ESG rating slip in Hong Kong and China

September 07, 2011
ESG abstract

Overall the Environmental, Social and Governance (ESG) performance of Hong Kong and China listed companies decreased during the last 12 months, according to carbon and ESG analytics firm RepuTex. The firm says that In 2010 the average ESG rating for Hong Kong and China listed companies was BBB (moderate), but has decreased to BB (unstable) in this year.

The decrease can be largely explained by the increased number of newly-listed companies on the Hong Kong and China Stock Exchanges in the last 12 months,” said Martha Grossman, Director Asia, RepuTex said. “Ninety percent of the 638 Hong Kong and China-listed companies reviewed sit in the B range, with BBB+ representing a moderate risk, and B considered at risk.”

Within the top tier, however, ratings were stable. HSBC, MTR Corporation, CLP Holdings, Swire Pacific and Cathay Pacific Airways topped the Hong Kong top-20 list with AA ratings while, among China's top 10, Baoshan Iron & Steel and Shanghai Pudong Development Bank received an A rating.

According to Reputex Hang Seng Corporate Sustainability Index constituents improved their 2010 ESG performance in both Social Impact and Workplace Practices with little change has taken place in the other two categories, Corporate Governance and Environmental Impact.

While this is not unexpected in the largely compliance-based Corporate Governance category, the truncated improvement in Environmental Impact indicates a potential weakness in light of increased risk attached to the inevitable roll-out of carbon reduction schemes,” Grossman said.

Comparisons between the performance of Index constituents verses non-constituents produce polarised results with performance differentials of 18 percent for Social Impact; 15.6 percent for Workplace Practices; 15.4 percent for Environmental Impact; and 10.9 percent for corporate governance.

Overall Corporate Governance performance is reflective of the mandated governance frameworks in both Hong Kong and China. Reporting indicates compliance which does not necessarily protect investors, but instead suggets a minimum commitment to governance practices” said Grossman.

Under the Environmental Impact category a growing number of companies are taking action to strengthen risk systems. More stringent legislation on environmental reporting has contributed to this rise. However, very few newly listed companies are demonstrating any recognition of ecological concerns.

In the Social Impact category transparency of information on human rights and supply chain remained weak, representing concern given the materiality of both risk in a predominantly supply oriented market.

Under the Workplace Practices category adoption of systems for effective employee training and transparent approaches to guide remuneration and organisational culture, has been slow.

The greatest change between 20101 and 2011 is Occupational Health & Safety. Regulations exist in both Hong Kong and mainland China to protect the health and safety of the workforce, however, these are not always strictly enforced with frequent breaches being reported during 2011.