Environmental and social disclosure policies in ChinaAssessment of Chinese company commitments and stock exchange requirements in land-based sectorsForest policy, trade and finance October 24 2016

Background

• “Go Global” strategy stimulated increase in OFDI• One Belt, One Road; new “development banks”

• Companies implicated in illegal/unsustainable activity, despite pledges to abide by host country laws, financial incentives from banks and investors, and government-mandated guidelines

• Growing share of publicly listed companies in investment output (v. SOEs) – but few studies to date

• Corporate disclosure requirements mandated by the Chinese Government, stock exchanges, and financial institutions

Research context

•Enhance understanding of the roles, activities, and environmental, social, and governance (ESG) impacts of publicly-listed companies engaged in land-based sectors, both in terms of company behavior and financial performance

•Aim: to identify avenues to ensure that operations, both domestically and abroad adhere to international best practice, filling literature gap

Questions to address

•Extent of ESG policies in publicly-traded Chinese companies (company-specific)

•Comparison of company-specific ESG policies in China vs. global peers

•Whether presence or absence of ESG policies affects financial performance of Chinese land-based sectors

Methods

Chinese stock exchanges: SSE, SZSE, and HKSE1.Screened global stock exchanges for companies in land-based sectors according to their Thomson Reuters Business Classification (TRBC)2.Identified a set of environmental and social indicators monitored by Thomson Reuters;3.Evaluated the indicators’ presence or absence for the companies in the set for Chinese and global companies;4.Identified and collected a set of financial performance indicators most relevant to this analysis;5.Analyzed company performance and E&S policy presence

ESG “indicators”

1. Human rights policy2. Environmental management team3. Environmental investments initiatives4. Sustainable packaging policies5. CSR sustainability external audit6. CSR sustainability reporting7. Land environmental impact reduction policy8. Biodiversity impact reduction policy

Number of land-based companies in each industry group

Land-based sectors Global China and Hong KongCoal 279 60

Containers & Packaging534 51

Food & Tobacco 2765 238Metals & Mining 4169 258Oil & Gas 1691 61

Paper & Forest Products487 63

Renewable Energy 381 56

Total 10306 787

Percentage of land-based companies with at least 1 ESG policy by sector

 ·       

  

Percentage of companies with each policy type

Comparing ESG policies with financial performance

• Financial performance metrics:1. Market capitalization2. 52-week total return3. Percentage Price Change Relative Index

• ANOVA statistical analysis to identify correlation between metrics and presence/absence of at least one ESG policy

05/01/23

Comparing ESG policies with financial performance: Results (China)

05/01/23

Results and conclusions

• Inferences on relationships between ESG policies and financial performance difficult to draw, but companies with policies are often larger, with high share price appreciation

• Companies that fare worst relative to market indices in both China and ROW demonstrate lowest adoption of policies

• <1% Chinese companies have ESG policies – slower to adopt than ROW peers (4%)

• No Chinese company in paper/forest product or coal sectors report policies – well behind global average.

Limitations: low availability of public data; difficult to parse out domestic v. international operations

05/01/23

• HKSE features the most comprehensive and concrete set of disclosure guidelines when compared to the SSE and SZSE

• No means to ensure that companies report on environmental impacts abroad distinctly from those domestically

• No specific wording to prompt companies to address timber legality or other land-based sustainability issues

 

Disclosure guidelines by stock exchanges

Companies’ disclosure on resource uses• 72% of companies provided some general disclosure on

efficient use of resources, symbolic reporting in nature

• Only a handful of companies (6%) fully complied by providing more comprehensive disclosure of resource use

• Companies tended to provide stronger disclosure on energy use

• Listed companies in the paper and forest products / containers and packaging industries were, on average, very limited in their disclosure

Companies’ disclosure on identity of suppliers

• High among companies listed on the SSE But, companies are not required to report the

geographies or location of land-based sourcing, nor on the supplier’s ESG performance

• Virtually non-existent for companies listed on the SZSE and HKSE

Companies listed on the latter exchanges exhibited some lag in complying with corporate disclosure requirements

Companies’ disclosure on risk management

 ·         • HKSE formally requires to disclose policies to

manage E&S risk in supply chains

• Companies that do so provide no insights into specific risks Leaves a window for companies in the land-

based sectors to under-report negative externalities

Thank youSun Xiufang

xsun@forest-trends.orgwww.forest-trends.org