New Revolutions Brewing

Chinese ESG evaluation systems have evolved rapidly over the past few years.

Pressure from investors and Western business partners is bearing down on Chinese companies. With a growing number of investors signaling that environmental, social and governance (ESG) considerations are shaping their decisions, many publicly listed Chinese companies have been taking action to raise their ESG ratings from firms like MSCI. For example, Changji Esquel Textile, a unit of Hong Kong–based Esquel Group and the world’s largest shirtmaker serving brands like Calvin Klein and Nike, is facing increased scrutiny concerning forced labor practices. The scrutiny could significantly hurt China’s exports volume, meaning ESG reform isn’t just necessary but urgent.

The pressure from within has been just as formidable. Chinese ESG evaluation systems have evolved rapidly over the past few years. Chinese rating firms launched the SGCX ESG50 Index and Beautiful China ESG 100 Index in 2017 and 2019, respectively. In December, Ping An Insurance Company of China, one of the largest financial service companies in the world, and Xinhua News Agency’s China Economic Information Service, one of the largest state-backed economic information service organizations, jointly launched XinHua CN-ESG System. Moreover, ESG-themed investments in China have grown quickly in the past few years, increasing the likelihood that the Chinese government will issue a new ESG policy in late 2021.

The US is experiencing its own swell of ESG enthusiasm. Although US companies have dominated the MSCI World Leaders ESG Index with superlative ESG scores in the past decade and the US has ESG evaluation systems favored by global investors, regulatory reforms are driving further ESG evolution.

The US Department of Labor’s final rule issued in October 2020 changed the regulatory structure on investment for the Employee Retirement Income Security Act in order to protect retirement savings. This triggered significant stakeholder considerations and ESG investing strategy discussion of the sustainable capital market. Less than two months later, Nasdaq proposed new listing rules with the SEC that promote inclusivity, requiring listed companies  to diversify their boards and to disclose various board diversity statistics. In addition, the incoming Biden administration has already proposed disclosure requirements for US companies regarding environmental risks. More regulations and ESG reforms are likely to follow.