(Bloomberg) -- In a 40-minute livestream in June, fund manager Hou Chunyan made her pitch directly to China’s growing population of retail investors: ESG investing is uniquely compatible with Beijing’s growing push for carbon neutrality and “common prosperity.”

To that end, her portfolio — the Da Cheng ESG Responsibility Investment Mixed Fund — doesn’t rule out coal companies or liquor stocks. Chemical manufacturers are fair game, according to China’s main ESG benchmark, the CSI 300 ESG Leaders Index. So are solar energy and technology firms with alleged ties to forced labor in the Xinjiang region.

Lifted by President Xi Jinping’s net-zero commitment and anti-poverty campaigns, the pitch is working. Already one of the biggest issuers of green bonds, the number of ESG, “sustainable” and “green” portfolios has exploded as well. At least 112 of these new funds have launched in the past 20 months, according to Bloomberg data, nearly triple the debuts over the previous four years combined.

Retail investors in China have shown more appetite for these types of funds compared with people in other major Asian markets, according to a survey by Fidelity International. Assets under management have doubled to around $50 billion since the beginning of 2021.

What Chinese asset managers define as “ESG” closely hews to Beijing’s political priorities, including a 2060 net-zero goal along with energy security, rural employment and poverty alleviation. Of more than 170 ESG funds domiciled in China, about 15% are invested in coal companies, by far the country’s biggest source of greenhouse gas emissions, according to Bloomberg data. More than 60% have holdings in the steel industry, a massive consumer of the country’s coal.

“People say ESG like we’ve agreed upon what it is — we’ve not,” said Bradford Cornell, emeritus professor of financial economics at UCLA, who wrote a recent paper on ESG investing in China. “In China, the rules on environmental and social issues are made by the Chinese Communist Party.”

China’s unique approach demonstrates some of the universal appeal of a general ESG principle, that companies that consider environmental costs and social risks will, in the long term, generate higher returns. It also shows that there’s lots of room for countries and regions to define those costs and risks for themselves — and often at odds with each other.

“A local analyst would consider being a state-owned enterprise a good thing, while their counterpart in Europe might consider it a deal-breaker,” said Liu Xiangfeng, whose Beijing-based firm, QuantData, specializes in ESG analysis. “There is culture and ideology involved.”

As a result, alcohol giant Kweichow Moutai Co., with its rural employment initiatives, is one of the top holdings in the CSI 300 ESG Leaders index, which tracks the 100 Shanghai- and Shenzhen-listed companies with the highest ESG ratings. China Shenhua Energy Co. which gets 78% of its revenue from coal mining, is another top holding, because it’s generating some renewable power and boosting energy security. 

Roughly 10% of Chinese ESG funds also hold Hangzhou Hikvision Digital Technology Co., a surveillance technology company under US trade sanctions related to alleged human-rights violations against Muslim minorities in Xinjiang. The company denies the charge.

The market was all but nonexistent until two years ago, when President Xi Jinping announced that China would reach “carbon neutrality” by 2060. A year later, Xi added “common prosperity” — widely understood to include more anti-poverty programs — to the official agenda, and big state funds began to ask for investments that dovetailed with those priorities.

“The government is bound to generate its own interpretation of ESG, because they want to make sure it will not conflict with the country’s national economic strategies,” said Boya Wang, an ESG analyst at Morningstar Inc.. Under Beijing’s “common prosperity” push, “social inequality and local unemployment top the agenda.”

Global firms are also joining the rush. Axa SA and Morgan Stanley are launching new ESG funds with their joint venture partners, adding almost 2 billion yuan ($290 million) in combined assets in less than two years. 

Some of the biggest funds prefer catch phrases like “new energy” or “low carbon” or “social responsibility,” to the broader ESG label. Fullgoal Beautiful China Mixed Fund, for example, launched in 2016 with an investment strategy based on the “Beautiful China” initiative put forth a decade ago, which promotes sectors that contribute to sustainable development.

“Industries and companies favored under the policy will become good investment targets,” according to the Fullgoal prospectus. Moutai, Hikvision and Wanhua Chemical Group are among the top holdings in the 4.9 billion yuan ($730 million) in assets. It’s down around 20% this year, roughly the same as the CSI 300 ESG Leaders Index. Fullgoal and Da Cheng declined to comment for this story. 

Chinese funds aren’t alone in stretching the original definitions of ESG and sustainable investing. Regulators around the world are grappling with standards to ensure that an ESG label on any fund is warranted. Even in Europe, which is developing some of the most rigid criteria, funds can hold fossil-fuel stocks under so-called Article 8 rules, as long as they “promote” sustainability.

Those regulations also reflect government prerogatives. European-based ESG equity funds have been increasing their investments in firms like Shell Plc and Repsol SA since Russia’s invasion of Ukraine upended the energy markets, according to analysts at Bank of America Corp. They’ve also benefitted: One of this year’s top-performing managers of so-called sustainable funds owns ConocoPhillips and Exxon Mobil Corp. 

To a few ESG investors in Europe and the US, China’s authoritarian regime is an automatic disqualifier. China is “uninvestible from any ESG perspective,” Felix Boudreault, managing partner at Montreal-based Sustainable Market Strategies, told Bloomberg News this spring. “By a strike of a pen, a bureaucrat in Beijing can really kind of wipe out an entire sector.” A $118 billion Dutch investment firm started blacklisting China’s sovereign bonds and state-backed entities on concerns about Beijing, and Mirova, a $30 billion unit associated with Natixis Investment Managers, also excludes China.

But there are plenty more who see opportunity there. As of the end of March, ESG funds domiciled in Europe held about $130 billion in Chinese assets — more than twice the size of China’s own domestic ESG fund industry. US-managed funds own close to $8 billion in Chinese holdings. 

China’s approach is much less prescriptive, as funds look to mimic Beijing’s priorities that range from emissions cuts for cleaner air and water, to income inequality and social mobility.

“As an asset manager in China, aside from using international ratings as a reference, we must follow China’s current stage of industry development and invest accordingly,” said Shirley Xu, head of ESG research at China Asset Management Co. “We’ve had to make appropriate adjustments according to our own Chinese characteristics. The principles and methodology could be different.”

For example, she said, global ESG investors might prioritize green construction when investing in the property sector. “We don’t think that’s the core issue for China’s developers,” she said, giving precedence instead to governance issues like accounting irregularities or potential corruption. “That is how we do localization of ESG.”

Chinese ESG funds also have plenty of holdings in “green” companies, including electric-vehicle makers and solar companies. Some 63% hold Tesla Inc. battery supplier Contemporary Amperex Technology Co. and half have exposure to Longi Green Energy Technology Co., the world’s largest solar company. 

China-domiciled ESG funds are down 12.5% on average this year, less than the 18% drop in the CSI 300 Index. Globally, ESG funds have generally outperformed the broader market, even as many have tech-heavy, energy-light portfolios.

Betting on Beijing’s priorities is no guarantee of success, “but there’s a higher chance of government support,” said Wang. By following the party’s priorities — sometimes at the expense of ratings and even returns — China ESG funds “contribute more to certain social goals.”

©2022 Bloomberg L.P.