Catherine Yeung: Hello and welcome to episode 15 of The Investor's Guide to China. I'm Catherine Young, Investment Director at Fidelity International.
Marty Dropkin: And I'm Marty Dropkin, Head of Equities, Asia Pacific.
Catherine Yeung: To many outsiders, Chinese equity investing might conjure up images of a huge momentum-fuelled market where investors revel in speculation and sustainability is an alien concept.
Marty Dropkin: But developments on the ground in China show how stereotypes like this are swiftly becoming outdated. The country's markets have been changing shape over the last decade as institutional influence expands in the onshore market and foreign investors increase their exposure. A growing awareness of ESG has followed close behind.
Catherine Yeung: Indeed, ESG really is a key focus. And in this podcast we'll be speaking to Fidelity’s Sustainable Investing team about the steady progress they’re seeing across the board when it comes to their engagement with senior Chinese management teams and policymakers on environmental, social and governance issues.
Marty Dropkin: Catherine, let's start by talking about what we actually mean by engagement and why it's so important.
Catherine Yeung: Well, essentially, engagement is when our investment teams interact with an investee or potential investee company to find out more about the way the company is run.
Marty Dropkin: And there are thousands of these conversations that our analysts and portfolio managers have with management teams every year across the world.
Catherine Yeung: But of course, it's through these discussions that Fidelity's able to work with businesses to find ways to improve their sustainability credentials and set more ambitious targets.
Marty Dropkin: The environment is obviously the focus for many conversations in China, but it's much wider than that. Social issues such as diversity and employee welfare are also high up on the agenda. To talk more on this, we have Flora Wang, Director of Sustainable Investing and Portfolio Manager who's based in Hong Kong. Flora, as we've said, Fidelity's investment teams engage with companies all over the world all of the time. Can you give us a flavour of the sorts of engagement that Fidelity is involved with in China?
Flora Wang: Sure, Marty. I think a good example is actually our engagement with one of the largest dairy makers in China. The issue of gender diversity, particularly on the board. So we started a conversation with the company beginning of last year where we devoted a full 60 minute meeting to a wide range of ESG issues where board composition including gender diversity is heavily featured. The situation with the company at the time was that for its entire history, the company had absolutely zero female directors on the board, and that to us is definitely an area where the company can improve on, not because, you know, the diversity of mind as represented by diversity of gender on the board is generally important for all companies in terms of enhancing the quality of decision making at the board level. But I guess in particular, for this company, given, you know, more than half of its customer base is actually female, it makes perfect sense for the company to actually have a female voice on the board. So we had the conversation with the company, we raised the issue and we explained where we came from. And, you know, the company was actually very receptive to our suggestion and said that, you know, they would work on it. But then at the time of its annual shareholder meeting, when the company had the re-election of its directors, we disappointingly didn't see any new female additions to the board which is when we used our votes to vote against re-election of the relevant directors, specifically those that sit on the nomination committee because we think they should be held accountable for the composition of the board. What happened after that is that a few months later, the company announced a major overhaul to its board composition and introduced a few new members to the board, including its very first female director. I think that's a really good example in really, you know, demonstrating the power of effective engagement in driving positive change at companies across markets, including the Chinese market - if you know the way you are doing your engagement is effective and you can demonstrate your understanding of its business.
Catherine Yeung: Sounds very effective, Flora. And on this note, earlier this year, Fidelity published its inaugural report on gender diversity in corporate China. What sort of reception did it get?
