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China Is an Ineffective Market When it Comes to ESG Leaders

Despite being the most weighted geography in the MSCI Emerging Markets ESG leaders (made up of mid- and large-cap companies from 24 emerging countries), no Chinese-listed company ranks among the best in the class. Thus, with ratings of A and triple B, with which MSCI designates companies that are in average for their industry, are China Construction, Tencent, Alibaba, Meituan and Baidu.



China is the Asian country that weighs the most in the index of emerging leaders in sustainability, but none of its listed companies leads its sector. 

When an investor thinks of potential companies to add to an ESG-based portfolio, emerging market companies rarely come up as candidates. These firms do not usually stand out for their sustainability ratings, since the levels of public disclosure of sustainability data they offer are low. In fact, the biggest point of contention with respect to the listed Western stock markets is usually that of governance. As an emerging power, China is called upon to lead this journey.

“China is perhaps the Asian market in which we are seeing the most progress and momentum in terms of ESG, with companies increasingly proactive in their commitment to shareholders,” said Álvaro Antón, Country Head of Abrdn for Iberia.

But despite being the most weighted geography in the MSCI Emerging Markets ESG leaders (made up of mid- and large-cap companies from 24 emerging countries), no Chinese listed company ranks among the best in the class. Thus, with ratings of A and triple B, with which MSCI designates companies that are in average for their industry, are China Construction, Tencent, Alibaba, Meituan and Baidu. Also, the Indian Housing Dev and Reliance industries receive this note. “China remains an ineffective market when it comes to identifying ESG leaders, but we believe this inefficiency creates an opportunity for active managers to identify both the current and the next generation of ESG leaders in China,” explained Antón.

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A unique ‘triple A’

Now, which emerging markets receive the best ESG ratings? Looking at the index heavyweights, only one company receives a triple A for sustainability from MSCI (the highest the vendor awards to industry leaders for their sustainability risk management).

This is Taiwan Semiconductor Manufacturing, the world’s largest chip producer, which produces more than half of this type of component that is sold to third parties around the world. The Taiwanese, which weighs more than 12% in the index, offers an additional run of 19% for the coming months, in addition to a buy sign. “We believe that the geopolitical backdrop has become more benign in recent months following the negative reaction to the US export control on October 7,” said analysts at Deutsche Bank.

They are followed by double A Infosys and Naspers, both with a weight of less than 2%. The first is a multinational information technology services company based in Bangalore. With its stock down 2% for the year, it offers up to 16% potential and buys advice.

China Construction receives an ‘A’ and technology companies Tencent, Alibaba, Meituan and Baidu, a ‘Triple B’

“Infosys has aggressively realigned its strategic approach to scaling digital transformation projects over the past two years. This includes significant sales investments and increased deal structure flexibility and has been rewarded with a sharp increase in large projects in around hybrid adoption and automation,” notes JP Morgan.

As for Naspers, publisher of media and payment services and owner of 31% of Tencent, it adds 12% in 2023 and has room to advance a further 34% to its fair price. “Secular expansion and growing spending could help Naspers deliver double-digit revenue expansion in many of its businesses over multiple quarters. However, some of that growth and spending could start to subside as participants in the market focus more on preserving cash. The commercial profit of 2023 (excluding Tencent) could continue to be negative, “they point out from Bloomberg Intelligence.


(Featured image by jeremy888 via Pixabay)

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Jeremy Whannell loves writing about the great outdoors, business ventures and tech giants, cryptocurrencies, marijuana stocks, and other investment topics. His proficiency in internet culture rivals his obsession with artificial intelligence and gaming developments. A biker and nature enthusiast, he prefers working and writing out in the wild over an afternoon in a coffee shop.