Is China the single most important driving force behind many aspects of ESG’s current reinvigoration? Xin-Yao Ng is Co-Manager of Aberdeen Asia Focus plc and in his latest article, explores this question with a top down and bottom up approach.
ESG is back in fashion – sort of. Having experienced declines throughout 2025, global sustainable investment funds returned to positive net flows during the first quarter of this year [1].
Europe is credited with leading the revival. European-domiciled ESG funds recorded net inflows of $9.1 billion in Q1 2026, having suffered outflows of $16 billion in Q4 2025 and $62 billion during last year as a whole [2].
By contrast, the US appears to be the designated villain of the piece. It has now experienced ESG-related outflows for 14 consecutive quarters [3], and it’s hard to envisage any kind of sensational reversal while Donald Trump presides over the world’s largest economy.
But what about the world’s second-largest economy? Historically, China was routinely portrayed as the bête noire of the ESG scene. Today, amid nascent evidence of an ESG renaissance, it still struggles to enter many investors’ conversations.
Does this mean China is such a lost cause ESG-wise that it isn’t even worth talking about? Is the inference here that Europe is the undisputed torchbearer, that the US will one day somehow redeem itself and that China, alas, is utterly beyond salvation?
Hardly. Get past the headlines, the at-a-glance figures and the high-level narratives and you’re likely to find China – far from being a full-blown no-hoper or, at best, a fringe player – is arguably the single most important driving force behind many aspects of ESG’s current reinvigoration.
From top-down…
It’s in terms of the E of ESG that China is proving most influential. Its approach in this regard could hardly be more top-down.
Five years ago, addressing a virtual summit staged during the ravages of the COVID-19 pandemic, President Xi Jinping declared his nation “a trailblazer in global ecological conservation” and urged all of humanity to “respect nature, follows its laws and protect it” [4].
The remarks may have seemed laughable to some at the time, but events ever since have shown Xi was far from joking.
With “green factory” considerations at the heart of industrial policy, China now operates an emissions-trading initiative of unrivalled scale.
The scheme extends beyond the energy sector and encompasses industries such as steel, aluminium and cement manufacturing.
Beijing’s broader commitment to the energy transition has already resulted in pre-eminence in both electric vehicles and the batteries that power them. BYD, which was founded in 2003, and CATL, which was established just 15 years ago, are now the respective leaders in these fields.
Perhaps even more significantly, Chinese primacy in solar and wind energy is unquestioned. Research published in 2024 suggested the quantity of renewables under construction in China was more than double that of the rest of the world combined – and even this was reckoned to be a conservative estimate [5].
Alongside unprecedented levels of state support, two attributes in particular have underpinned this rapid rise. The first is China’s acknowledged strength in industrialisation and commoditisation. The second is an apparently insatiable appetite for technological innovation.
…to bottom-up
It must be said that China’s environmental record remains somewhat less than spotless. The country was the principal producer of greenhouse gas emissions when Xi championed its credentials back in 2021, and it still holds that dubious distinction today [6].
Yet few economies are better positioned to achieve net zero. China’s latest Five-Year Plan includes a call for the development of “a new energy system that is clean, low-carbon, safe and efficient” by 2030, with ongoing incorporation of solar, wind, hydro and nuclear power [7].
For ESG investors, of course, it’s vital to remember that investing in Chinese companies isn’t simply a matter of investing in China’s own environmental journey. It’s also a matter of investing in the environmental journeys of the many nations that use these companies’ products.
The aforementioned BYD and CATL both illustrate the point. The latter’s case is especially relevant in this context, because CATL can be seen as an enabler – that is, a brand-agnostic manufacturer that supplies multiple customers in a rapidly expanding arena.
This helps explain why a fund like ours prefers to specialise in smaller companies.
In China and, indeed, across Asia and elsewhere, the most promising businesses at the lower end of the market-capitalisation spectrum tend to offer both more scope for growth over the long term and a greater focus on the innovative thinking necessary to fuel positive, lasting change.
There was a time when China featured in ESG discussions only as a subject of contempt or even ridicule. Today, by any reasonable standard, it deserves to feature as a subject of serious investor interest.
Sources:
[1] See, for example, ESG Today: “Sustainable fund flows return to positive territory, driven by rebound in Europe: Morningstar”, May 28 2026 – https://www.esgtoday.com/sustainable-fund-flows-return-to-positive-territory-driven-by-rebound-in-europe-morningstar/.
[2 & 3] Ibid.
[4] See, for example, People’s Daily: “Xi calls for unprecedented efforts to improve global environment governance”, June 6 2021 – http://en.people.cn/n3/2021/0606/c90000-9858116.html.
[5] See, for example, Guardian: “China builds two thirds of world’s wind and solar projects”, July 11 2024 – https://www.theguardian.com/world/article/2024/jul/11/china-building-twice-as-much-wind-and-solar-power-as-rest-of-world-report.
[6] See, for example, Carbon Brief: “Analysis: China’s CO2 emissions have now been ‘flat or falling’ for 21 months”, February 12 2026 – https://www.carbonbrief.org/analysis-chinas-co2-emissions-have-now-been-flat-or-falling-for-21-months/.
[7] See, for example, Carbon Brief: “What does China’s 15th ‘five-year plan’ mean for climate change?”, March 6 2026 – https://www.carbonbrief.org/qa-what-does-chinas-15th-five-year-plan-mean-for-climate-change/.
Main image: China, ESG, william-olivieri-HwY9R6_YzgM-unsplash
