China’s MSCI constituents must meet environmental, social and governance ratings within two years

Global equity indices compiler also warns it’s not happy with current high level of trading suspensions

PUBLISHED : Sunday, 03 September, 2017, 2:10pm
UPDATED : Monday, 04 September, 2017, 11:07am

MSCI, the global equity indices compiler, aims to finish assigning environmental, social and governance (ESG) performance ratings on the mainland’s 222 listed firms to be included in its widely tracked Emerging Markets Index, within two years to meet rising global investor demand, according to its global chief executive.

But he has also warned it is unhappy with the level of suspensions in trading of mainland shares, which he said was “unfair to shareholders whose shares get frozen”.

Investors are increasingly scrutinising listed companies’ contribution to sustainable development and their impact on society, besides looking at the hard numbers on their profitability and financial health, Henry Fernandez told the South China Morning Post in an exclusive interview.

“Why? Because a lot more information is now available on every kind of institution in the world, which is spread rapidly through social media.

“Society is less tolerant of transgressions, which do lead to decreases in the value of the institutions be them government, religious or business ones.”

He cited the case of United Airlines chief executive Oscar Munoz not agreeing to take up his executive board chairman position as expected, after a video of a passenger being dragged off a sold-out plane went viral online, resulting in a barrage of criticism of the carrier’s handling of the situation and a fall in it share price.

Awareness of corporate ESG impact is particularly strong among so called millennials – people born in the 1980s and 90s – who are gradually taking over or joining the management of their entrepreneurial parents’ businesses or managing large assets.

“They are extremely cognisant of the tremendous impact on the environment that prior generations have been creating for them,” he said.

“I don’t see why it should be any different in China and Hong Kong ... the young generation is very connected to the world via social media, travel, and education. And this will spread, it is just a question of time.”

ESG ratings have been widely adopted as a tool for investment allocation by fund managers in Europe and North America, but are still at an early stage of development in Asia.

MSCI has compiled over 700 ESG indices covering US$62 billion worth of market capitalisation, a drop in the ocean compared with the close to 200,000 equity indices it has set up, on which some US$11 trillion of investments have been made.

But the number of ESG indices and investment involved have been growing in high-double digit percentages annually, he said.

MSCI has already come up with ESG ratings on over 70 overseas listed mainland Chinese firms.

“In the next one to two years, we are committed to creating ratings for all the firms that are going into the Emerging Market indices from China.”

The level of voluntary stock suspensions in China is incredibly high relative to any other market in the world.
MSCI global chief executive, Henry Fernandez

MSCI agreed initially to include only 5 per cent of free-floating shares of the 222 Chinese firms in its indices, with 100 per cent inclusion expected in five to 10 years.

Meanwhile, Fernandez also expressed concern on the rising number of Chinese companies having their shares’ trading suspended, due to major restructuring or business negotiations.

“The level of voluntary stock suspensions in China is incredibly high relative to any other market in the world,” he said.

“The decision to include large [capitalisation mainland traded] A-shares in the MSCI Emerging Markets Index [in May next year] was based on expectation of the continued decline of the stock suspension, but the contrary has happened.”

An average 265 mainland traded firms, or one in 13, had trading halted in July, compared with 202 in January and displayed a consistent rising trend, Reuters quoted data from fund consultancy Z-Ben Advisors as reporting.

“Sometimes the suspensions get abused ... some companies don’t like their share prices going down and have come up with some excuse to stop trading ... that’s unfair to shareholders whose shares get frozen,” said Fernandez.

“This is just not a proper mechanism, it is not [in line] with international norms.”

China Securities and Regulatory Commission spokesman Chang Depeng last month said the watchdog would continue to improve its suspension rules and that over 90 per cent of trading halts in the previous three months were asset-restructuring related.

MSCI’s Asia Pacific research head Chia Chin Ping last month warned it would remove mainland shares from the Emerging Markets Index, that have been suspended for more than 50 days.

“You as a company will have to make a decision: do you want to have access to [international] capital and potentially have a higher share price?” Fernandez said.

State-backed energy majors China Shenhua Energy and GD Power, which have just announced plans to pool their coal-fired power plants into a joint venture as part of their respective parents Shenhua Group and China Guodian Group’s merger, have had their shares trading suspended in Shanghai’s bourse since June 2.