The integration of Environmental, Social, and Governance (ESG) principles into investment strategies has gained significant traction in China in recent years. Chinese policymakers and financial institutions increasingly recognise that mobilising capital in alignment with ESG objectives and principles can play a critical role in advancing national priorities. These priorities include the ‘dual carbon’ targets of peaking carbon emissions by 2030 and achieving carbon neutrality by 2060, promised by President Xi Jinping during the general debate of the 75th session of the United Nations General Assembly in 2020. The growth of ESG-focused, green or sustainable-themed investment funds in China thus reflects both an internal policy imperative to promote green finance and an external response to international standards.
The development of green financial instruments in China has followed a phased and sequential trajectory. In the early stages, policy and regulatory efforts were primarily concentrated on green credit and green bonds. Within this context, green industrial funds, especially those closely aligned with industrial policy and established under government participation, emerged as important vehicles for promoting specific green sectors.
As market mechanisms matured and ESG awareness increased, ESG-themed publicly offered funds and market-driven green private equity (PE) and venture capital (VC) funds began to expand rapidly. By 2022, the assets under the management of publicly-offered ESG funds continued to grow. This shift from policy-driven, government-led financial tools to a more diversified and market-oriented landscape has shaped the current structure of China’s ESG fund market.
While China’s ESG funds have demonstrated substantial progress in market scale, a significant literature gap remains. My new paper titled ‘The Rise of Sustainable Finance in China: ESG Funds and Regulation’ seeks to fill this gap by addressing the following key research questions:
- How are different types of ESG funds operated and regulated in China and what legal reforms are needed to ensure the sustainable growth of ESG funds?
- What are the regulatory approaches of ESG funds in China, and how do they compare with those in the European Union (EU)?
- What insights and lessons can be drawn from China’s legislative and regulatory experience in the development of ESG funds?
Given the EU’s leadership in green finance regulation and the ongoing close cooperation between China and Europe on sustainable finance standard-setting, exemplified by initiatives like the Common Ground Taxonomy (CGT), this article examines China’s ESG fund ecosystem from a comparative perspective. It first discusses the concept and classification of ESG funds in China, including public, private, government-guided, and public–private partnership (PPP) funds. It then examines the regulatory framework for ESG funds in China, covering policies, fund establishment, labelling, standard-setting, investment operations, industry guidelines, local legislation, information disclosure, ESG ratings, and requirements for fund managers.
This article finds that China currently lacks a comprehensive regulatory framework governing sustainable investment and related funds. In the early stages of fund development, particularly green funds, regulatory emphasis has been placed on top-down policy promotion rather than the construction of a dedicated supervisory framework. The result is a state-led model of multi-agency coordination characterised by an adaptive approach to policy design, while standard-setting efforts remain ongoing and incomplete.
At the institutional level, China has adopted a step-by-step approach, emphasising the role of government in directing capital flows into green sectors and fostering real economic activities. This strategy aims to gradually shape a uniquely Chinese pathway for ESG fund development. The above initiatives are mainly reflected in the following aspects:
- From the exemplification of SOEs to inclusive transformation;
- The market mechanism centred on information disclosure is in decline; and
- Stage-by-stage focus on “E before SG” and long-term prospects.
Against this backdrop, China’s green finance policy reveals a foundational tension. The state’s priority has been to deploy financial instruments capable of rapidly channelling large volumes of capital into national strategic sectors. However, relatively limited attention has been paid to the design of mechanisms that incentivise the market-based operation of private capital. While this strong top-down mobilisation framework has proven effective in steering capital flows towards key sectors, it may also give rise to concerns of overconcentration of risk and insufficient reliance on market forces. To address this tension, the article suggests that it is essential to construct a self-sustaining ESG investment ecosystem. The effectiveness of China’s ESG investment ecosystem relies on the distinct yet synergistic interactions among its key participants: invested entities, fund managers, and ESG funds.
In this model, the process begins with the fund manager, who integrates sustainability risks into investment decisions and practises active stewardship to influence corporate behaviour. This relationship is operationalised through a strategically designed ESG fund, which serves as the vehicle for allocating capital towards sustainable activities and directing funds to enterprises that meet verifiable criteria. To maintain integrity and prevent greenwashing, the fund manager is responsible for ensuring the fund’s strategy, classification, and marketing, ultimately connecting investor capital with companies committed to driving a sustainable transformation.
Building this market-based ecosystem in China requires a nuanced approach. A linear progression, where rigid, prescriptive standards are presumed to precede orderly market growth, is empirically unfounded and risks stifling necessary financial innovation. Therefore, recognising that China’s ESG fund market is in its early stages where government intervention is particularly high, a more foundational strategy is needed. Focused efforts should be directed towards constructing four core enabling pillars:
1) Conceptual guidelines: establishing clear legal definition and official classification standards;
2) Incentive mechanisms: encouraging genuine green investment;
3) Information disclosure: ensuring transparency and accountability; and
4) Active shareholder cultivation: fostering engagement and participation.
The article concludes that China’s ESG fund market is still in its early stages of development, with its primary drivers coming from the government, central and local SOEs and government guidance funds. The investment strategies of these entities typically align closely with national strategic objectives, providing crucial impetus to China’s ESG market. Against the backdrop of the relatively weak foundation of China’s ESG fund market, this government-led development model is rational and demonstrates significant momentum. The trajectory of China’s ESG funds indicates that, in an environment where market mechanisms are underdeveloped, sustainable financial instruments can explore development models. However, excessive policy support may limit the functioning of market forces. This potentially hinders non-SOEs, SMEs, and the innovative industries from accessing necessary financial support when they lack policy backing. It may also give rise to risks such as greenwashing and regulatory arbitrage.
With the continuous development of China’s ESG investment regulatory framework, particularly the improvement in company-level ESG disclosure rules in recent years, China has clearly demonstrated its willingness to develop market-driven mechanisms for ESG investment. As China continues to build its ESG ecosystem, policymakers must balance between incentivising equity capital to flow into ESG investments, and establishing robust standards and disclosures to guard against greenwashing. Clear and enforceable ESG frameworks are essential to protect investors’ trust and ensure the integrity of sustainable finance. At the same time, it is critical that capital not only circulates within financial markets, but is also channelled into the real economy, supporting innovation, entrepreneurship, and the development of genuinely sustainable industries. This dual approach will be key to aligning financial growth with long-term environmental and social goals.
The author’s paper is available here.
Lin Lin is an Associate Professor at the Faculty of Law, National University of Singapore.
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