status of foreign banks

The Shanghai Stock Exchange, and Shenzhen Stock Exchange have been formed

1990

1992

To consolidated the supervision of capital markets, China Securities Regulatory Commission was set up

1998 The promulgation of the Securities Law formalized the legal status of capital markets in economy.

2005

Govn’t initiated reform that made non-tradable shares tradable, aligning the interests of large shareholders with that of outside shareholders

China established China Insurance Regulatory Commission

China established China Banking Regulatory Commission.

2003

Development with Chinese Characteristics

• Young but growing rapidly– Banking market has 30 years history, but

Total outstanding loans reached USD6.7 trillion (2009) ICBC became the world’s largest bank in terms of market capitalization, and

the most profitable lender (2009)– Securities market has 20 years history, but

Equity market capitalization has achieved USD 3trillion (2007) Shanghai Exchange has overtaken Hong Kong in terms of market

capitalization, became the 6th largest exchange in the world– Legal structure has 10 years history, but

China have over 160,000 governmental officials working in this area (2008)

Outcome: Less advanced infrastructure

• Not only regulator but also shareholder– Govn’t ownership is common (33% public shares were state owned in

2005)

Outcome: Top-down approach

Sustainable Investment in China

Report: Sustainable Investment in China 2009

Objectives

• Investigate current state of sustainable investment market in China

• Develop recommendations to stimulate this market

Scope

• Investment in public equity & private equity in mainland China

• A share market + ADRs

Research methodology

• Desktop research

• Around 100 interview with government agencies, institutional investors, asset managers, equity research, academic and civil society.

Source: EuroSIF. “SRI Study 2008.”

Sustainable Investment Supply Chain

Financial market regulators

Securities exchanges

Insurance company reserve funds

Mutual funds

Pension funds

Endowments & foundations

Asset ManagersBuy-side research

Listed equitiesAlternatives (Private equity,

real estate, etc.)

Sell-analysts (broker/dealers)

Independent research

Stock ownership services e.g. proxy voting

Rating agencies & sustainable

indexes

C O M P A N I E S

High Net Worth Individuals

Voluntary principles& learning network

Investment Supply Chain Mapping

Financial market regulators

Securities exchanges

Insurance company reserve funds

Mutual fundsPension

fundsQFIIs

Asset ManagersBuy-side research

Listed equitiesAlternatives (PE)

Sell-analysts (broker/dealers)

Independent research

Stock ownership services e.g. proxy voting

Rating agencies

C O M P A N I E S

Civil Society

Tsing Capital

NSSF

STB

Norwegian Pension

Fund

Industrial FundChina Reinsurance

SSE-SRI

CCB-Principal

Green IPO Policy & CSR

Reporting

Key Findings

• Sustainable Investment (SI) is a nascent market in China.

– SI is still a niche play rather than mainstream strategy

– SI supply chain has not formed yet, and the market currently remain undeveloped

• Chinese homegrown SI mythologies primarily focuses on compliance and governance.

• The current SI development is early signs of a growing market in China.

BSR Overview

We work with business to create a just and sustainable world

We have worked in more than 70 countries from six offices in Asia, Europe, and North America

San FranciscoBeijingGuangzhouHong KongNew YorkParisWashington DC

Languages & Dialects Spoken:

CantoneseDutchEnglishFrenchGermanGuaraniHindiItalian

JapaneseKannadaLaoMandarinPortugueseRussianShona

SpanishSwedishTagalogTaiwaneseThaiUrduVietnamese

The BSR Approach

MemberNetwork

Cross-sector Collaboration

ConsultingServices

Research & Innovation

Member Network: More than 250 BSR member companies

Industry Focus Areas

Agriculture, Food, and Beverage

Consumer Products

Energy

Financial Services

Information and Communications Technology

Media and Entertainment

Mining and Minerals

Pharmaceuticals and Biotechnology

Transportation and Logistics

Travel and Tourism

Sample member companies• The Allstate Corporation • American Express Company • ANZ Banking Group• Barclays Bank PLC• The Bank of New York Mellon • Calvert Group, Ltd. • Citigroup Inc. • General Electric Company • Kohlberg Kravis Roberts & Co.• The Redwoods Group• Risk Metrics Group, Inc.• Rockefeller & Company • Standard & Poor’s• State Street Corporation• Sumitomo Trust and Banking Co.• Tsing Capital • Visa USA, Inc. • Wells Fargo & Company

ESG Services in China

Strategic Focuses:

Awareness Raising

ESG News Screening

ESG Engagement

BSR works with financial institutions to develop sustainable business solutions, and customized support

Awareness Raising

What We Do:– Investor workshops/network– Sustainable Investment in

China Quarterly Newsletter with support from UN PRI

– Independent research: Word from The Street” Issue

Briefs on investor perspectives on Toxicity and Health (Apr 08) and Water (May 08)

ESG: Moving to Mainstream Investing? (Aug 08)

ESG in the Mainstream: The Role for Companies and Investors in Environmental, Social, and Governance Integration (Sep 09)

Sustainable Investment in China 2009 (Oct 09)

Key Learning:– It’s a long term process

Mainstream domestic investors have not yet moved from the “what” and “why” to the “how”

– Confusion over terminology slows market uptake

“Without a clear definition, people would tend to ask what SI is and why it is important; and the government would be skeptical to promote it in China” – a government official

ESG News Screening

• What We Do:– Screen and classification of ESG

news, and providing regular and flash reports

– What we look at:

• Key Learning:– Negative news are limited and

do disappear sometimes

– The Chinese govn’t is raising the bar on ESG regulation.

In the past 6 months, central govn’t introduced 16 ESG-related regulations and laws, making extensive efforts to increase level of detail on requirements and remove loopholes in ESG legislation, which will make it increasingly difficult for companies to commit violations in these areas.

Environment: Environmental management and policies ：standards, polluting control, waste & recycling, etc Environmental legal compliance Ecosystem impact Climate Change: awareness and reporting, carbon emission, energy efficiency, green products

Social: Labor management and standards Healthy and Safety compliance Human rights Community relationship and philanthropy

Governance: Commitment and standards on governance Minority shareholder rights Transparency and disclosure Control environment and process Business integrity

ESG Engagement

• What We Do: • Key learning:– Letting the candidate

companies understand the consequences are more important than providing them solutions

1

2

3

1 Learning of client responsible policy and objectives

Conduction of ESG assessment and identification of priority issues

• Desktop review

• Field-visits and interviews

• ESG analysis and issue prioritization

• Documentation and reports

Engagement with candidates

• Preparation proposals

• Partnership with stakeholders

• Initiation of engagement

Thank you!