“China’s ESG ratings tarnish its allure for sustainable investors” – Financial Times – November 30, 2020

On November 30, 2020 the Financial Times reported that the “(w)orld’s second-largest economy has the worst ESG ratings of any major market.

While China accounts for 40.9 per cent of the MSCI Emerging Markets equity index — taking into account mainland A shares listed in Shanghai and Shenzhen, Hong Kong-listed H shares and US-listed American depositary receipts — its weighting is far lower than this in many of the indices typically followed by ESG ETFs.

The MSCI Emerging Markets SRI Index has just 18.6 per cent China exposure, for example, while for the MSCI EM SRI Select Reduced Fossil Fuel Index it is 19.4 per cent.

More strikingly still, China accounted for 47.6 per cent of FTSE Russell’s plain vanilla Emerging Index as of the end of October, yet just 10.8 per cent of the sister ESG-driven FTSE4Good Emerging benchmark, far below the weightings of Taiwan and India.

‘Companies in China have historically tended to have lower ESG ratings which means that sustainably-screened indices and passive funds tracking them would typically be quite underweight to China,’ said Andrew Walsh, head of passive and ETF specialist sales, UK and Ireland at UBS Asset Management.”

“There are different levels of sustainability practice and also disclosure across countries globally. China would be the lowest ranked large market, according to David Harris, London Stock Exchange Group.

Mr Harris believed China’s weak ESG showing would ‘limit investment flows’ to those companies with poor ratings. ‘The practices of these companies on sustainability themes will be influencing their weight in the indices that form the basis of the benchmarks for international investors,’ he added.”

Registered subscribers may read the article on the Financial Times internet site.