Sustainable Investment in China | Looking to China’s Philanthropic Sector to Push Sustainable Investing Forward

Charities and foundations that focus on social well being and environmental protection are some of the major players in the global sustainable investment market. There are several opportunities for these organizations to align their missions with their asset allocations.

However, foundations’ interest in sustainable investment varies around the world. In recent years, interest in sustainable investment in the United States and Europe has been on the rise. For example, a U.S. group of foundations launched the “2% for Mission Campaign” to encourage their peers to place at least 2 percent of assets in mission-related investment products. And in Europe, many charities are already adopting social investment practices: A 2009 survey conducted by the Charity Finance Directors Group and EIRIS Foundation revealed that 60 percent of U.K. charities with assets totaling more than GBP1 million (US$1.6 million) had an ethical investment policy.

This development, however, has progressed more slowly in China due to its relatively young philanthropic sector and underdeveloped sustainable investment market. Before 2004, there were very few foundations operating in China. Ever since the implementation of the “Regulation on the Administration of Foundations”—which clearly defined the work scope of private foundations, differentiated between public and private foundations for the first time, and enhanced tax incentives for personal and corporate donations to foundations—the number of foundations in China has increased dramatically. By the end of 2009, there were more than 1,843 foundations in the country. Even though the value of foundations’ assets has been growing steadily, many foundations still do not pay attention to their capital investments.

To help China’s investment community move the sustainable investment market forward, BSR has identified a few of the major impediments that are hindering China’s philanthropic sector from participating:

• Limited tax incentives for money management by foundations and charities: According to Ministry of Finance regulations, investment income earned by nonprofit organizations is not tax exempt. Additionally, the National Tax Bureau’s “Regulations on Pre-Tax Income for Foundations” specifies that foundations should pay a 25-percent tax on all income derived from asset appreciation, which is the same rate as taxes on business income.
• Lack of awareness of sustainable investment: According to BSR’s 2009 study, sustainable investment in China is still relatively underdeveloped and a fairly new concept for most foundations and endowments in the country. The first Socially Responsible Investment (SRI) Fund was established in China in 2008 by AEGON-Industrial Asset Management.
• Few sustainable investment products and services are available in China: Compared to the West or even East Asia, there are limited sustainable investment products in China. At present, AEGON-Industrial Asset Management, CCB Principal Asset Management, and China Universal Asset Management are the only three major asset managers with sustainable investment products available in mainland China. Compare this to Japan, however, where there are more than 80 such products. In addition, there are a limited number of intermediaries (such as investment consultants) who advise foundations and endowments on asset allocations and fund selection in mainland China.

To overcome the challenges mentioned above, we recommend the following:

• Asset managers need to create suitable sustainable investment products and generate interest in those products among charities and foundations by educating them on the potential social benefits sustainable investments can have.
• International charities and foundations should share their experiences building sustainable investment policies and strategies with their peers in China.
• Charities and foundations in China should engage with the government to find more options for tax relief on investment income. As long as the income is used only for charitable purposes, all of the investment income should be tax exempt.

If charities and foundations in China commit to sustainable investment practices, they can play an important role in stimulating the overall sustainable investment market in the country.