Flora Wang: Overall, it's actually very, very positive. We got a lot of media attention because the government actually has been putting a lot more emphasis on promoting female representation in the working force. As we know, you know, China's demographics have been changing quite significantly. It will be facing severe challenges in the labour market as we move along. So it's important actually from the government's perspective, to encourage more female participation in the workforce. So I think from that perspective we are getting a lot of policy tailwinds to promote female participation in the workforce, including female representation in senior ranks as well as board levels. The reason why we did the report is really to have a deeper understanding of, you know, where China is in terms of gender representation, particularly at the board level, to facilitate our engagement efforts as we speak to companies on these issues. And I think what we find is encouraging in the sense that, you know, over the past decade, female representation has definitely been improving in China. If we look at 10 years ago, the percentage of companies with at least one female on the board was only about 60%. Today it stands at 73%, so it's a significant increase. However, there are clearly much room for Chinese corporates to improve on, you know, we use the China A50 index as an example. And out of those 50 biggest companies in China, only one actually has a gender policy with specific measures to actually promote female representation at senior level. So it's still very much at a very early stage, which I think, again, highlights the importance of institutional investors like us to continue to speak to companies on these issues and use our votes to put that extra layer of pressure on companies to really take action.
Marty Dropkin: Another question that comes up quite a bit is about the difference between engagement with private companies in China versus state-owned enterprises. I'm wondering if you can help us think that through?
Flora Wang: Well, I think perhaps the biggest difference that I would highlight when it comes to engaging with the state-owned enterprises in China is that it's not enough to just engage with the listed arm because the listed arms are only part of a much bigger state-owned group which remain unlisted. The parent co. 99% of the time is not listed, and 99% of the time they have a controlling stake in the listed arm. And when it comes to issues such as climate change, decarbonisation is very much tied to the country's strategic pivot in the way it's developing its economy. So the group company would have its own decarbonisation plan, of which the decarbonisation plan of the listed company is only a part. So just talking to the listed company on decarbonisation is not going to give us that full picture. And that is why in our engagement with these state-owned enterprises in China, we would always try our best to actually invite parties from the group level as well, just so that, you know, we get a much more complete picture of what is actually going on at these companies.
Catherine Yeung: So what do companies really think about sustainability? It's one of the many questions we asked 161 of Fidelity's investment analysts as part of the recent ESG analyst survey. The findings give an excellent insight into how engaged companies really are with ESG issues. In the survey, we looked at our analyst confidence in the company's emissions targets. An interesting finding was that despite how ambitious these net zero goals are, their confidence did indeed double over the past year. Eric Zhu is a Consumer Staples Analyst based in Shanghai and he spoke to our Editor-in-Chief, Richard Edgar, about what's behind the rise.
Eric Zhu: Actually, a lot of Chinese companies, they have been doing a lot of work and last year they made a lot of breakthroughs. So basically moving to this year, they had more things to share and they had more confidence in that. And additionally, there was another case last year that the China government actually was very determined to control greenhouse gas emissions and to meet the carbon neutral targets.
Richard Edgar: So there's definitely an element of top down direction from the central government.
Eric Zhu: Both top down and bottom up, the bottom up is a very gradual way that a lot of Chinese companies, they have good incentives, and they are doing their gradual work. But at the top down level, the government’s attitude accelerates this kind of work.
Richard Edgar: And what sort of a reception do you get from Chinese companies when you go to meet the management teams with these topics of engagement?
Eric Zhu: They have great sense of environmental impact things, on social responsibility shouldering. But the problem is that many of them say they don't know how to disclose all this work - about all the data, the facts. So basically, I think what we can do is also to help them to improve their data disclosure quality and give them suggestions on how your international leaders are doing.
Richard Edgar: That's a very encouraging thing to hear, Eric. Can you give me any particular examples of companies that have stood out during the period of the survey?
Eric Zhu: Sure. For example, I engaged with a cosmetics company in China. They have world-class supply chain. They have high product quality, but they used to be punished by MCSI, rated CCC because they have imitated disclosure. But when I talked to them, they told me all the work they've been doing to protect the environment, especially in biodiversity issues. And I just give them suggestions to offer all the certificates they use and to disclose more about their supply chain management work. And they did, this year. So, this is an example that a lot of companies, they have been doing well, but they just don't know how to show it, to tell everyone that, ‘We have been doing such good.’
