A strange and contradictory feature of the current market is how global capital can both support and subvert the environmental, social and governance agenda, which has always been the central focus of investors’ attention. COP26 Climate Change Summit.
According to data from the data provider EPFR, equity funds with socially responsible investment or ESG authorization have attracted twice as much capital so far this year as similar funds without them.
However, this promotion of decarbonization and social responsibility is not only an asset management marketing strategy, but also a symbol of virtue, mainly a stock market phenomenon.
In the larger global bond market, BBVA’s Global Market Research Department estimates that by the end of 2020, the stock of green, social and sustainable bonds has not reached US$1 trillion of the total US$128 trillion market. Although this green exposure is rising rapidly from a low base, it is undoubtedly insignificant.
The vast majority of this market is morally worthless. ShareAction, a non-profit responsible investment research group, Established For example, last year, 84% of asset management companies did not oppose the public policy of purchasing sovereign bonds from countries that are subject to international sanctions for human rights violations.
One consequence of this in the fund management community is that global capital is rewarding China, The world’s largest polluter And a country criticized for human rights. Despite the growing geopolitical tensions between Washington and Beijing, foreign direct investment in China is still at a record level, and inflows into China’s domestic debt will reach US$186 billion in 2020.
According to data from the central bank, even if the market is uncomfortable with the regulatory risks caused by Beijing’s “shared prosperity” agenda and the rising risk of default in the real estate industry, foreign holdings of Chinese bonds have jumped by about 30% in 2021, reaching more than 3.9 tons.
For debt investors, the bait is that the long-term yield of China’s sovereign debt market is significantly higher than that of the U.S. Treasury market. Since the inflation rate is much lower than that of the United States, the actual rate of return on the Chinese government’s IOU is also positive. Therefore, for global investors, seeking income is better than ESG considerations. At the same time, Chinese bonds are gradually being included in large global indexes to ensure that passive fund managers who track them continue to inject more funds into China.
Nevertheless, the ESG sensitivity of the global bond market will continue to rise, as developed countries’ central banks are working to green their bond portfolios acquired through asset purchase programs.
According to data from China’s foreign exchange regulator, the central bank accounted for US$264 billion of the outstanding balance of US$512 billion of foreign-held Chinese debt.
The liquidity of the Chinese government bond market is relatively poor because commercial banks, which are the main participants in the market, buy and hold until maturity. Therefore, the increase in the central bank’s exposure to its risk reflects an increasing tendency to prioritize diversification and seeking returns over liquidity and safety.
It also shows that central banks such as the European Central Bank and the euro system central banks holding RMB-denominated assets may fall into an internal green-brown carbon conflict.
COP26 policymakers have been seeking asset managers and owners to do a lot of decarbonization, whether it is funding the reform of carbon-intensive capital stocks or putting pressure on companies to achieve net zero emissions. However, given that many large greenhouse gas emitters are state-owned or privately owned, their ability to do is limited, so there are not many institutional investors.
In addition, BlackRock’s chief executive, Larry Fink, warned that the pressure of listed companies to pursue net-zero targets—while keeping private companies out of the spotlight—is creating opportunities. “The biggest capital market arbitrage in my life”.
He makes sense, although the transfer of dirty assets from public assets to private equity also brings the greatest regulatory risk on the planet. This is because if carbon pricing is not used more widely, the goals of Paris and Glasgow will not be achieved, which will seriously damage the value of dirty assets. However, private equity managers know that carbon pricing and stricter regulation of heavy emitters are politically worrying. Therefore, their absorption of carbon-intensive assets of listed companies may continue for some time.