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Finance leads the way on ESG reporting in China

Governance is a key issue in China's financial services industry, according to Tricor's CEO.

Corporate solutions firms have to understand and be able to implement good governance – the “G” in ESG – as an essential part of their service. Hailiang Zhang, CEO of Tricor China, told Christine Dawson for ESG Clarity Asia, that it is the “part of ESG which is closest to home for him”.

“Personally, looking at governance of a company is really my role – to make sure my company is running properly in compliance with all the laws and regulations in China.”

Zhang is based in Beijing and his team advises nearly 300 businesses in mainland China. Globally, Tricor works with 50,000 clients across 48 offices offering services for companies through the entire business cycle – launch stage, growth stage and maturity stage.

It is the environment – or “E” of ESG – which has made policy headlines in China recently, and it is that policy which is filtering down to how businesses are run and the help they need with reporting.

“President Xi Jinping pledged to reach a carbon emission peak by the year 2030 and to achieve neutrality by 2060.

“This brings a strong message to the companies in China to get more serious about this topic and also, in the meantime, it creates huge investment opportunities,” explained Zhang.

Rate of reporting

Despite that it is not yet mandatory in China, companies are coming to realise how ESG reporting can add value.

“A lot of companies take ESG reporting as an opportunity to showcase or to demonstrate their vision in terms of ESG and a little bit to improve their value proposition as a company,” Zhang said.

According to him, you only need to look at the rate listed companies are reporting on ESG for evidence of this shift: “It is positive. If we look back ten years to 2011 in total only 65 [Asia-listed] companies released an ESG report. If you look at the number today it is more like 1,000. That is almost 25% of listed Asian companies.

“And for the China Securities Index it is almost 85% of those companies – or 255 – which released their ESG report for last year.”

Leading the way

Among the companies embracing ESG reporting, it is the finance sector which is ahead of the game, Zhang said.

“The finance sector has the highest rate of ESG report releases – pharmaceuticals and manufacturing are catching up, but they do not yet have that high a percentage.

“If you look at the industry of the companies that release the ESG report, we see that financial services and banking made up almost 98.5% of companies that released an ESG report on the CSI.

“I believe those companies started realising the importance of ESG and the potential returns it could bring in the long term.”

ESG reporting is new territory for many companies across the globe and, according to Zhang, Tricor is well positioned to help companies setting up in China.

Investment stages

When it comes to private equity newcomers to China there are two main stages of establishing themselves, Zhang explained: pre-investment and post-investment. At both stages ESG is starting to feature more frequently.

“Private equity firms looking at the portfolio companies in China… we see the trend that they are now adding ESG as one important point. It is used to evaluate whether or not this is an asset they want to buy and also how much improvement there can be after investing into this portfolio company.

“Some might have this as a 10% weighting in the decision to buy or not; for others it will be lower or higher. It really depends on different investment strategies.”

Zhang went on to describe how a private equity company or an asset manager looking at one or two portfolio companies needs to establish an ESG performance model to use. This will combine some criteria, some opportunities and also the reasons for those opportunities. Zhang said frameworks like MSCI can be leveraged at that point to assess the suitability of the companies.

Post-investment, what is needed is a thorough understanding of the regulations and requirements relevant to each portfolio company.

“Policy can not stay the same forever. There will be changes or updates from the government about certain regulations or policy.”

He gave the example of China this year releasing a new rules about how companies must disclose penalties in terms of pollution.

ESG boom

The Tricor CEO said he has seen an increase in the number of ESG mutual funds in China, which he puts down to the groups seeing ESG as an opportunity to invest more intelligently.

Part of the reason for the ESG boom in China, according to Zhang, is the ESG-integration demand from international investors and from domestic players and he sees this trend set to continue thanks to the need for environmental protection and the green transition shift.

“In addition to that,” Zhang said, “the national carbon markets already started to operate this year.

“Right now, it is only limited to the power sector so carbon price is likely to become an important consideration in asset pricing and investment strategies.

“Again, a potential business opportunity is in financial institutions conducting research on carbon markets and the carbon price mechanisms.”

It will not only be market players within China paying close attention to how the new carbon market pans out, it has garnered attention internationally as well. The unique mix of some ambitious environmental policies in an emerging economy traditionally reliant on carbon-intensive industry means ESG in China is having to move fast to keep up. By seeing the opportunities available, the finance sector has every chance to continue leading the way.

Part of the Mark Allen Group.