Can China A share issuers adapt to ESG realities?
Now that China A shares have partially entered some mainstream MSCI indexes, institutional investors and other stakeholders are raising questions about Chinese constituents’ ESG track records and potential risks from these new exposures in their portfolios. And these questions are fair. Of the 423 newly rated constituents of the MSCI China A International Index,1 we find that 86% fall below BBB, the mid-point for MSCI ESG Ratings.
However, investors should keep in mind that a skew towards lower ESG ratings is not unusual for emerging or newly covered markets. While there are challenges ahead for China A share issuers, we see indicators that suggest they may quickly adapt to the new ESG realities.