Could COVID-19 Be Turning Point for ESG in China?

[Sponsored Article]

Few would argue that China, despite its many economic achievements, is a posterboy for good ESG performance. However, a recent research study by The Chinese University of Hong Kong (CUHK) hopefully adds further motivation for firms in the country to speed up their adoption of business practices that focus on their environmental, social and corporate governance outcomes in addition to profits: It found that high-ESG firms in China performed better on the stock market during the COVID-19 pandemic.

“Overall, ESG scores were positively associated with short-term cumulative returns over three- and five-day event windows around the Wuhan lockdown. We found modest evidence to suggest that higher ESG firms exhibit lower price volatility during the COVID-19 period.” says Kalok Chan, Wei Lun Professor of Finance at CUHK Business School and one of the authors of the study. “We found the performance of firms with high ESG scores were attenuated in normal times, and strengthened during times of crisis.”

ESG Investing in China

ESG investing in China remains at an early stage of maturity. Among the more than 3,200 signatories to the Principles of Responsible Investment, or PRI, a UN-backed network of investors, only 49 hail from China. Unlike developed markets where institutional investors play an important role in ESG investing, retail investors dominate the markets within China and they are only recently incorporating ESG into their thought processes.

There is hope, however, as the investor network sees strong ESG momentum for Chinese firms, in part driven by the inclusion of its many top performers into global stock indices. The country is also expected to kick off a programme before the end of the year to require its more than 3,000 listed companies to increase ESG disclosure.