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Chinese corporates making strides in ESG journey

By Flora Wang | China Daily | Updated: 2023-07-03 09:23


As companies in Asia pick up pace to catch up with global peers, China appears to be on the fast track when it comes to ESG advancement.

Environmental, Social and Governance issues have been increasingly gaining traction among Chinese investors, corporates and policymakers as the country shifts toward an economic development model focused on quality and sustainability.

A recent Fidelity International survey aiming to understand how Chinese companies develop and implement their ESG strategies found that 93 percent of surveyed Chinese firms expect to have published an annual ESG report by 2026, highlighting that ESG reporting is soon to be the norm. This is an important signal and a good sign for any long-term investor in China as we believe ESG factors will have an impact on long-term value creation.

Market forces driving change

While there are many factors driving Chinese companies' ESG adoption, the survey results from our recent research report — ESG priorities in China: How companies in China are approaching ESG — showed that customer and investor expectations are the top two drivers of corporate ESG strategy development.

We have observed that as the nation's capital market matures, an increasing number of investors have started to take an active stewardship approach to clearly communicate expectations to companies through voting and engagement.

As financial institutions and stewards of our clients' capital, it is important to continuously engage and have in-depth conversations with companies on sustainability issues that are material to their long-term development.

One of the most important tools that investors can deploy to help corporates sustain momentum and achieve ESG goals in China and elsewhere is effective engagement. Compared with exclusion, engagement supports meaningful change, tracks progress over time and ultimately creates value for investors.

As Chinese companies continue to step up efforts to align with global peers, investors can inform companies on industry best practices to accelerate this process and in return, also gain more insight into companies' plans and actions.

However, it is important to note that there is no easy shortcut to achieving change. While effective engagement as a tool can have real-world impact, it is an ongoing process where case-by-case analysis on companies within the local context is crucial for deriving the relevant conclusions and feedback.

More progress to come

While many Chinese companies have been making rapid progress on their ESG journeys, there are several challenges that remain along the way. For example, while significant improvements are evident, Chinese corporates still lag when it comes to ESG disclosures and reporting, and the key roadblock to this challenge is ESG data collection.

That being said, China is not alone in this. Accurate ESG data collection is a common problem for companies globally, and in turn a significant challenge for investors when analyzing patchy data. Often it is not the data that present the problem, but the lack of standardization when it comes to such data, reporting formats and verification.

The good news is that companies are aware of the problem and are already tackling the challenge. Over half of the surveyed Chinese companies plan to further invest in building technological and data capabilities to improve the efficiency in ESG data collection over the next 12 months.

China's ESG regulations are also maturing, providing guidelines on ESG reporting, while international bodies such as the International Sustainability Standards Board will help to slowly improve the global reporting landscape.

Another potential roadblock in China's continuing ESG advancement is the ESG skills gap. Having the right talent to develop strategies and tackle evolving ESG topics when it comes to ESG adoption is essential.

While the talent gap is a global challenge as well, demand in China far outweighs the supply. Indeed, this gap in supply and demand is expected to exacerbate as reporting becomes mandatory and investor expectations on ESG continue to heighten. Similar to enhancing and standardizing ESG data collection, time will be needed to solve the talent gap.

Change is here to stay

It is clear that China's appetite to bring ESG into the corporate agenda is on the rise and here to stay. While data collection remains the key obstacle to progress on ESG disclosures, many companies are already looking to commit more resources to tackle the challenge.

In addition, our research found that companies are also prioritizing reviewing and setting up quantitative ESG targets over the next 12 months, which is another strong signal of genuine commitment.

Looking ahead, financial institutions and asset managers can play their part by using our global experience to continue to work with companies, industry partners and regulators in China to contribute toward the long-term sustainable development of the Chinese economy.

The views don't necessarily reflect those of China Daily.

The writer is head of stewardship, Asia, and portfolio manager at Fidelity International.

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