Richard Edgar: So a bit of a two way street there, perhaps. Is there any particular emphasis on either the E, the S or the G, the environmental, the social or the governance.
Eric Zhu: For cosmetic companies, they are basically E, energy. For E, it's about biodiversity. The palm oil resources, it's very important for a cosmetic company because they have to use so much palm oil. Before, the company I engaged with they already used world-class sustainable palm oil but they just didn't know it’s a necessity to disclose the source. But this year, they just changed and they disclosed all the palm oil sources. And in the G area, basically it was a family business but the board independence is a problem from a global ESG rating agencies’ mind. So basically, what I offer to them is that they should add more positions for independent board directors, and they should build more barriers between the board and the management team. And they are also open minded to it.
Catherine Yeung: Marty, as Eric just pointed out, disclosure is a huge part of the puzzle here.
Marty Dropkin: Absolutely, Catherine. Helping companies communicate to markets what they're doing and the progress they're making is vital if they're going to be assessed fairly. You've seen this a lot in China yourself, I'm guessing, Flora?
Flora Wang: Yes. Yes, absolutely. Because, you know, I still think the biggest influence we as an investor have is through our capital allocation decisions. And for us to allocate capital in a way that would tilt businesses and economy development towards a more sustainable path, we need to have information. We need to be able to assess our investee companies effectively. So we need the companies to tell us exactly what they're doing to decarbonise their business. And this is why we devoted a lot of time engaging with companies, particularly in the power generation sectors, to really tell us their story. And we see our role in that process is really to help companies to improve their disclosure. I think oftentimes when people talk about impact of engagement, they tend to underwrite or understate the importance of transparency. They would say, you know, at the end of the day, you're just getting more information, but, you know, so what? Right. But as I said, you know, for us to allocate capital effectively, we need to assess our investee companies effectively. So disclosure is really transparency. And transparency helps the market to be more efficient. So we've led a group of investors to engage one of the largest power generation companies in China and the focus is very much on how to improve their disclosure. For example, the company actually has been disclosing a lot of things around their decarbonisation efforts. Some of the information is disclosed through the CDP platform, some of the information is embedded in their annual report and then some of the information is in their separate ESG report. So one recommendation we actually gave to the company is to really consolidate all the information. You know, the sustainability report is the golden source that most investors actually go to. So, they took our advice and one very important piece of information which they initially didn't include in their sustainability report, is that they actually embed their decarbonisation targets in their CEO remuneration. That's, you know, as we do our analysis on companies, a very strong indication of whether the company is committed to this course and whether they're able to deliver. So, you know, after our conversation they actually reviewed their sustainability report and made sure that all this important information is highlighted, featured in their sustainability report.
Catherine Yeung: Yeah, that's great. Great outcome. But Flora, I noticed you mentioned that this engagement was a collaborative one. What does that mean and how does it differ from an ordinary engagement?
Flora Wang: By and large, serves similar purposes, right? Both of them are about explaining to companies what investors think are important and sharing with them the good practices we've seen, perhaps among their peers in other markets and getting them to take more action, take faster actions. Now, I think there are two reasons where collaborative engagement will, may be more effective. One is when the underlying topic is actually a very universal issue where investor expectation is very much aligned. So, things like climate change, things like deforestation, it will be likely that every investor, when they reach out to the similar group of companies, and we know raising similar requests. So, for that type of engagement, it will be a lot more efficient for like-minded investors to just band together and go to companies together to make our case in one go as opposed to, you know, for the same company to have very similar conversations with 100 companies all differently. So that's the first reason why I think collaborative engagement sometimes may be more effective. The second case where we would really resort to a collaborative engagement is when certain companies, for whatever reason, may not be as willing to speak with investors on this issue. So, when there is a lack of good corporate access, it's also I think, sometimes it helps to band together with other investors because you come as a bigger voice, as a bigger stakeholder, and companies are more likely to respond to our requests.
