Environmental, social and corporate governance (ESG) disclosure in China has gained momentum in recent years, but data disclosure, governance issues and regulatory risk need to further improve if the nation is to move in line with international standards, according to a recent report published by Willis Towers Watson.
Global asset owners look set to continue providing this pressure, as they further embrace ESG standards and demand that their external fund managers do so as well, including in China.
The number of ESG reports published by China A-share companies and CSI 300 constituent firms increased from 1,193 in 2009 to 1280 in 2020. But the report noted that this remains a low level, given that only 25% of the 4,000 A-share companies have published ESG data.
“Factors such as controlling shareholders (state-owned; founder-led) and a low level of ESG disclosure need addressing to help China move in line with global ESG best practices,” Liang Yin, China project lead at Willis Towers Watson and lead author of the report, told AsianInvestor.
Still, he is confident that China is catching up with the rest of the world and will continue to do so when mandatory ESG disclosure rules for all listed companies are eventually enforced.
There are no plans for mandatory ESG disclosures in China yet, but President Xi Jinping said the country planned "to have CO2 emissions peak before 2030 and achieve carbon neutrality before 2060", at a virtual meeting of the UN General Assembly last September.
Most recently, China barred fossil fuel projects from being applicable for green bond issues, for which the country has become the leading issuer in the world. Chinese borrowers including banks, property developers, power generators and railway operators sold $15.7 billion of the bonds between January and March to fund ‘green’ projects such as clean and renewable energy, according to Refinitiv data.
David Smith, a senior investment director for Asian equities at Aberdeen Standard Investments, agrees that China could improve on ESG data disclosures and governance. But he believes the country's regulators are moving in the right direction.
“Disclosures are extremely inefficient in China compared with other markets, [but with] national-level regulators’ support and push, the ESG development is clearly going in a right way in the country,” Smith told AsianInvestor.
However, corporate governance in China "has huge potential for improvement and given that the capital market of China is still going through a maturity and internationalisation stage, the pick-up in governance improvement might take some time,” Smith said.
The Willis Towers Watson report found that in terms of worldwide governance indicators, China had improved in several areas namely rule of law (45.2% percentile), political stability (38.1% percentile) and government effectiveness (71.6% percentile). But they remained in the low percentile of 6.4% for voice and accountability. Regulatory quality and control of corruption also remained stagnant at around the 40% percentile.
China's engagement with ESG is becoming increasingly important to global asset owners who have embraced the principles. Many of these global institutional investors want to build their exposure to China's large and fast growing economy, particularly as it gains more weighting in global benchmark indexes. But they want to do so in a manner consistent with their avowed commitments to sustainable investing.
This is sometimes easier said than done, with political and regulatory risks in particular proving difficult to navigate at times.
The recent Ant Group saga, in which the Chinese government halted its public listing in Shanghai and Hong Kong last year days before it was to proceed and slapped it with a $2.75 billion monopoly fine, highlights the regulatory risk in the country.
Ant Group, the financial affiliate company of tech giant Alibaba that was established by business tycoon Jack Ma, was also asked to hand over its data to a state-controlled company to be run by former central bank officials.
Regulatory reform has been an integral part of China's economic reform for the past four decades, and astute investors will need a firm handle on how it proceeds, Liang said.
"The key to address this risk is having skilled asset management that understand the lay of the land,” he highlighted, adding that well-resourced local investor partners could help global institutions narrow their risk.
To attain higher efficiency in research work and a better grasp of localised ESG data and frameworks, "more asset owners have been willing to lean on local, on-the-ground partners to access China’s vast capital market," he observed.
The pressure for local companies and fund managers to improve local ESG reporting looks set to continue. Domestic fund houses note that they have been increasingly asked by foreign institutional investors about their ESG considerations.
“We’ve received more ESG-related requests from overseas institutional investors last year and, to be honest, it is very difficult to secure a mandate from European investors if a fund is not equipped with a satisfactory ESG framework”, said Rebecca Fan, managing director at Bosera Asset Management.
Fan said some investors have enquired about how their portfolio compares with ESG weighted indices.
However, more work needs to be done. Jeremy Tai, global business manager at China-based Harvest Fund, told AsianInvestor that local asset managers struggle to meet international standards.
“ESG in China is still in its early stages and local asset managers face the challenge of achieving the breadth and depth for a systematic ESG framework, including data sourcing and scoring granularity,' he said.
He tries to solve this by referring “to global ESG frameworks and focusing on localised issues and metrics in combination with insight from fundamental analysis,” he said.