Determining China’s net-zero reality
Poor transparency levels can make meaningful investment insights into China hard to gauge
In September 2020, Chinese president Xi Jinping surprised many commentators by announcing to the UN a net-zero target for China of 2060. This means sweeping energy transition reforms for China, which is known for being one of the biggest contributors to global emissions.
Experts may be divided on how realistic these ambitions are – especially given China is currently building over half the world’s new coal plants – but this highlights another challenge investors face. A long-running investment criticism of China has been that much of the data coming from the country (regarding growth, GDP, employment, etc) has been regarded as dubious, and prone to manipulation from the state. This can make net-zero investing, reliant upon emissions data, particularly challenging.
A reassuring factor for international investors is the prospect of greater regulation of climate reporting for Chinese companies. Lars Hagenbuch, consultant at investment company RisCura, points to evidence of change in this direction with the Hong Kong Securities & Futures Commission announcing climate risk disclosure reporting – consistent with the Taskforce on Climate-Related Financial Disclosures (TCFD) – will be expected from Q3 2022.
“No doubt, the onshore regulators will follow in due course,” he says. “According to CDP, a non-government organisation focused on environment-related global disclosures, TCFD reporting of Chinese companies has increased sharply over the three years to September 2021. There were then 1,300 companies delivering some reporting across 11 sectors and the quality of data has improved.”
This is in contrast to just one company meeting this standard back in 2016. Hagenbuch adds: “No doubt there is still lots of room for improvement, but the trend is in the right direction.
“It is also important to understand that China is a heavily regulation-driven market and that non-compliance with rules can lead to substantial penalties. Therefore, once the relevant directives are issued, compliance from corporates is likely to be high.”
Such introductions could be of benefit to investors, like GIB Asset Management portfolio manager Kunal Desai. Currently he and his team have to do more work to make up for information deficits, but the targets being set are of comfort he says.
It is important to understand that China is a heavily regulation-driven market and that non-compliance with rules can lead to substantial penalties. Once the relevant directives are issued, compliance from corporates is likely to be high.
Scraping and mapping
“Company level ESG reports are fast improving in China with an increasing number of companies now disclosing more granular data – we hope this continues to improve,” says Desai. “To get around data consistency and coverage issues, we also lean on scraping and mapping news, social media, NGO reports for relevant ESG issues.”
Poor data transparency may not appease current critics of China’s net-zero plans. Despite these challenges, investors are optimistic about the net-zero opportunities they see in China.
Here, the role of the Chinese state is a benefit according to Alan Siow, portfolio manager at investment manager Ninety One, especially in the fixed-income market as more green bonds are issued.
“While we expect opportunities to abound – given the size, scale and complexity of the changes; and the interconnectedness of value chains; investors will need to do their homework from the bottom up to sort the wheat from the chaff in both public and private markets as the transition takes place within the corporate space,” says Siow.
These investment opportunities reflect the scale of China’s net-zero mission. According to Desai, a 50-80% reduction in emissions is needed in the country alone to meet Paris Agreement targets. For him this creates “compelling” opportunities that he is keen to access.
“China is seeking to compete for climate leadership with the US as net-zero transformation requires a new industrial revolution with existing and new technologies (in particular energy and fuel production) and end-use applications/industries dependent on it,” says Desai.
“We see attractive opportunities in renewable energy, electrical vehicles (with 88x more battery capacity required for 100% sales coverage by 2035), hydrogen production and carbon capture as key technologies with a roadmap of higher incremental returns.”
