Global sustainable investment continues to grow. According to the “2018 Global Sustainable Investment Review” released by the Global Sustainable Alliance, the world's top five regions had US$31 trillion in sustainable investment assets in 2018, representing 33% of global assets under management. Of this total, 51% was invested in equity products and 36% in fixed income products.
In recent years, China's public fund industry has also been exploring sustainable investment. According to WIND data, there were 117 ESG investment funds in China as at 30 June 2020 with a total value of 102.5 billion yuan, including four ESG ETFs worth a combined 3.342 billion yuan. However, up to now ESG investment strategies mainly cover equities only. Bond products are not yet included and so offer great market potential.
The main reason for the temporary absence of bond ESG fund products in the domestic market is that available ESG evaluations have not been able to fully cover Chinese bond issuers, resulting in investors not being able to obtain effective valuations or investment benchmarks. As more third-party evaluation institutions begin to provide ESG evaluation services for bond issuers, more and more new fixed income ESG investment opportunities will arise.
In recent years, ESG ratings services have been introduced in China. Since 2019, domestic institutions such as university research institutions, ratings companies and index issuing companies, have studied and published ESG ratings and indices covering domestic listed companies and some bond issuing entities.
On 30 October 2020, ChinaBond Pricing Center Co., Ltd. (hereafter referred as CBPC) issued an in-house developed ESG evaluation system covering all public listed bond issuers in the Chinese bond market.
The ChinaBond ESG Evaluation system has five characteristics:
ChinaBond ESG Evaluation’s maximum score is 10 points, with 1 point being the lowest. Each point scored represents a tier, with a higher score indicating that the issuer's performance is better.
The evaluations cover all relevant aspects for the majority of publicly-offered credit bonds in the Chinese bond market dating back to 2017 and will be continuously updated according to the latest developments in the bond market.
Using the ChinaBond ESG Evaluation as a basis, CBPC compiles the ChinaBond ESG Select Credit Bond Index, which represents the performance of bonds with a market value of more than 6 trillion yuan.
The index constituents include domestic publicly-issued and listed bonds with remaining life of not less than one month, ChinaBond Market Implied Ratings of not less than AA grade, excluding bonds issued by issuers with ChinaBond ESG Evaluation below 4 points. Then the index selects only the top 30% ChinaBond ESG Evaluation scored bonds within each group so as to enhance the ESG performance of the index. If issuers have the same ChinaBond ESG Evaluation scores, priority is given to newly issued bonds.
Findings of ChinaBond ESG Evaluation and the Index
Chinabond ESG Select Credit Bond Index is used to assess the ESG investment strategy performance in the Chinese bond market. Preliminary studies show that ESG evaluation is a useful complement to corporate credit assessment, improves investors' risk management capabilities, enables more stable returns and helps investors practise sustainable investment.
Figure 1: Average ChinaBond ESG Evaluation scores vs ChinaBond Market Implied Ratings
Figure 2: Historical performance of various total return indices
Note: The basic reference universe differs slightly from that of ChinaBond Credit Bond Index, and the comparison results are for informational purposes only
Figure 3 Distribution of ESG Evaluation of the Index constituents (by quantity) as at 31 October 2020
Figure 4: Comparison of ChinaBond ESG Evaluation of index portfolios as at 31 October 2020
Figure 5: Annual increases in average ESG Evaluation scores of bond issuers in the ChinaBond ESG Select Credit Bond Index
In recent years, the concept of sustainable investment has been increasingly valued by government departments and related institutions, but there is still room for further development in information disclosure, evaluation framework standards and investor education.
 The credit qualification of bonds is based on the ChinaBond Market Implied Ratings;
 In the statistical sample, bonds with ChinaBond Market Implied Ratings below AA- account for only about 10% of the total sample and so have been included as a single group;
 The basic reference universe consists of bonds that meet the basic screening rules of ChinaBond ESG Select Credit Bond Index but are not screened for the ESG evaluation, and are used only for statistical reference
 The ESG rating of bonds issued by index component securities is calculated according to the weighting of the total market value weight of the bonds issued in the index