The Chinese character of sustainable investing

China is not as far along its path to implementing sustainability principles as some other regions in The 2023 Fidelity International ESG Analyst Survey. But for investors, this should be both a call to action and a cause for optimism.

Some of the shine may be wearing off sustainable investing in the West, but China appears to be at an altogether earlier and more optimistic stage of its journey. 

Environmental, social and governance (ESG) factors have been rising steadily up the priority list for management teams in China for some time, albeit from a low base. But this embrace has taken on new urgency since 2020, when President Xi Jinping issued a pledge that the country would hit peak CO2 emissions by 2030 and achieve carbon neutrality by 2060. 

For all its positive implications, Jinping’s net zero pledge also presents clear top-down challenges for firms that have yet to fall in line. Our sector analysts who focus on Chinese companies say that only about a quarter of those they cover have a net zero goal in place, compared with a global average of just over half of all companies under coverage. While that figure can't be directly extrapolated to represent all businesses in China, it does point towards a need for prompt action. "Chinese companies have a lot of catching up to do, and fast, if they are to get in-step with the government's targets for cutting emissions at the national level," says Flora Wang, Head of Stewardship for Asia at Fidelity International. 

Targeting results 

But in China, where there’s a political will, there’s a way: nearly half of the ESG Analyst Survey respondents covering the country said regulation was “significantly helping” to boost their companies’ shifts to net zero, the highest for any region. 

Anecdotally, there’s scope to amplify this top-down regulatory push and maximise its impact. “One challenge that I find when engaging with my companies is that national targets often haven’t been cascaded down to local levels,” says Wen Wei Tow, a fixed income analyst in Shanghai who covers local government financing vehicles. “The result is that companies sometimes lack action plans or resources to help them lower their carbon footprints, so improving this would be one way to accelerate the green transition.”

While it may still be early days, China’s energy transition is creating a swath of opportunities for investors. Already, fast movers among Chinese companies tapping green opportunities are starting to consolidate their positions in this rapidly evolving marketplace. 

Consider electric vehicles. China already ranks as the world’s biggest market for electric vehicles (EV) by sales volumes, but the balance is quickly swinging towards nimble homegrown competitors.

“Domestic auto manufacturers are building new EV brands and products to take market share from global brands,” says Eric Tse, an equity analyst based in Hong Kong who covers China’s carmakers and battery manufacturers. “Battery makers are taking advantage of burgeoning demand stemming from the rollout of solar, wind and other renewable power installations, which need to be paired with energy storage solutions so they can keep delivering uninterrupted power when the sun isn’t shining, and the wind isn’t blowing.” 

Other China sector analysts see opportunities to expand in waste and water management, or in the domestic banking sector as it ramps up lending to low carbon sectors.

Room to grow

While the regulatory imperatives to adopt greener practices in China are strong, companies don’t always appear to have a similar set of compelling market-based incentives for making the transition. For example, our ESG Analyst Survey finds that companies in China are the least likely to see a reduction in their costs of capital as a result of improving their ESG profile. This in turn disincentives companies to make outside parties aware of the (often good) sustainability practices they are already employing.
“There’s clearly room for Chinese companies to expand and deepen their ESG disclosure and how they are rated by external providers of sustainability ratings,” says Alex Dong, an equity analyst based in Shanghai who covers companies in the construction materials and machinery sector. 
This lack of a pricing reaction function though is consistent with other trends we’ve observed in the Chinese market, such as the absence of a so-called ‘greenium’ or price premium of green bonds over non-green debt from the same issuer.
Other areas where we see room to grow and develop include carbon trading. Fewer than 10 per cent of our analysts say Chinese companies use carbon trading as part of their net zero plans, which is the lowest level among all regions. This is partly due to the recency of the country’s national carbon emissions trading market and its restricted availability to only those companies engaged in the power sector. “China's initiatives on carbon neutrality and greater development on carbon trading will help encourage enterprises to adopt more energy transition related policy and practices,” says Theresa Zhou, a Hong Kong-based equities analyst covering Chinese industrial companies. 

Aim high

Of all regions in our survey, China arguably has the most capacity to move the dial on the implementation of sustainability, especially when it comes to cutting greenhouse gas emissions. But by the same token, Chinese corporates usually also have more ground to cover when it comes to keeping pace with counterparts in the US or Europe. We’ve highlighted a few areas where China has good prospects for closing the gap. There are many others. And the targets couldn’t be clearer.