Investing in China. Focus on sustainability and corporate governance.
China has caused a stir with its announced sustainability goals. Corporate governance and sustainable investments are to be promoted in the future. What impact will this policy shift have on the markets?
Sustainable investments are on the rise in China
In the West, the "big bang" in China's climate policy caused surprise. The country's stated goal is to reduce CO2 emissions from 2030 and achieve climate neutrality by 2060. As a result, the government took a number of measures and adopted new regulations, both in ESG (environmental, social, and governance) and other sectors.
But what do these developments mean for investors? At the Credit Suisse Asian Investment Conference 2022, experts Christine Loh, Angela Zhang, and Jamie Allen discussed the impact of these decisions on the markets with Phineas Glover, Head of ESG Securities Research Asia & Pacific at Credit Suisse.
China promotes sustainable investments
For Christine Loh this move toward sustainability comes as no surprise. "China has been steadily preparing to address the climate issue seriously over the past decade." Meanwhile, the Communist Party has enshrined the concept of "ecological civilization" in its party constitution, and the Chinese government has embedded it in the national constitution. Incorporated with it is a mandate that declares ecology, the environment, and biodiversity to be at the core of development.
Nevertheless, the Chinese economy's hunger for energy remains unabated. To satisfy this hunger, investment in fossil fuels will increase alongside the expansion of renewable energies, nuclear reactors, and new energies, such as hydrogen. "This idea that China can simultaneously have its carbon-peaking commitment and continue to increase its coal power consumption is something that investors can find hard to reconcile,” adds Phineas Glover. Navigating this temporary contradiction is not only a challenge for policymakers in China. It is also a point that investors must take into account.
Corporate governance plays an important role for investments in China
Another important issue for investors is corporate governance. "When you look at failed companies, you often see that they had weaknesses in internal governance and that risk management was not optimal," says Jamie Allen. That's why good corporate governance is not only relevant for large companies, but is also a key building block for success for smaller firms, he says. Awareness of this is currently growing throughout Asia, albeit slowly.
New focus on regulation in the tech sector
Finding the right level of regulation is a constant challenge for the authorities. One example is the Chinese tech sector. Here, regulatory requirements are likely to relax somewhat after the authorities sharply tightened the screws virtually overnight at the end of 2020. "That has a big impact," says Angela Zhang and adds: "The focus is no longer on enforcing regulations. Instead, the focus is increasingly back on international cooperation and on ensuring fair competition."
This change in priorities among competition regulators is also an important signal to calm markets and investors. "The crackdown at the end of 2020 had caused great uncertainty," says Jamie Allen. A long-term, consistent, and predictable process in formulating and enforcing regulations helps build long-term confidence in the Chinese market, he adds.
What factors should be considered when investing in China?
"An enormous amount is happening in China in terms of sustainability and environmental protection, and the measures adopted have far-reaching consequences for markets and companies," explains Christine Loh. That's why it's important for investors to keep a close eye on developments.
Jamie Allen sees climate change and good ESG reporting as important levers for companies to modernize their governance structures. "It's about being transparent about the biggest risks and opportunities. If you don't manage it that way these days, you're not serving the market, your shareholders or other stakeholders." For investors, he said, the key is to examine basic governance frameworks and engage in dialogue with companies, rather than simply demanding short-term reports. "Because such discussions on core issues are the best way investors can support companies on governance."