Monday 11 December 2017

A key part of China's push to develop its green finance industry is improving the disclosure of environmental information.


China is working hard to ensure that the financial industry plays a meaningful role in developing a sustainable economy. Earlier this month, Beijing held the International Green Finance Forum – an event designed to promote the mainstream adoption of green finance, with a focus on environmental risk analysis, green bonds, and the potential contribution that FinTech can make.

At the forum, seven of China's leading financial industry associations – covering everything from banking and asset management to insurance – made a formal commitment to maintain high environmental standards in their offshore activities through the Environmental Risk Management Initiative for China's Overseas Investment. The guidelines are made all the more relevant considering the high level of overseas investment activity conducted by Chinese companies in recent years.

Each of the initiative's 12 principles focus on a different aspect of green finance, including one around green information that encourages financial institutions to improve disclosure of data relating to environmental, social and governance factors (ESG).

Information disclosure is an integral part of green finance, as it allows investors to assess whether an asset meets sustainable standards or not. For a listed company, this means releasing data relating to its carbon footprint, while in the fixed income market an issuer of a green bond is required to make additional disclosures to show investors that the capital raised is being used for sustainable purposes.

Environmental data standards were the subject of a panel discussion at the forum, which brought together experts from financial institutions, data providers and research institutes. The panel discussed the importance of green data in investment decisions, as well as the evolution of China's disclosure framework.

"The level of disclosure is improving. But we are still not seeing the level of disclosure that we would like – not only in China, but in many markets across the world."
Gaetan Obert, Global Head of Sustainability at BNP Paribas Asset Management

Mr Obert highlighted the positives that arise from companies releasing environmental data. In addition to nurturing a culture of transparency between corporates and investors, he said that it also provides portfolio managers with the necessary information to engage in responsible stewardship. At the same time, asset managers can use the data to promote the benefits of a low carbon portfolio to clients.

Ma Xianfeng, Vice President of the China Institute of Finance and Capital Markets (CIFCM) discussed how listed companies could act as role models for the broader business community by releasing environmental information.

"Business need incentives related to information disclosure, then they have more reason to publish data"
In particular Mr Ma pointed to a June agreement signed by the Ministry of Environmental Protection and the China Securities Regulatory Commission to promote improvements in environmental disclosure, which is a step towards the gradual introduction of mandatory releases of information.
The two government bodies are currently working on a set of standards – deciding on what kind of companies need to make disclosures, and the kind of information that they should publish.

Mandatory disclosure will rectify a situation where companies release data on a voluntary basis, resulting in an incomplete picture of the overall impact that China's listed firms have on the environment. It will also put the country in line with other markets – such as the EU, the US and Japan – where these disclosures have been part of standard financial reporting for some time.

There is clearly room for improvement. A study by Fudan University of companies listed on the Shanghai Stock Exchange found that the level of disclosure was inconsistent. The research found that oil companies were slightly above average when it came to releasing data related to their environmental impact. Companies that make pharmaceuticals or textiles had the lowest ranks.

"Business need incentives related to information disclosure, then they have more reason to publish data," said Sabrina Zhang, China Country Director at CDP – a global disclosure system made to help investors manage their environmental impact. She added that when some Chinese companies do decide to release information they find that they score very highly according to international standards.

Incentives could come from government policy, or it could arise from companies realising that being transparent with regards to environmental data can improve relations with investors. "We want companies to know that disclosure is important to the way that we allocate capital," said BNP Paribas's Mr Obert.

There are signs however, that some large Chinese corporates are already taking seriously their environmental responsibilities - especially in relation to the development of green supply chains, which is when a company ensures that its suppliers adhere to high environmental standards.
Ma Jun, Founding Director of the Institute of Public & Environmental Affairs, an environmental database, said that large Chinese consumer brands and property developers are using information to force improvements in vendors from polluting industries like glass, steel and cement.

"More than a hundred large brands have put green factors into their purchasing standards, and more than a thousand bidding companies are under pressure to rectify any problems," he said.



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