Marty Dropkin: Eric and Richard touched on the balance between top down and bottom-up incentives. Can you tell us how the Chinese government is influencing things like gender diversity or better disclosure on environmental factors?
Flora Wang: Yeah, I think policy and regulations set the baseline practice right, because once you have the regulations, the majority of the participants in the markets will comply. So I do think regulators and government policy play a critical role in driving market level changes. And we're seeing that in China, I guess particularly in a market like China where, you know, government policies are actually very influential, not just in terms of the actual incentives provided by these policies, but also the government's influence through the large amount of state-owned enterprises which do represent the bulk of the economy. So policy is critically important, and again, we're seeing a lot of policy tailwinds in terms of sustainability development in China. I think the biggest example clearly is climate change, you know, after President Xi announced China's 2060 decarbonisation goal in 2020, we're really seeing real actions from companies across sectors to start putting in place their own carbon peaking and carbon neutral targets. And also those targets are starting to translate into their short term and mid-term CapEx plans to really back up their ambition.
Marty Dropkin: Now let's shift gears and talk a little bit about what's happening in the China fixed income landscape. Local government financing vehicles, investment companies that help to build infrastructure projects on behalf of local governments, issued $28 billion of offshore debt last year, making up an incredible quarter of China's 2021 corporate debt fundraising. I caught up with Shanghai-based Sustainable Investing Associate Binyu Zhao to find out more about LGFVs and why they're so important to fixed income investors in China.
Hi Binyu, local government funding vehicles, or LGFVs for short, generally aren't public companies. So what, if any, is the commitment that they have to ESG?
Binyu Zhao: You’re right. Most LGFVs are not public companies, therefore subjecting to less regulation scrutiny compared to their listed counterparts. And also in China, you know, markets where ESG development is rather nascent and top down, most companies are taking a compliance-driven approach. So now, you know, as we can imagine, even listed entities do not currently face any mandatory ESG disclosure requirements, let alone LGFV. However, since this companies, their business operation is strongly tied to local governments. So if the government and regulatory bodies are very committed to ESG and start to pass down policies, then these companies, local SOEs and LGFVs, will then quickly implement and adopt. And this is very true, especially when it comes to the E part which relates to China's zero carbon goals.
Marty Dropkin: You've recently been engaging with a county level LGFV. Could you walk us through that process and explain why this is so unprecedented?
Binyu Zhao: Yes, this county level LGFV is the first LGFV we engaged for ESG. And similarly we're also the first investor to talk to the company specifically on ESG issues. And I think for the preparation work it was the same as how we engaged other companies, but only this time around we weren't able to find any relevant information on key ESG issues. And together with our credit analysts, we started by identifying their material issues and then sent over questions and areas we would like to further check to this LGFV before the actual meeting. And then the moment I stepped into the meeting room, a virtual one, of course, already had a feeling that this one would be a very difficult one because firstly, unlisted, secondly, county level SOEs are not very high up along the SOE chain of command. So China's national policies and goals might take a while to reach and affect county level corporates. And just as I expected, I spent the first 20 minutes educating them on the differences between ESG and CSR. And although our discussion covered many topics, including this LGFV, their overall ESG approach, their progress in promoting green energy efficiency, on corporate governance, and also on employee management, etc. But this more like an education I would say, most of the time we needed to give this LGFV a thorough explanation of why an issue and topic is material before asking a question so that they can understand why this question was even being raised in the first place.
Marty Dropkin: It's really impressive. And just even the fact that you got the meeting is something that I think is an accomplishment, isn't it?
Binyu Zhao: Yes, it is. Actually, this company is the first one who actually accepted our request to have a meeting. Many just turned us down or rejected us. That's true.
Marty Dropkin: Maybe it would help us to understand why it's so important to engage with a company like this?
