Chinese opportunities are hard for ESG investors to ignore despite the social turmoil

1 Jun, 2020 12:39
source: Singularity Financial

Singularity Financial Hong Kong June 1, 2020 – Chinese opportunities are hard for ESG investors to ignore despite the social turmoil.

Attention to the social aspect of ESG has lagged behind environmental and governance concerns as it is generally less understood and inherently more qualitative. Indeed, according to the UN’s Principles for Responsible Investment (UNPRI), the “social element of ESG issues can be the most difficult for investors to assess.”

Amid ongoing trade tensions with the U.S., China took steps this month to impose national security laws on Hong Kong, raising concerns about the global commercial and banking hub’s autonomy. The U.S. administration said Hong Kong may no longer be considered autonomous enough to quality for special economic treatment from the U.S.

Hong Kong is critical to raising capital to China at a time that Nasdaq is pushing forward with proposals to delist companies that don’t comply with U.S. accounting oversight rules following an accounting scandal at U.S.-listed Chinese firm Luckin Coffee (LK). At the same time, the White House has directed the federal pension fund to halt plans to invest in Chinese companies.

If there are sanctions placed on investing in China and Hong Kong, “every U.S. asset manager will have to abide,” Guillaume Mascotto, head of ESG and Investment Stewardship for American Century Investments, said in an interview.

Many ESG investors already shun China, because the stocks generally don’t have high ESG ratings. Low P/E ratios across sectors like health care, real estate and energy “are not enough to counteract the sizable ESG Risk Rating spread differentials across every sector,” Sustainalytics wrote recently.

In China, ESG data “is spotty at best, and many people do not trust it in the first place,” Boudreault said. Hong Kong, however, has been robustly improving ESG reporting, introducing voluntary disclosure guidelines in 2013 and moving to mandatory reporting beginning in July, he said. As China relaxes ownership restrictions, companies will cater to pressure from investors who increasingly place a premium on sustainability, he said. That will lead to more transparency in financial disclosures.

Hong Kong’s autonomy will remain important to China, which still needs access to international capital, even though China will be a competing financial center. Chinese opportunities are hard for ESG investors to ignore because of the government’s commitment to decarbonizing the economy, not to mention the size of the economy.

“Clean environment and green finance initiatives, which would be reasons that would interest investors,” said Mozaffar Khan, analyst at Causeway Capital, in an interview. Still, Khan cautioned, spotty ESG data means that extra “boots-on-the-ground” research as well as greater engagement with companies will be required to ensure that investments are on the right track.

Most important, Khan of Causeway added, is “the macro backdrop: “How does this affect a given firm, its commitment to decarbonization, employee policies, and social issues? It isn’t immediately clear because all these developments are so new.”

There are plenty of opportunities for ESG investors in China, says Mascotto. One of American Century’s favorites: China Construction Bank (0939 HK), where green loans account for 16% of corporate loans. China Construction Bank also issued its first green and sustainable development bonds last year.

Another is GDS Holdings (GDS), which develops and operates data centers, and has been working to reduce energy consumption and emissions by boosting efficiency and using renewable energy, including hydroelectric energy in Chengdu and wind power in Hebei Province.

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