Five Questions about SRI – Weekly Expert Interview with Professor Hu Ruyin, Director, Research Center, Shanghai Stock Exchange, China – February 10, 2012

Each week Emerging Markets ESG publishes an interview entitled, “Five Questions about SRI.”  The interview features a practitioner’s insights about SRI in emerging markets and through Emerging Markets ESG shares this expertise with a wide global audience.  The goals of Five Questions about SRI are fourfold:

  • To collect a catalogue of examples of SRI in practice in emerging markets;
  • To raise awareness about SRI in emerging markets;
  • To reflect on what SRI in emerging markets means to practitioners; and
  • To enable SRI practitioners in emerging markets to network with peers around the world.

This week’s interviewis with Professor Hu Ruyin, Director, Research Center, Shanghai Stock Exchange, China.

The Shanghai Stock Exchange (SSE) was founded on November 26, 1990 and started trading on December.19, 1990. The SSE is directly governed by the China Securities Regulatory Commission (CSRC). The Shanghai Stock Exchange is the main board in China. As of 2011, there were 931 listed companies with a total market value of RMB 14.8 trillion. Total share turnover value is RMB 23.7 trillion.  The Shanghai Stock Exchange is the third largest stock exchange globally in terms of both market capitalization and trading value. Professor Hu Ruyin joined the Shanghai Stock Exchange (SSE) as director of the Research Center in 1997.  He is also a member of the Academic Committee of the China Finance Association, the Asia Corporate Governance Roundtable (organized by the OECD and the World Bank) and the Advisory Council of Shanghai Municipal Government. Prior to joining the SSE, Hu was The Director of the Institute of Economic Development at East China University of Science & Technology from 1988to 1993.  As an expert in corporate governance and the stock market as well as the foremost proponent of Chinese corporate governance reform and investor protection campaign, Hu participated in amending China’s Company Law and Securities Law and put forward many important policy recommendations to the  leadership  of  China’s  stock market. He led the efforts to launch China’s   first   corporate   governance   index and corporate social responsibility index at the SSE. Hu also led research team at the SSE to publish an annual report on China’s corporate governance that is focused on a specific topic each year. He publishes extensively in leading journals and is the twice winner of Shen Ye Fang Prize, China’s most authoritative prize in economics.

Emerging Markets ESG:  How would you define socially responsible investment (SRI)?

Professor Hu Ruyin: SRI, also known as Ethical Investment and Sustainable Investment, takes into account environmental, social and financial factors in selection of companies. Specifically, it contains the following aspects:

  1. Incorporate environmental, social and governance criteria into the investment analysis and investment portfolios, such as developing some indexes and derivative products associated with social responsibility.
  2. Shareholders and company managers have a good understanding of ESG, and take them into the daily corporate practices.
  3. Deposit or invest in banks, credit markets, venture investment and credit funds that have a good performance of social responsibility.

Emerging Markets ESG:  What distinguishes SRI from mainstream investment? 

Professor Hu Ruyin: First of all, the salient feature of SRI is to integrate the financial, social and environmental theme into investment while the mainstream investment mainly focuses on financial performance. Second, the principle of SRI is sustainable development, whereas mainstream investment cares about maximum profit, regardless of social performance. Third, SRI focuses on long term value creation, such as environmental performance which might make sense after several years, while the mainstream investment only emphasizes short term results, such as profit or revenue, etc.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for companies in China to manage?

Professor Hu Ruyin: Compared to the other two, corporate governance is more familiar to us. People, including managers, investors and regulators believe that good governance is important to the sustainability of companies. Early in the 1990s, the China Securities Regulatory Commission (CSRC) introduced a series of corporate governance rules. Today, the quality of the governance of China listed companies is much better than years ago, although some companies are still struggling with some governance issues.

As far as environmental and social themes are concerned, China just started to tackle them. In particular, environmental theme is the most challenging one for companies to manage. As China is at the stage of heavy industrialization, a lot of listed companies are in the sector of heavy polluting industries such as mining sector. Companies hide problems such as environmental pollution.

Emerging Markets ESG:  Which extra-financial theme – environmental, social or governance – is the most challenging for investors in Chinese companies to analyze?

Professor Hu Ruyin:  Listed companies in China are required to disclose corporate governance reports in the annual report for a few years. In addition, there is a full array of rules released both by the CSRC and stock exchanges on governance. Therefore, it is easy for investors to analyze governance quality. Also, the ‘Corporate Governance Index’ enables them to evaluate the governance performance. However, it is difficult to analyze environmental performance because there is a lack of detailed environmental information disclosure guidelines. As a result, investors cannot have accurate and consistent information for valuation purpose. Most environmental information is narrative and is quite difficult to assess. In addition, there is no local ESG report assurance agency.

Emerging Markets ESG:  What is the Shanghai Stock Exchange doing to improve both the quality and quantity of ESG disclosures made by Chinese companies?  Which SRI products are available on the Shanghai Stock Exchange?

Professor Hu Ruyin:  The Shanghai Stock Exchange (SSE) is spearheading efforts to improve Chinese listed companies’ ESG disclosure. In 2008, SSE released a social responsibility disclosure guideline, requiring three types of companies to disclose CSR reports and encouraging other companies to voluntarily disclose CSR reports. In 2008, 290 companies released CSR reports.  In 2009, the number was 318 and in 2010 the number was 327. Meanwhile, in order to improve the disclosure quality, the SSE encourages companies to follow the GRI standard and have the reports audited by an independent institution.

For the SRI products, we have the SSE Corporate Governance Index which was released in 2008 and the SSE Social Responsibility Index released in 2009. The latter index contains companies that are doing well in governance and social responsibility. Both indexes are tracked by ETF launched by domestic fund companies.