Now that China A shares have partially entered some mainstream MSCI indexes, institutional investors and other stakeholders are raising questions about Chinese constituents’ ESG track records and potential risks from these new exposures in their portfolios. And these questions are fair. Of the 423 newly rated constituents of the MSCI China A International Index,1 we find that 86% fall below BBB, the mid-point for MSCI ESG Ratings.To get more chinese finance news, you can visit shine news official website.

However, investors should keep in mind that a skew towards lower ESG ratings is not unusual for emerging or newly covered markets. While there are challenges ahead for China A share issuers, we see indicators that suggest they may quickly adapt to the new ESG realities.
We’ve been here before. Historically, it has taken up to 18 months for newly issued MSCI ESG Ratings to stabilize, as companies conduct internal assessments of ESG risks and focus areas in response to questions from global investors. We observed similar dynamics when we expanded MSCI ESG Ratings coverage to South Africa, Japanese small caps and some Latin American countries.

What makes China’s case stand out is that the evolution of ESG awareness among the corporate community is being promoted from the top. The gears have already been set in motion, not just by growing interest from global investors, but by a state-directed transformation from a resource-intensive, heavily industrialized economic structure to a services- and technology-focused economy, which will likely have a much lighter environmental footprint. In fact, a major factor behind the initial low ratings of many Chinese companies has been the lag in response to the higher bar set by recent state policy commitments, as elevated exposure to new compliance risks poses operational challenges for Chinese companies.
The MSCI ESG Ratings distribution of the newly added companies provides a snapshot of the current status of China’s transformation, and highlights the risks associated with evolving policy changes. Many companies, and especially the 58% that we classify as state-owned enterprises, find themselves in a tough spot: the targets set by policymakers are aggressive and enforcement can be very strict, while the infrastructure underlying their operations is massive and often outdated. This gap can be daunting, and could lead to heavy near-term capital expenditures, payment of penalties and even suspensions of operations.

The same top-down policy directives that create burdensome near-term compliance risks for companies, however, suggest the potential for a rather positive long-term ESG outlook. We observed something similar in European markets that experienced significant policy shifts towards stronger environmental stewardship in the mid-to-late 2000s. The short-term compliance challenges for European companies went hand-in-hand with policymakers’ support for innovations directed at “greener” long-term economic growth.