Michelle Qi, Eastspring Investments
Technological innovation is one of the key pillars in the Chinese government’s growth agenda, while at the same time the government is vocally promoting its green ambitions.
“As such, investors need to review the sustainability of business models to assess how companies are adapting to the new demands from policy shifts, changing consumer preferences and increasing investor appreciation of ESG risks,” said Michelle Qi, head of equity at Eastspring Investments, China.
At the height of the Covid-19 outbreak in 2020, Chinese ecommerce players and food delivery platforms played important roles in helping the economy and society stay connected and productive.
Online learning platforms helped students to continue learning, while many Chinese cloud companies offered free video and audio chat tools, helping companies maintain their daily operations. They also provided free access for research institutions to accelerate drug screening for potential vaccines.
Over the years, Chinese fintech companies have also transformed how millions of Chinese consumers make payments, borrow, save, invest, and insure themselves against risk.
Concurrently, the government and its regulators have been introducing tougher environmental requirements on all sectors, including tech firms.
In May 2021, the China Securities Regulatory Commissions (CSRC) released new guidelines requiring listed companies to make ESG disclosures in their annual and semi-annual reports, such as providing transparency on environmental breaches as well as making efforts to reduce carbon emissions and other ESG initiatives.
Prior to the latest requirement by the CSRC, it is estimated that about 25% of China A-share companies provided ESG-related disclosures. In fact, the corporate response rate among constituents of the MSCI China Index almost doubled from 2017 to 2018 and was on par with that of the emerging Markets in 2019.
Given rising investor and regulatory scrutiny, as well as the Chinese government’s ambition to achieve carbon neutrality by 2060, the quantity and quality of ESG-related disclosures among China share companies is likely to improve, according to Qi.
“Tech is an important enabler of ESG, as seen from the innovative solutions used to promote financial inclusion, increase energy efficiency and democratise knowledge,” she said.
For instance, data centres are often criticised for their high energy consumption because of the low temperatures needed for them to function efficiently.
China’s data centre operators have been incorporating new features to make them more energy efficient, according to Qi, highlighting one operator that has one of the world’s largest server clusters submerged in liquid coolant, and others that that aim to use free air cooling systems where possible.
Meanwhile, the rapid adoption of electric vehicles (EV) and advanced driver-assistance systems creates strong demand in semiconductor and other electronic components, and despite more stringent regulatory oversight, Qi believes that the long-term trend underpinning the e-commerce sector is likely to continue.
“Technological innovation will be key to helping the government achieve its emission reduction target, and so we expect to find more exciting tech-related opportunities going forward,” she said.
However, it is critical that active managers complement companies’ voluntary disclosures and third party ESG ratings with their own on the ground research and understanding of the local policy backdrop and cultural nuances, she warned.
“Compared with the developed markets, there are distinct differences in policy priorities, social needs and customer preferences that need to be considered,” said Qi.