While Chinese companies continue to lag their global peers in terms of their ESG scores, MSCI expects a “strong upward momentum” in the improvement of mainland ESG ratings, according to Wang Xiaoshu, the firm’s Beijing-based head of ESG research for Asia-Pacific.
“Like any other emerging market, there are more CCC- and B-rated Chinese companies compared to the MSCI All Country World average, so that is not a surprise to us.
“But we noticed that there is a very strong rating improvement momentum, especially when we compare 2019 to the year before that.”
MSCI’s ESG rating scores companies from CCC, which is the lowest score, to AAA, which is the highest. It takes into consideration the relevance of the ESG factor to the sector. Companies are also compared against their industry peers globally, with the scores reflecting a relative rating instead of an absolute rating, according to Wang.
MSCI’s ESG ratings
BB, BBB, A
In 2019, ESG laggards – those that are rated from CCC to B – accounted for 56% of the 500 Chinese companies that MSCI covers, which includes share listed inside and outside of China.
However, Wang noted that the figure last year is lower compared with 59% in 2018.
“Most of the improved companies moved to have average ESG ratings from being laggards,” she said.
At least 50 Chinese companies or 11% had rating upgrades in 2019, with ESG leader companies (rated AA to AAA) growing to seven from five in the previous year.
“That means those seven companies have already become global leaders when it comes to ESG.”
Examples of ESG leaders include consumer discretionary and information technology companies, such as Hangzhou Robam Appliances, Geely Auto and Legend Holdings.
MSCI China Constituents
Wang was not able to comment on whether the rate of improving ESG scores in China is faster compared with other emerging markets. But she noted that scores are also improving in Asia, with regulators and institutions driving ESG awareness.
“ESG momentum is already there in Asia, as we have noticed quite a few policymakers and asset owners take action when it comes to ESG. There are just slight differences in terms of their focus.
“For example, in Japan, there is a lot of focus on gender diversity improvement, while in China, the government has highlighted the importance of pollution control and carbon emissions. In Malaysia, they have also introduced a revised stewardship code in 2017 to improve corporate governance.”
Wang explained that a huge driver for improving ESG scores is coming from both offshore and onshore investors.
“There is more scrutiny now from global investors, especially since China A-shares have been included in mainstream indices,” she said.
Even domestic asset managers and institutions have started to include ESG in their investment process. According to Wang, the number of UN’s Principle for Responsible Investing (UNPRI) signatories in China has grown to 30 from 10 about two years ago.
“Some Chinese financial institutions, such as insurance companies, are starting to consider ESG factors as a risk management tool,” she said.
The local bourses are also proponents of ESG improvement. Last month, for example, the Shenzhen Stock Exchange invited the UNPRI to deliver training to 300 listed companies on how they can improve ESG awareness.