Binyu Zhao: Of course. So I think the most important reason is that Fidelity is a long term active investor, especially in China where most companies are just starting out on their own journey. So stewardship plays an even more significant role. And this is also because most companies, they need guidance or even hand-holding as they get started. And through engagement, they can obtain better clarity on investor expectations and they can also learn about industry best practices and become more informed about the resources that are available. It can help them to assist their effort and we investors in turn, we can get better insights into a company's thinking and plans which help us to arrive at a more objective ESG score via our proprietary ESG rating framework. And we do think this is even more essential for companies like LGFV that generally lack quality disclosure. Engagement really might be the only way for us to have more visibility of what is happening, and will happen within a certain firm.
Marty Dropkin: Yeah, it's that disclosure that's so important, isn't it? So last question I have for you - really around what lessons overall you've learned from this engagement and not just about LGFVs, but fixed income more generally in China.
Binyu Zhao: So, I think, first of all, a case by case analysis is crucial and that is something Fidelity has been doing. Because boilerplate, you know, types of ESG analysis can’t really get us anywhere, especially in China, where no ESG disclosure framework is yet available. And you know, for different industries and companies, the reference on when they're making their own disclosures and also for data users like us to compare and analyse this information holistically. And this is especially important for fixed income issuers because each and every one of them could be influenced by different macro policies and local regulations, therefore generating cross industry and regional impacts.
Marty Dropkin: Thank you so much, Binyu.
Binyu Zhao: Thank you, Marty.
Catherine Yeung: Marty, Binyu really is covering some new ground there. Coming from equities, I've seen firsthand the impact engagement can have on companies. But when we look at fixed income where bond holders don't have the power to vote, is it right to assume we're starting from a somewhat weaker position?
Marty Dropkin: Yeah, you know, Catherine, it's a really good question and it's one I get quite a bit. Even though bondholders don't have a vote, there are many ways the bondholders can influence issuers of bonds. For instance, a recent newer security that's being issued across many bond markets globally is something called sustainability linked notes, where companies have to achieve certain targets, and if they don't achieve those targets, the interest that they pay on their bonds, well, will ratchet up a little bit so it'll become more expensive for the company. Another way that we've seen bondholders be able to influence management teams is to actually come back to them in their covenants, which are the protections of the cash flow and influence those covenants around sustainable issues. So there are a couple of ways, even though bondholders don't have a vote, that they can influence and engage with management teams.
So, Flora’s still with us but we're now also joined by Fidelity's Global Head of Stewardship and Sustainable Investing, Jenn-Hui Tan. Jenn, there's clearly a lot of work that still has to be done in terms of engaging in China. When do we draw the line as stewards of our client's capital and when does divestment enter the conversation?
Jenn-Hui Tan: So I don't know if I would call it drawing the line. I think what I would think of is more of a guiding principle, and that principle is that we are fiduciaries for our clients’ capital. So said in a less fancy way: it's not our money, it's our clients’ money. And all of our engagement activities are designed to create value in the companies that we invest in on their behalf and therefore to be able to enhance our ability to deliver long term returns to them. So when you ask me, ‘Where is the role for divestment?’, it follows that divestment should occur when we see that our engagement is not working in a way that can create that long term value for our clients. And so we are better off then redeploying that capital into another company where we feel we have a better chance of creating that value.
Marty Dropkin: Thanks for that, Jenn. But exclusion still comes up quite a bit in conversations we have. Where did these policies come into the debate?
