A review of China’s Hang Seng Corporate Sustainability Indices showed slow but steady improvements in overall corporate social responsibility over the past year, said research experts.
Research firm RepuTex, which analyses environment, social and governance (ESG) factors on behalf of the Hong Kong-based stock market index series, said in a Tuesday statement that the third annual review of the corporate sustainability index series had indicated a “groundswell of interest” in ESG performance from firms and investors.
“Competition for places within the index series has increased dramatically over 2012,” said RepuTex ESG research director Martha Grossman.
At the same time, high profile corporate scandals involving Chinese listed firms have demonstrated to corporate boards the need to minimise risk from non-financial factors, she told Eco-Business in an interview.
Such scandals included allegations that poor working conditions led to multiple suicides at the Chinese factory of Taiwan electronics firm Foxconn and the arrest of two directors – both members of the company founding family - from real estate firm Sun Hung Kai Properties on charges of bribery and misconduct. Another example was the money-laundering investigation of multinational bank HSBC, which allegedly had financial dealings related to illegal drugs and terrorism.
“As stakeholder scrutiny of environment, social and governance issues continues to grow, we are witnessing greater repercussions for companies that fail to live up to community standards,” noted Ms Grossman, referring to lower sales and stock prices - and the potential for downgraded investment ratings.
The Hang Seng Corporate Sustainability Indices rate firms on how well they manage risks from ESG factors. These include corporate governance, environmental impact, social impact and workplace practices.
The series, which started in 2010 as the only index specialising in corporate social responsibility for Chinese firms, includes 30 Hong Kong listed firms on the Hang Seng Corporate Sustainability Index and 15 mainland Chinese listed firms on the Hang Seng (China A) Corporate Sustainability Index.
The indices benchmark the listed firms against 636 companies that are publicly traded in Hong Kong and mainland China, which together represent 95 per cent of the value of China’s tradable shares. Ratings range from “D” at the low end of the spectrum to “AAA” at the high end.
Four companies – three from Hong Kong and one from mainland China – have ousted indexed companies from last year, and the average rating has increased from “BB” in 2011 to “BB+” in 2012.
RepuTex’s Hong Kong ESG Honour Board
The indices are useful to firms who want to compare their performance with other Chinese companies, but the ratings are on par with international sustainability indices such as the FTSE4Good and the Dow Jones Sustainability Index, said Ms Grossman.
Despite an original plan to develop a system specifically for Chinese companies, RepuTex uses a standardized method for analysis because larger firms said they wanted to be appraised against their international peers.
“The usual suspects in the Hong Kong market, such as Cathay Pacific Airways and (transit firm) MTR Corporation, compare very well,” she said.
Mainland China lagged behind Hong Kong in ratings, with Hong Kong firms scoring from 6 to 8 per cent higher on average in the different categories and achieving an average rating of “BBB-” compared to “BB” for mainland-listed firms.
Still, mainland Chinese firms are making progress. RepuTex found a small but significant jump in the number of mainland firms submitting CSR reports with their annual financial reports for the first time, noted Ms Grossman.
This increased transparency may be partly due to pending regulations from the State Assets Supervision and Administration Commission, which has said it would make ESG reporting for state-owned enterprises mandatory in the near future, she said.
After two years of educating companies and raising awareness on ESG reporting, RepuTex is starting to see results – even with smaller companies, she added.
An increasing number of firms are responding to requests for better data. More than 100 companies provided RepuTex with additional information for their research, which Ms Grossman said was a significant increase from previous years.
“We have also seen demand grow from institutional investors, as capital markets seek to better understand corporate ESG risk and the degree to which that risk is being managed by corporate executives in Asia,” she said.
