While mainstream and SRI investors are increasingly seeking opportunities for returns in emerging markets, little environmental, social and governance (ESG) research is available on companies in those countries. In order to provide some evidence on climate-related risks and opportunities, Centre Info conducted the first analysis of the carbon intensity of 50 Chinese companies quoted on the Shanghai Stock Exchange.
Centre Info measures the carbon intensity of companies along the entire value chain. This means integrating direct emissions from production alongside indirect emissions from the company’s supply chain, use of its products and their disposal. The level of carbon intensity indicates the overall impact of a company on the climate as well as its dependency on fossil energy and other sources of greenhouse gases. It is also a proxy for the exposure of the company to climate-related risks, the underlying hypothesis being that climate change will lead to market and regulatory changes that will impact the bottom line of carbon-intensive companies. Our research shows that the average carbon intensity ofChinese companies in the SSE-50 index is substantially higher (41%) than the average carbon intensity of the MSCI Index. (see PDF chart in downloads)
This suggests that investing in Chinese stocks bears higher carbon risks than investing in other markets. Investors willing to be exposed to the Chinese market should therefore either be willing to support those risks or hedge them by investing in less carbon-intensive assets.
“Investing in Chinese stocks bears higher carbon risks than investing in other markets.”
Chinese companies are overrepresented in carbon intensive industries, which are likely to sustain China’s economic growth over the next years. The sectors identified by our research to be the major contributors to China’s carbon footprint are the energy, the utilities and the materials sectors.
Interestingly, comparing Chinese companies even within the same carbon intensive sectors leads to significant differences in climate impacts. This suggests that by carefully selecting companies – for example, hydropower utilities instead of coal utilities – it is possible for the investor to be exposed to Chinese stocks while maintaining a reasonable climate risk profile.
Our research tends to confirm other macroeconomic studies of the competitive positioning of China vis-à-vis climate challenges. It also makes possible the integration of the climate component of Chinese stocks into the investment process, either for optimization or for portfolio assessment purposes. (See attached PDF)
The environmental transparency of Chinese companies is notably low, which makes the assessment of their climate profile more complicated than in other markets. Our assessment of environmental disclosure confirms previous findings of the Carbon Disclosure Project(CDP), which found a
2.5% response rate by companies. As suggested by the CDP report, this could reasonably be attributed to weak governance frameworks and the strong presence of the Chinese government in quoted companies.
China’s projected economic growth (i.e. 400% by 2020 according to the World Resources Institute) will pose serious climatic challenges both regionally and globally. As a coal dependent nation, China’s march to a low-carbon economy is likely to be long and costly. Therefore, if China is willing to compete internationally for capital, it is fundamental that quoted companies implement a credible financial and extra-financial reporting framework that is easily accessible to worldwide investors. This is even more important if we consider that China is now the biggest emitter worldwide of greenhouse gases.
Philippe Spicher is managing director at Centre Info in Switzerland.