China - working towards greater transparency
China has instituted a wide range of ESG initiatives in recent years. Hu Jintao, speaking at the APEC Meeting in 2008, said regulation and guidance should be enhanced and corporate social responsibility strengthened: “An important lesson we have learned from the ongoing financial crisis is that while trying to maximize economic returns, enterprises should follow a prudent, well-thought-out and responsible approach in market operations,” he said.
In December 2006, the People’s Bank of China announced its collaboration with the State Environmental Protection Administration (SEPA) to integrate information on corporate pollution records into the database for corporate credit. PBOC then urged all commercial banks in China to conduct a strict environmental screening process when lending money to companies. This became widely known in China as the “green lending campaign”, with all banks in China forced to adopt this policy.
Energy efficiency and emissions control became two other hot issues in the banking sector, since they were high on the Chinese government’s agenda. An official from the China Banking Regulatory Commission announced that CBRC was drafting a piece of guidance which aimed to link a company’s energy efficiency and emission performance to its credit standing.
The Shenzhen Stock Exchange (SSE), demonstrated its concern for SRI in 2006, when it first launched a Corporate Social Responsibility Guideline for Listed Companies. In this guideline, SSE encouraged its listed companies to be more socially responsible, and in particular to disclose non-financial information through CSR reports.
In December 2007, SSE announced it was cooperating with the TEDA Group in developing the TEDA Environment Index. This index consists of 40 listed companies. The companies on the index were selected from ten environment-relevant sectors according to their environmental and governance performance. Launched in January 2008, TEDA Environment Index was said to be the first SRI index in Chinese history. It set up a benchmark for SRI style investment which might be able to indicate the potential long term value and risk-resistant capabilities resulting from the adoption of ESG policy by Chinese companies.
In January 2008, the Chinese Government State-owned Assets Supervision and Administration Commission (SASAC) issued an official policy to facilitate and encourage State-owned
enterprises to implement CSR in order to achieve sustainable development of SOEs. Most large-cap Chinese listed companies are SOEs and are controlled by SASAC.
The “green securities policy” stipulated that highly polluting companies must pass environmental inspections when applying for an initial public offering or refinancing. Since the launch of Green Securities Policy in February 2008, about 38 IPOs were reviewed under the requirement of this policy. Roughly 20 companies were refused IPOs because they failed the environment review in accordance with the policy.
It wasn’t until May 2008 that the Shanghai Exchange issued the Shanghai CSR Notice and the Shanghai Environmental Disclosure Guidelines. According to the two documents, Shanghai Exchange-listed companies should fulfill social responsibilities, address the interests of stakeholders, and commit themselves to promoting sustainable economic and social development.
By 2008, the investment management industry in China had 60 mutual fund investment management firms and 422 products, with assets under management of US$286 billion. This total was actually down from US$440 billion at the market peak in 2007. Of the 60 mutual investment management firms, approximately half of these were joint ventures between Chinese entities and foreign entities.
Major institutional investors in China include mutual investment management firms, insurance investment management companies, the National Council for Social Security Fund (NCSSF) and Qualified Foreign Institutional Investors (QFIIs). To become QFIIs, foreign investors need to apply for a licence and a quota to trade in China’s domestic A-shares market. By 2008, there were 59 QFIIs and their quota to invest in the Chinese A-shares market reached US$10.67 billion.
One notable ESG fund is the Bank of China’s Sustainable Growth Equity Fund, which manages its investment portfolio from two dimensions: profitability and sustainability. The fund was launched in 2006 but was not very popular while the whole market was booming, because its investment style is rather conservative. When the market slumped, however, the fund showed its strength. From October 2007 to January 2008, the Shanghai Stock Index dropped by 12.7% while the Sustainable Growth Equity Fund still managed to grow by 7.6%. It provides a good example for investors who care about long term value and enhancing the risk resistant capacity by using the SRI strategy.
Another fund, the Industrial Social Responsibility Fund was established in April 2008 by Egonindustrial Fund Management. This fund evaluates companies on factors such as sustainability and ethics. It aims to prompt the fulfilment of enterprises’ social responsibility and to promote the harmonious development of the society while pursuing an excellent investment performance.
A statement by Li Keping, the Vice Secretary General of the NCSSF, indicated that the pension fund might consider SRI as its future investment style. Li said the Social Security Fund will promote a long-term value investment style and consider corporate governance and socially responsible investment.
JRI has screened Chinese listed companies on the implementation of their CSR activities. The research methodology was based on the one used for Japanese SRI funds. Two Chinese research partners were consulted in order to reflect the results in a Chinese context.
A total of 1,645 companies were targeted (on the Shanghai, Shenzhen, Hong Kong and Singapore stock exchanges) during the period July 2008 to November 2008. We received 309 answered questionnaires, a response rate of 18.8%. The questionnaire consisted of 70 questions in total, on Governance (18), Protection of employees’ rights and interests (14), Protecting profit and right of suppliers, customers and consumers (12), Contribution and communication to local community (8) and Environmental Performance (18).
The lessons we learned from this process were that it is difficult to get open and consistent answers from Chinese companies, and that the concept of CSR is not well understood below the top executive.Chinese companies are not familiar with answering questions from outside agencies, except for the government. As a result, it is still not so easy to get negative information about CSR corporate policy and practice. And the scope of the research is also limited by the fact that it is difficult to check the plausibility of responses. But we are encouraged that the number of companies who published CSR reports is now growing. There are now around 300 according to the latest information from the Shanghai stock exchange.