ESG investing in China not an oxymoron

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Investors with a strong ESG emphasis should not ignore the world’s second-largest economy – China – notwithstanding the country’s poor form with human rights and, until recently at least, unsatisfactory labor conditions.

Nathan Lim, portfolio manager in charge of international equities for Australian Ethical, says that with a globalized supply chain there is more opportunity for ESG-orientated managers in countries such as China.

Joint research by Australian Ethical and CAER – Corporate Analysis, Enhanced Responsibility, showed that investors need to dig down into the data which reveals that ‘China and Chinese companies are, in many areas, ticking all the ethical investor boxes’, says CAER chief executive Duncan Paterson.

Lim said a Chinese (Hong Kong listed) company which was ethically acceptable, for example, was Trina Solar.

“What we are primarily doing with our companies is examining their Chinese exposures. We are able to better pick up the improving ESG environment in China via established overseas companies who are finding success locally as improvements remain patchy. For example, the new high-rise fire-proof regulations favour the use of stonewool for insulation which benefits the global leader in this space, Rockwool, a Danish company.”

However, he adds: “Finding a pure play Chinese company that passes our strict ethical screening process is far more challenging.”

Lim says that while the Chinese government has made significant progress in recent years in terms of openness and the rule of law, there remain a number of challenges for Western businesses operating in China’.

Typically, due to their positive and negative screening, Australian Ethical can invest in a broad range of companies and their investment charter says their funds must avoid companies unnecessarily inhibiting human rights.

“For example, US IT companies have faced criticism in their own country for caving into Chinese government requirements about internet activist monitoring and policing,” says Lim.

“In some cases information provided by a US company has resulted in the imprisonment of Chinese activists. So, we would seek to avoid companies that are assisting in the inhibition of human rights in this way.”

CAER’s Paterson says low wages and poor working conditions are something that most companies manufacturing overseas will need to monitor (also part of Australian Ethical’s charter).

He says Apple has faced recent criticism for using a Chinese manufacturer, Foxconn, which is implicated in worker suicides, protests and allegations of the use of child labour.

Whilst China’s environmental standards were improving, Paterson says, “they are not yet on a par with those in more developed nations such as Australia”.

‘Developed countries need to work with China to help educate on best practice environmental standards; although many would argue that many Australian companies still have a long way to go.’

Beyond its demand for raw materials such as Australian 
iron ore and coal, China is also a significant consumer of end-products and – as the size of the middle class in
 China increases – this consumption-led part of the economy is growing exponentially.

For example, in the past 10 years the number of electric bikes (e-bikes) in China has exploded from fewer than 1 million to 130 million, making it the largest market for e-bikes in the world.

Lim says the rapid penetration 
of these vehicles has ridden the trends of rising incomes, greater urban sprawl and, more importantly, the banning of petrol motorcycles in many major cities to curb air pollution.

“Mirroring its popularity in traditional push bikes, Shimano derailleurs (the part of a bike that changes gears) are often found on many of these e-bikes which has been a boon for the company,” he says.

Paterson says China is also the largest wind turbine market in the world with over 62.7 gigawatts of installed capacity –
the equivalent to 1.3 times the total capacity in Australia, not just of wind but all forms for power generation.

China is also the largest solar panel manufacturer in the world having brought industrial scale and capital which has helped to drive down panel prices by 75 per cent in less than 10 years.

Lim says that, while the owners of this manufacturing capacity have not fared well in recent times, the winners have been consumers who are able to reduce their environmental footprint and installers who continue
 to enjoy booming demand.


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