Rural revitalization: the role of socially responsible investment

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Socially responsible investment may become an important force to fill the gap in funding for China’s rural revitalization, “enabling capital to flow more responsibly to the countryside”, according to a newly released report.

The report, titled “Unleashing Potential: Socially Responsible Investment for Rural Revitalization”, was published by the Chinese Academy of Financial Inclusion at Renmin University of China (CAFI) at the 2022 International Forum for China Impact Investing.

Rural revitalization is crucial to China’s sustainable development

The report points out that China cannot achieve sustainable development without revitalizing its rural areas, for example, building an inclusive society requires narrowing the gap between urban and rural areas, and addressing climate change requires improvement of farmers’ ability to resist climate risks.

What is rural revitalization?

It is the process of improving farmers’ income and developing rural industries while taking into account environmental protection and human development. It includes both an increase in material wealth as well as benefits from the cultural and governance perspective. More specifically, according to the report, rural revitalization should at least cover the following four aspects:

Improvements to the total factor productivity of agriculture: Due to the fact that China has a large population with limited land, the key to its agricultural development is to effectively utilize the land and actively seek technological advancements. Therefore, optimal allocation of resources should be promoted in rural areas to moderately develop large-scale operations and promote efficiency.

Develop county-level rural industries according to local conditions: The report argues that in addition to the agricultural industry, counties could develop non-agricultural industries according to their locations. However, counties within main agricultural production areas are advised to prioritize their produce-processing industry and agricultural productive service industry.

Improve rural human capital: There is still a big gap between the level of human capital in China and that in developed countries, according to the report. Rural human capital in particular has considerable room for improvement, in terms of education level and health status. Solving these issues is crucial for China on its way to becoming a high-income country.

Make good use of rural ecological resources: Ecology is the biggest advantage of rural areas. To increase people’s wealth as well as preserve nature, several measures are recommended, including correcting price distortions through government guidance, and engaging more financial institutions and different sectors in eco-compensation through a market-oriented mechanism.

Large quantities of investment are needed to achieve these goals, but several challenges still remain. County-level governments, small and medium-sized rural banks, and the private sector rooted in the countryside are generally facing financing difficulties. In addition, public investment generally lacks efficiency, and most capital flowing into rural areas is driven by short-term interests without any long-term vision or social responsibility drive.

The role socially responsible investment can play

The report suggests one solution to these challenges: socially responsible investment (SRI), which includes sustainable finance, ESG investing, and impact investing based on CAFI’s definition, for they all emphasize investments for social and environmental benefits.

To unleash the potential of SRI to tackle these challenges, the report highlighted the necessity of investment guidelines, which should provide answers to the following questions to help investors set up their investment strategies.

First, investors should be able to find out what key areas they can focus on. For example, to guide SRI in agriculture and rural industries, the Ministry of Agriculture and Rural Affairs has specified 13 key areas, including the modern breeding industry, modern seed industry, produce processing and circulation industry, and agricultural and rural infrastructure.

Second, it is important to help investors understand what social and environmental benefits can be generated, what impact their investments in the key areas can have on different demographic groups, and how they can contribute to the United Nations’ Sustainable Development Goals.

Third, besides the focus areas of investment, investors should also be well-informed about what investment options are available and what are some cases that can be referred to and learned from.

Lastly, they should know what impact metrics can be used to measure and manage social and environmental benefits. It is difficult for investors to conduct impact management if rural financing entities including local governments, small and medium-sized financial institutions, and the private sector, do not provide authentic, reliable, and verifiable data on their impact performance.

Therefore, rural financing entities need to be urged to use impact metrics and management, which consists of five dimensions: (1) What impact? (2) Who is impacted? (3) How much impact is there? (4) What are the additional contributions? (5) Potential risks.

During the process of achieving rural revitalization and bringing in SRI, local governments should improve the market-based eco-compensation mechanism, for example, by correcting price distortions and introducing more financial institutions to participate in eco-compensation through a market-based mechanism.