Jenn-Hui Tan: So I think I think it depends a little bit on what you want to achieve from ESG. I think exclusions are a pretty good way of expressing an ethical view on markets. So if you don't want to be invested in tobacco or thermal coal or weapons, that's fine. You have an exclusion policy that says, I don't want to invest in those sectors. But I think when you're trying to make change in public markets, the question you should be asking yourself is, “If I'm selling these securities, who is buying them and what are they doing about these different holdings?”. And I think, you know, the evidence has shown that, say, take fossil fuel industry, the net buyer of fossil fuel assets over the last five years has been the private equity industry, some $60 billion of capital deployed in those purchases, because increasingly it is hard for public listed companies to be holders of these fossil fuel assets. And I guess the question there for us as a society is, Is that the right outcome? Should these assets be run essentially for cash, or should they be run in a long term way that achieves the transition that we want to see as a society? The other point that I'd make about sort of divestment and to differentiate it from exclusion, I think divestment is part of showing that engagement has consequences. I think it's very easy to be sceptical about engagement. And actually I'm very sympathetic to views of people that say, look, all you're doing is talking, you know, what's the big deal here? Right. What kind of change do you think you're making? And I think that's made harder because it's very difficult to attribute causality to engagement. You know, you say something, something else happens. Can you say it's because you said it, that that thing happens? And so, it's not that straightforward. So I think, again, the onus is on us as fund managers to show that our influence as an investor, whether it's in shares or bonds, can create that difference, that it can lead to positive influences on the management teams of companies that will then enhance the sustainability of those companies and therefore the value that they're creating.
Catherine Yeung: Jenn from an ESG perspective, could you tell us how the team actually identifies and rates companies?
Jenn-Hui Tan: So, the first thing I'd say is that I don't think it is my team - it is not the sustainable investing team that rates and identifies companies from a sustainability perspective. I know that's a very odd thing to say, as the Head of Sustainability, and for me to tell you that that's a good thing. But the reason why I say it is because we've decided as a firm that the right people to be making that kind of judgement are our fundamental analysts. So the 180 analysts we have across equities and fixed income, sector specialists all across the world. These are the individuals that are meeting companies every day. We think that they are in the best position to not only make judgements about the fundamental characteristics of those companies, but also increasingly the sustainable characteristics of those companies. And so what we've done in the last year is redesign our proprietary sustainability ratings from the ground up. We call it version 2. We have created a new methodology which is centred around a few core principles, most important of which I think is double materiality, the idea that we are no longer just measuring the financial impact of ESG factors, but we are measuring the impact of companies operations on the environment and on society. Because that's where we think that long term lens is going to turn to. And so we have built this tool and we've given it to our analysts, and they are the ones now rating the companies. We've had an amazing response, we've had more than 3700 issuers already rated, with new deployments in structured credit and sovereigns coming this summer.
Catherine Yeung: Jenn, what I find really fascinating, though, is when we look at these ratings, it's not all about past performance, is it?
Jenn-Hui Tan: No. In fact, I think this is one of the things that we feel distinguishes our approaches from the approaches that you see from third party rating providers. So another way of assessing company on historic performance is to essentially assess them on the disclosure that they produce. And that's essentially what third party providers are doing. Our view is that that isn't going to tell you where the company is going. And we know this field of sustainability is evolving so rapidly and that people are making all sorts of different advances. I think particularly in a market like China, where that emphasis is really just beginning, our approach has been to take this forward looking lens. So not just to look at where companies are today, but what they might look like tomorrow in terms of their transition ability, in terms of their ability to manage these broader societal impacts, in terms of their ability to manage their businesses for long term growth. So that's, I think, where we can add a differentiating factor in our approach to sustainability research.
Marty Dropkin: Thanks, Jenn. Flora, can I come back to you? You and I just spent quite a bit of time talking to investors and a question that kept on coming up was measurement. And what I'd like to get a better sense of from you is how do we actually measure the real world impact?
Flora Wang: Yeah, that is difficult to do, to say the least. But I also think, you know, Jenn, in his introduction to our sustainability research has sort of addressed that question. I think it all comes back down to, “Do we know our companies well enough with regards to the environmental impact and social impact they’re making to actually report to our clients on the impacts they're making through the investments they're making in these companies?”. And that is, again, why we've invested so much of our time and energy to develop a, you know, what we think is a quite robust methodology and is actually asking our 180 global analysts to spend a lot of their time to use this methodology to evaluate the environmental and social impact that each and every company in their coverage is making. So I guess to answer your question, we measure the real world impact through our sustainability research. So our ESG prop rating or V2 rating is designed explicitly to measure the negative impacts companies are making on the environment and the potential negative impacts they are making to their key stakeholders if they don't look after these stakeholders properly. But on top of that, we now also have a SDG alignment rating, which is specifically designed to capture the positive impacts companies are making through the provision of products and services. And with these two very distinct ratings capturing two distinct aspects of any company, we think we're in a good position to measure the real world impacts we're making through our investments.
