Chinese companies face cost surge amidst exposed ESG failings

According to a new report by MSCI, the US-based provider of index and portfolio analysis tools, many of China’s largest companies are facing a huge backlog of neglected environmental, social and governance (ESG) problems, The FT reports

“With a focus entirely on economic growth in the past, China has ignored many significant environmental, social, and governance issues – issues that have grown to threaten not only longer-term sustainable economic growth, but also the social and political stability of the country,” noted the report, authored by Xiaoshu Wang, Shuyuan Jin, Frank Li, Sabrina Zhang and Emily Chew.

According to MSCI EM, Chinese companies listed offshore — mainly in Hong Kong — have among the poorest ESG standards in the emerging markets universe.

Of the 140 companies included in the MSCI China Index, more than 85 per cent have an ESG rating below BBB, putting them in the lowest three among seven categories. By contrast, some 45 per cent of companies included in the MSCI EM index have ratings of BBB and above.

While the government has yet to adequately balance its role as promoter and regulator, the raft of reforms and curbs recently announced – including reducing pollution, carbon emissions, and saving water – could mean a surge in costs for many firms as they invest in new cleaner technologies and begin to clean up. Those who may be hit hardest are state-owned enterprises that historically pay three times more in environmental penalties than their private sector counterparts, according to MSCI research.

First on the list of industries targeted for regulatory attention are electricity producers, construction materials, metals and mining, chemicals and airlines.

Food and beverage companies also have substantial risk exposure under proposed and intensifying water management policies.

Data analysed by MSCI shows that among the 140 Chinese companies included in the MSCI EM index, about 43 per cent are in the top five water-intensive industries, namely oil, gas and consumable fuels; food products; beverages; independent power and renewable electricity producers; and pharmaceuticals.