Investing Responsibly in China

Following MSCI’s recent inclusion of China A-shares in its Emerging Markets index, many investors are evaluating their exposure to Chinese equities. A popular perception that Chinese companies lag with respect to ESG considerations has drawn attention to such issues even from investors that have not pursued ESG-based approaches in other contexts. In this note, we review ESG risks that are particularly prevalent in China, including corruption and human rights. We also highlight areas of ESG-related progress that may be overlooked by investors, such as dramatic improvements in health, education, and standards of living, as well as innovation in renewable energy and green industries. We close with a discussion of how we integrate these considerations into our alpha forecasts for Chinese stocks, and we highlight challenges in engagement.