Catherine Yeung: Flora, what about in terms of Chinese regulators? What do you think they want to see?
Flora Wang: Well, you know, we've talked about the government and regulatory attention on climate change. I think on the social front, one thing that's actually worth highlighting is the increasing scrutiny from regulators on the welfare of gig workers. You know, as we know, I think particularly as a result of COVID, the gig economy has risen quite significantly. And with that, we're seeing a large amount of people employed in the gig economy. I think by certain estimates globally there are more than 300 million people currently are working for platform companies like Deliveroo, like Uber in China, like Meituan. And because they are most of the time not legally contracted with these platform companies, they don't really enjoy the legal and regulatory protection from a benefits perspective, from, you know, insurance perspective. But increasingly, you know, we're seeing customers and regulators across the board to start paying more attention to this issue. And in China last year, regulators actually launched a raft of policy to ask these platform companies specifically to look after the gig workers much better. They're asking them to really make sure they're paying at least minimum wage and also adopting measures to ensure the safety of these workers. For example, rolling out things like a smart helmet that has a voice control function which could help to free up the riders hands. One company we engaged with, which you know, is one of the biggest players in the food delivery sector, has also done a lot to address this issue. One of the things they have implemented is a mandatory break for their riders. They're enforcing a 15 minute break for every 4 hours these workers worked by essentially stopping to dispatch orders to these workers. I think measures like this are definitely helping to address this issue. And through our engagement, we're able to identify companies that are doing more on this issue and are ahead of the curve in terms of preparing themselves for more stringent regulatory requirements ahead.
Catherine Yeung: Jenn, what about from a more global perspective? What are the things global regulators are looking at, particularly when it comes to diversity or climate change?
Jenn-Hui Tan: So, looking at diversity first, there is an interesting trend that we're seeing of regulators getting significantly tougher. And when I say tougher, what we're seeing is minimum quotas introduced either through legislation, as in the EU, or through the financial regulatory authority, as in the UK or through listing requirements as in Hong Kong. So to give you an example, the EU has recently introduced a requirement that by 2024 at least 40% of non-executive board seats need to be female or one third of all board seats. And in Hong Kong, all new IPO's have to have at least one female director and by 2024 all listed companies in Hong Kong must have that. And what's interesting is that the consequences for not meeting that are also escalating. So previously it might have been ‘comply or explain’, so, do it or explain why you can't do it. And now essentially it's becoming mandatory - so, just do it. And the penalties for not doing it are becoming increasingly severe from public reprimands to fines to in some cases, delisting of the business itself. Now, I think the question we should be asking as investors is this is, I think, really positive in terms of moving the needle. And I think we are now past the point of, you know, not enough available talent, you know, not enough experience in the market. I think these are, you know, things, reasons that might have worked ten, 20 years ago. I think we can't really trade on that anymore. But I think the question is, is this the right area to focus on, board diversity at a gender level? And are there other aspects that we should be thinking about? So if you look at a market like Norway, which has had a minimum quota for female directors for a long time now, over 10 years, what you've seen is that companies meet those requirements just, but there is not a lot of trickle down effect. So over 40% of non-executive seats are female but when you when you look at the executive positions, it's still single digits. So I guess the question then is, are these quotas achieving what they need to be achieving, which is bringing this down across the whole business? And that's why when we do a gender diversity campaign like we are currently in Japan, which essentially is the second worst in the in the OECD, there is, I think, set by a common consensus, a structural problem with diversity in Japan. We're looking not just at the board level, we're looking at diversity across the management level, across the employee level and crucially, across the pay level. And it's only by assessing a combination of these different factors, can you build a picture of what that looks like. I think on climate change, the picture is just as active. A lot of regulators are now introducing new requirements for climate change disclosure. The UK is leading with mandatory TCFD disclosure by next year and there is a new development, the ISSB, the International Sustainability Standards Board, which is part of the IFRS, which is the global regulator for all financial disclosures. They will shortly introduce a global standard for climate related disclosures. And these things we think, will help significantly to increase the information that's available for investors like us to make these sorts of decisions.
