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China’s impact investing is an expat project

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Polluted Beijing is an apt place to consider how international asset managers can incorporate concerns about the environment into their investment choices.

[BEIJING] Polluted Beijing is an apt place to consider how international asset managers can incorporate concerns about the environment into their investment choices. But China's domestic share owners simply expect returns. Meanwhile, reliable information on ESG – environmental, social and governance – factors is scarce, investors and companies talk past each other, and there are plenty of other issues to worry about.

There's hope, nonetheless, according to panellists at the Asian Corporate Governance Association's ESG-focused annual conference in the Chinese capital this week: some local companies and investment firms see the point. Still, ACGA observes that the number of China companies reporting on corporate social responsibility or CSR, which rose rapidly to around 1,600 in 2014, has subsequently plateaued.

ESG, a more mature, mainstream version of CSR, is relatively new. Getting all the right data is a challenge worldwide. Companies may view reporting as a compliance exercise rather than a meaningful part of their strategic and risk-management thinking. They may focus only on good news. Or they may simply misunderstand what information investors want, a point underscored in several presentations in Beijing.

Using the data is tricky, too. By way of illustration, MSCI and FTSE ESG scores for the same global companies plotted against each other show little in the way of correlation, Charles Yonts of CLSA noted at the ACGA event. Investors have to figure out if such ratings are useful.

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They also have to grapple with potentially bigger issues. For overseas-listed Chinese companies, there are basic uncertainties surrounding the legality of the so-called variable interest entities that give shareholders their indirect ownership. In many corporations, wherever listed and whether government or privately controlled, it's hard to know who makes decisions when dominant shareholders, management boards, supervisory boards and Communist Party officials are all involved.

Beijing's moves towards more shareholder-friendly state-owned enterprises (SOEs) has helped make them preferred investments over private-sector firms for international investors by a three-to-one margin, according to an ACGA survey. This surprising state of affairs probably says more about the weakness of governance at typical private companies than its strength at SOEs.

That's because corporate governance remains a work in progress in China. ESG may well take hold eventually, just as stock markets, Starbucks and smog have done. But it will take time – and for now, it's mainly a project for foreign investors.

The Asian Corporate Governance Association's annual business dialogue titled "The Rise of ESG in Asia: Implications for Companies and Investors" took place in Beijing on Nov 13 and 14.

REUTERS