Allianz Global Investors is frequently quizzed about its stance on the balance and interplay of its strategic focus on both China and sustainability.
We do not take this topic lightly and we wanted to provide our perspectives as to why the two are not mutually exclusive topics, and how we are adopting a pragmatic approach to the transition of such an important economy.
China’s goals are not dissimilar from those of other countries – it wants to create a resilient and growing economy to ensure stability and confidence. It is how it seeks to achieve these goals where most discussion rests.
China is a genuine leader in clean energy. Given that the country emits 27% of global CO2 and a third of global greenhouse gas emissions,¹ the advances in its technological capabilities will help not only its own path to net zero but contribute to global goals. China produces the most renewable energy globally and it is the world’s largest producer of wind and solar energy and the largest investor in renewable energy.² According to S&P Global, China is on track to meet its 33% electricity consumption target from renewables by 2025.³
China also has a significant role to play in fostering and protecting biodiversity, which will help it sustain its population’s needs. China is among the 17 mega-diverse countries in the world,⁴ which together account for only 10% of the earth’s surface but at least 70% of its biological diversity. China’s environment minister was the chair at December’s COP15 meeting, which saw the historic “30 by 30” biodiversity loss reversal framework.
Engaging on social and governance topics
While there appears to be alignment on environmental strategies and credentials, the fellow “ESG” areas of social and governance are more sensitive. China is not the only authoritarian regime, although it is the largest and most influential for the global economy. The most sensitive of these considerations is human rights, and the findings of a report by the UN High Commissioner for Human Rights in September brought the topic to the headlines.⁵ The question for us as an asset manager is how best we can engage on such topics.
Efficient access to capital markets is one way in which a country ensures a resilient financial profile. Should the UN’s guiding principles on business and human rights become more integrated into law and regulation (eg, via the EU’s proposed directive on corporate sustainability due diligence⁶), China will be aware of the standards required to ensure and expand its access to global capital markets.
If legal and regulatory frameworks combine with collective and collaborative engagement to guide China and its companies on a pathway (as with decarbonisation and net-zero initiatives), there may also be meaningful incentives to address social and governance issues. While exclusion may be a simpler answer, we believe we should attempt to use whatever influence we can exert to achieve genuine transition. On the governance side, it is notable how Chinese companies have evolved and continue to develop their disclosures and investor engagements based on normalising expectations.
Avoiding geopolitical parallels
On the geopolitical front, we acknowledge heightened nervousness around Taiwan, driven in part by a perceived parallel with Ukraine. We think the parallels are misplaced, and that the differences are greater than the similarities. It is worth reiterating that the delicate situation with Taiwan has been the status quo for decades. Moreover, China is not Russia, and all countries will have learned important lessons from the events of the last year.
We recognise that the transition pathway for sustainability can be complex, challenging, uneven and divisive on many fronts – China is no different. As a firm, we prefer to engage rather than exclude but within clear guidelines – by having an expanded presence in Shanghai, we are better positioned to target this. China operates based on Five-Year Plans and when the 14th Plan was introduced in 2021, there was a clear shift from quantitative growth to quality development. As China approaches its 15th Plan for 2026, there is an opportunity to contribute to the country’s development strategy.
1 https://www.worldbank.org/en/news/press-release/2022/10/12/china-s-transition-to-a-low-carbon-economy-and-climate-resilience-needs-shifts-in-resources-and-technologies
2 Column: China widens renewable energy supply lead with wind power push | Reuters
3 https://www.spglobal.com/commodityinsights/en/market-insights/latest-news/energy-transition/092322-china-could-exceed-renewables-generation-target-of-33-by-2025#:~:text=According%20to%20the%20NEA%20report,to%20the%20intermittency%20of%20renewables.
4 The World Conservation Monitoring Centre (WCMC) of the United Nations Environment Program has identified a total of 17 mega-diverse countries: Australia, Brazil, China, Colombia, Ecuador, United States, Philippines, India, Indonesia, Madagascar, Malaysia, Mexico, Papua New Guinea, Peru, Democratic Republic of Congo, South Africa and Venezuela.
5 https://www.ohchr.org/en/press-releases/2022/09/xinjiang-report-china-must-address-grave-human-rights-violations-and-world
6 https://commission.europa.eu/business-economy-euro/doing-business-eu/corporate-sustainability-due-diligence_en