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FTSE Russell expands China ESG coverage

Foreign investors are expected to increase allocations to China A-shares, so Chinese companies face more pressure to raise their ESG standards.
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FTSE Russell has added around 800 China A-shares in its ESG ratings, bringing its coverage across Chinese securities, which include onshore and offshore stocks, to 1,800, according to a statement from the firm.

The move follows after the index provider started adding China A-shares in its global equity indices in June. FTSE Russell’s addition of Chinese onshore securities will be made over three phases, with the first phase expected to be completed in March this year, the firm said.

Other index providers have also started adding China A-shares in its global indices. MSCI was the first mover and just completed its third and final phase of the partial inclusion of China A-shares in its indices in November, according to a statement from the firm. Meanwhile, S&P started adding onshore securities to its emerging market index in September.

Separately, FTSE Russell has also expanded its small-cap coverage in Japan, bringing the ESG research universe of Japanese securities to 1,300, the firm said. In total, around 4,300 Asia-Pacific stocks are now included in FTSE Russell’s sustainable investment analysis, accounting for around 60% of its global coverage of 7,200 stocks.

ESG challenges in China

With more China A-shares being included in mainstream indices, more foreign institutional investors with high ESG principles are expected to buy A-shares – and hence put pressure on Chinese companies to raise their standards by subjecting them to greater scrutiny, according to Jie Lu, Robeco’s head of research.

However, he believes that the quality of ESG disclosure varies and most companies are still just box-ticking, he said previously.

In addition, listed companies have low awareness of the ESG concept, and a limited appreciation of the importance of sustainability to their business operations, he added.

Even domestic asset managers in China find it difficult to incorporate ESG factors in their investment process, citing the lack of historical and quality data as a huge barrier, according to a CFA report.

But there are signs that Chinese companies are improving. According to an MSCI report published in October, around one-fifth of the constituents of the MSCI China Index, which includes onshore and offshore securities, have improved their ESG ratings.

Part of the Mark Allen Group.