Better ESG data disclosure is coming to Hong Kong, although it is yet to reach global standards

9 Jun, 2020 06:40
source: Singularity Financial

Singularity Financial Hong Kong June 9, 2020 – Starting from fiscal years July 2020, Hong Kong stock exchange requires that, all exchange-listed companies produce a statement setting out the board’s consideration of ESG risks, as well as how it determines what ESG matters are material to the business.

That materiality assessment is significant, according to Morgan Stanley analysts, because it is likely to force executives to fully integrate such disclosures into their business strategy “instead of merely a box-ticking requirement”.

The stock exchanges of Shanghai and Shenzhen are expected to follow Hong Kong’s lead this year, and require all issuers to increase ESG disclosures. The China Securities Regulatory Commission (CSRC) has announced such a plan, but has yet to provide details for the more than 3,000 companies affected.

But while developed markets’ heightened focus on sustainable investing is often driven by investors — in turn under pressure from their clients — it is a different story in China, where the government plays a more powerful role in the functioning and purpose of markets.

More and better information is needed, said Mengran Zhao, lead ESG analyst at Beijing-based China Asset Management, which has about $150bn in assets. Once the CSRC code kicks in, she said, “we can make more quantitative decisions instead of only qualitative decisions”.

But some issuers appear to have provided that information through gritted teeth. In its response to the Hong Kong Stock Exchange’s ESG proposal, conglomerate CK Hutchison, which has assets spanning retail, ports, oil and telecoms, said many of its individual shareholders “view such reporting as wasting company resources”.

Issuers of bonds, too, are under some pressure to tighten standards. China has embraced the trend for “green bonds” — whose proceeds are supposed to be used to fund environmentally-friendly projects — with vigour, selling $13.9bn between January and August last year. That puts it third as a nation behind Germany and France, according to the Institute of International Finance.

China’s domestic green bond market has been a minefield for global investors, who worry they might inadvertently buy green debt that does not meet international standards. But the growth of the Chinese market in recent years has been too fast for the world’s largest investors to ignore, and many experts say standards are improving.

“What I’ve seen is the rapid growth of the market but a slight increase in harmonization with international standards,” says Xuan Sheng Ou Yong, a green bond analyst at BNP Paribas Asset Management in Hong Kong.

Chinese companies led the world in green bond issuance last year, when they sold $33.6bn worth, according to data group Dealogic. The country’s rise to the forefront of the market has been rapid, expanding from three green bond deals worth $1.2bn in 2015 to 43 worth $33.2bn the following year.

Green finance is an area of focus for many of the world’s largest asset managers and pension funds. Such investors have created “environmental, social and governance” (ESG) frameworks that guide how they invest and ensure they are not creating unacceptable levels of pollution or disruption to local communities.

Several global organisations have issued guidelines for green finance standards. The International Capital Market Association (ICMA), for example, issues the Green Bond Principles, which are used as a cornerstone for global standards.

But China’s domestic market, in which most of its green bonds are issued, is still far from meeting such standards, meaning that most of the world’s largest and fastest-growing green bond market is off-limits to foreign investors.

“Despite its relatively large size, we believe global green bond investors are not involved in China’s domestic renminbi-denominated green bond market,” says Singapore-based Paul Lukaszewski, Aberdeen Standard Investments’ head of corporate debt for Asia and Australia.

Yet there are also signs that Chinese bond issuers are learning how to live up to global standards. The percentage of offshore green bonds denominated in currencies other than the renminbi has increased over the past four years. Those securities have been forced to reach global standards in order to attract investors.

“Almost all Chinese green bond issuance in the offshore market follows the Green Bond Principles — so international investors can have confidence that the use of proceeds and the disclosure are in line with international best practice,” says Mushtaq Kapasi, the ICMA’s chief representative for the Asia-Pacific region.

Despite the challenges, there are signs that China’s onshore market could become more accessible for global investors. Last week, China’s central bank proposed excluding “clean coal” projects from qualifying for green bonds funding — a major step in aligning with global standards.

Some experts also say Chinese financial disclosure is improving, although it is yet to reach global standards.

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