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PetroChina, ICBC among top Chinese firms embracing ESG principles and giving stock investors better returns

Citic also places highly among Chinese firms in a global ranking of environmental, social and governance criteria

PUBLISHED : Monday, 28 May, 2018, 6:36pm
UPDATED : Tuesday, 03 July, 2018, 5:31pm

Shares in some Chinese firms that have high scores in a global ranking of environmental, social and governance (ESG) criteria have been outperforming others in the past year, in a sign of a shifting focus toward sustainable investing among mainland Chinese investors.

In the rankings of 6,500 companies globally, compiled by Thomson Reuters, PetroChina holds the highest score among Chinese firms for ESG, while Industrial and Commercial Bank of China and Citic Bank were also top performers.

Shares in PetroChina have climbed around 4 per cent in the past year, beating a gain of 1 per cent by its peers in the CSI 300 Energy Index, while ICBC and Citic have advanced 11 per cent and 7 per cent respectively in the past year, beating the 3 per cent increase of the CSI 300 Financials Index.

Those performances show that mainland Chinese investors are increasingly aware of sustainable investing, helped by a push from the government and industry organisations, and that strong ESG compliance has joined a stable business model as a key ingredient for attracting investors, analysts said.

“It is a self-fulfilling process. The more transparent a company is, the more the society changes its mind and goes toward the ESG compliant, and the more interest the company has to be ESG compliant,” said Markus Mueller, global head of the chief investment office at Deutsche Bank Wealth Management.

A report from the Global Sustainable Investment Alliance last October found that US$22.89 trillion, or one quarter of all assets managed worldwide, was invested according to ESG principles in 2016, but Asia excluding Japan made up only a fraction of that at US$52 billion.

Why China has yet to catch the wave of global responsible investing

Chinese companies have also been slow to embrace ESG principles, due to a lack of understanding of its benefits, observers have said.

The first China chief of Principles for Responsible Investment (PRI), a United Nations-supported non-profit organisation set up to promote sustainable investing, told the South China Morning Post in February that many firms were concerned that including ESG factors into investment decisions would negatively affect returns and restrict investments.

However authorities have been pushing the ESG idea. In August 2016, the People’s Bank of China issued guidelines on the role of the securities market in financing green investment by supporting qualified green companies to raise funds via IPOs and secondary placements, and on setting up a mandatory environmental information disclosure system for listed companies.

The guidelines also called for the drafting of laws and regulations for introducing a mandatory pollution liability insurance system.

Deutsche’s Mueller noted that it was easier for ESG compliant investments in China and emerging markets to produce positive financial performances than those in developed markets.

“There is already a relatively high general minimum level of ESG factors built into the system in developed markets, leaving companies with only so much they can do in terms of additional ESG efforts,” he said. “On the other hand there are fewer ESG standards imposed in the emerging market systems, hence individual companies are able to make more of a difference compared to their peers.”

In a study released in 2015, researchers from Deutsche’s wealth management unit and Germany’s Hamburg University found that 65 per cent of ESG compliant investments had a positive effect on corporate financial performance in emerging markets, while the figure for developed markets was 38 per cent.

For investors, the incorporation of ESG issues allows a wider range of opportunities and risks to be considered as part of the investment decision-making process, according to HSBC’s head of climate change centre of excellence, Chan Wai-shin.

“Hence we think ESG factors should at least be considered in order to provide appropriate levels of risk-adjusted returns in line with investment policy statements,” Chan said.

Additional reporting by Zhang Shidong