Marty Dropkin: That links very nicely to one final question I have for you, which also ties back into a comment you and Flora made earlier around our own ratings and the forward looking nature of them. And that question links to China. And it's about which sectors in China do you think are making the most progress? And also which ones do you think have the most opportunity to drive improvement when it comes to ESG and sustainability?
Jenn-Hui Tan: So I think the way that I would answer this question is to follow the money. You know, there are estimates that around 15 to $75 trillion of investment will be required over the next 30 years to finance the low carbon transition in China. And so what we can see is broad based spending in green investments across the entire economic spectrum. But I think there's two areas in particular where China is leading both the world and its own targets. The first is in power generation. China has been the largest and fastest builder of wind and solar power. It now accounts for 35% of all new wind and solar capacity in 2021. And it's set to reach its 2030 target for renewable energy by 2025 based on its current trajectory. It is also the largest manufacturer of wind and solar power. And so what that means is that it is going to be very difficult for other countries to achieve their net zero targets without the renewable infrastructure build out that China will help to facilitate. The other aspect of sort of China's lead is around the development of energy storage systems. I think a lot of the power cut issues that we've been seeing around the world highlight the core problem with renewable energy, which is that of intermittency. It's very hard to predict when the sun will shine and the wind will blow. And so China has been introducing new policy requirements to accelerate the buildout of energy storage systems, such as widening the price gap between, for peak to trough electricity price and the requirement to have minimum energy storage attachment rates to all new renewable capacity that's being built. The second area, I think, where China is very rapidly developing, is around transportation. We're seeing electric vehicle penetration at astonishing rates, accelerating from just 5% in 2020 to now, 25% by June of this year. And again on current targets. It looks like it will achieve its 2025 target well in advance of that. China is also one of the world's largest electric vehicle battery manufacturers and one of the key suppliers of materials for batteries, the metals of batteries, rather. And that will further strengthen its position in the electric vehicle transition to come in the developed world.
Catherine Yeung: Yeah, Jenn, that EV space is huge. I like how you mentioned the predicting of weather and how hard it is. But what we can certainly predict, Marty, I'm sure you will agree, is, you know, this area is only going to get bigger and more important. So, you really have to be at the forefront of it.
Marty Dropkin: Yeah, I mean, Catherine, the thing that really strikes me, if we kind of come back to your first comment about perceptions of the Chinese market and you look at how far we've come. I mean, some of these statistics that Jenn just threw out around, you know, penetrations and industry leading efforts on things like, you know, renewables. It's just phenomenal how advanced the Chinese market has become in such a quick period of time.
Catherine Yeung: Yeah, and the companies that are really forging ahead in that space from an investment perspective. So this really brings us to the end of the episode. Thank you to all our guests, Flora Wang and Jenn-Hui Tan, and to our other contributors, Richard Edgar, Eric Zhu and Binyu Zhao.
Marty Dropkin: And thank you for listening. If you want to read more of what's been covered today, please go to your local Fidelity website or fidelityinternational.com. The producers are Rory Fong and Neil Gough, with production support from Seb Morton-Clark, Tommy Su, Keith Chuen and Holli Eastman. The editor is Richard Edgar.
Catherine Yeung: Until next time, from all of us at Fidelity, goodbye.
Marty Dropkin: Goodbye.
