MSCI China'S Constituent Stocks ESG Rating Higher Stock Pledge Risk Is Concerned

With the improvement of the degree of internationalization of the capital market, the level of ESG (environment, society and corporate governance) of domestic listed companies is constantly improving.

In twenty-first Century, the economic report reporters learned from MSCI (Ming Sheng) in October 10th that MSCI has upgraded the ESG rating of MSCI China Index Stocks in the latest ESG report.

The report shows that the ESG rating of MSCI China Index Stocks with index weight up to 20% has been improved, while only 2% of the stocks have been downgraded.

In MSCI's view, the overall rise of the ESG level of MSCI China index stocks is not related to the continuous promotion of domestic regulatory authorities to promote ESG practice and stronger information disclosure regulation measures. These measures have led domestic investors and listed companies to pay more attention to the factors of ESG in the decision-making process.

But in MSCI's view, domestic listed companies still lag behind in some aspects, such as employee health and product safety.

In the eyes of the industry, we attach more importance to ESG as a necessary process to deepen the internationalization of the capital market. With the continuous improvement of the consciousness of investors and listed companies, the ESG level of domestic listed companies will also further uplift, which is also conducive to further attracting long-term capital.

20% heavyweight was upgraded.

In MSCI's view, the ESG situation of more Chinese stocks has improved.

According to the report, the ESG rating of 11% of China's constituent stocks has been raised, while 7% has declined, but if the proportion of MSCI weighting is taken into account, the improvement of ESG seems to be more optimistic.

MSCI points out that the ESG rating of the 20% weighted constituent stocks has been improved.

Specifically, the number of different ESG level companies has also changed. Among them, the proportion of Chinese companies with the lowest rating CCC has decreased from 22% last year to 20% this year, and the proportion of companies with B ratings has dropped from 37% last year to 36% this year.

By contrast, the proportion of companies that acquired BB ratings increased from 21% last year to 26% this year, while the proportion of companies that rated BBB, A and AA remained unchanged at 14%, 4% and 1%, respectively. Among them, AA companies were mainly distributed in consumer goods and information technology industries, including boss electric appliances, Geely cars, Lenovo holdings and so on.

This also means that the improvement of the ESG level is mainly due to the improvement of CCC and B companies to BB and higher levels last year. According to the ESG classification, the companies that have improved their ratings have reached a transition from a lower level to an ordinary level.

For example, in the MSCI China Index, the top ten companies, Alibaba and China Mobile's ESG ratings have been raised to BB level, slightly lower than Tencent and China Merchants Bank's BBB, while Baidu and CNOOC are the top ten largest weights of two ESG ratings.

In fact, this is inextricably linked to the impact of the A share index incorporated into the MSCI China Index and the ratings accepted. In twenty-first Century, the business reporter reported that the majority of China's constituent stock companies first contacted the ESG rating communication process in 2018. This year, more than 200 A share companies were included in the MSCI China Index for the first time and accepted the ESG rating.

Along with the further expansion of A shares into MSCI, the results of communication with MSCI's ESG program have been further responded.

"In the past three years, we have observed that the links between issuers and MSCI ESG research departments have been greatly strengthened, which is not only due to our active communication with enterprises, but also from the initiative of enterprises." MSCI said, "the response rate of MSCI China Index shares has doubled, from 13% in 2017 to 26% in 2018."

The gap remains.

There are many reasons for the improvement of ESG level, for example, the decline of carbon emissions from China's constituent stocks has attracted more attention from MSCI.

According to its research, the carbon emissions intensity of MSCI China Index has shown a significant downward trend since 2013. The data show that the MSCI China Index's carbon emissions are 16.8% lower than that of MSCI emerging market portfolios, but still 95.6% higher than that of MSCI global benchmark index portfolios.

Wang Xiaoshu, vice president of ESG Research Department of MSCI, believes that the reduction of carbon emission concentration is closely related to the relevant policies and market influence promulgated by the government in recent years.

"The ESG performance of the constituent companies has been improved, and the concentration of carbon emissions has been reduced. This indicates that the Chinese government has made preliminary achievements in recent years to introduce new laws and policies aimed at improving ESG practice and information disclosure." "In view of the strong influence of the government in the Chinese market, these regulatory measures may further push investors and issuers to implement the ESG concept," Wang Xiaoshu said.

In the view of the industry, this aspect stems from the fact that regulators attach more importance to the supervision and guidance of information disclosure. In recent years, in the process of capital market reform, the importance of information disclosure regulation has become an important direction for the Securities Regulatory Commission and the exchange to supervise listed companies. On the other hand, ESG has received more and more attention in recent years in China. Whether it is the China Securities Investment Fund Association, or the securities companies, public offering institutions and listed companies, they are vigorously developing the support and application of ESG in China.

Regulatory policy is an important impetus for the gradual increase of ESG level in Chinese listed companies. The absorption and attention of talents in listed companies is also regarded as one of the reasons for the improvement of ESG level in MSCI.

"The continuous improvement of ESG performance is partly due to the growing concern about highly skilled talents, whose increasing position in economic development has increased the challenges they face in attracting and fostering talent." MSCI pointed out that since 2018, 18% of the ESG ratings in the technology, finance and healthcare sectors have been upgraded, thanks to better talent management and communication plans.

However, there are also some shortcomings in China's constituent stocks, such as employee health problems, product safety and corporate governance. For example, this year, the 996 topic of public opinion boom (nine a.m. to nine p.m., six days a week) has become the focus of MSCI, and product safety measures are lagging behind international peers.

MSCI said frankly, "although the government has stricter regulations on product safety and the growing demand for quality and safety products by China's growing middle class, China's constituent stocks of the MSCI global benchmark index still lag behind international counterparts in adopting product safety measures."

"The market still shows relatively high share price volatility, lower issuer disclosure transparency and higher policy impact, thus highlighting the importance of corporate governance practices. Our research focuses on the key personnel risks and stock pledge risks of Chinese founders. " Wang Xiaoshu said.