Climate change: Chinese companies must improve emissions disclosures from supply chains to aid national net-zero goal
South China Morning Post
4 min read
Chinese companies need to improve their disclosures of carbon emissions, especially along their value and supply chains, for investors to properly assess business risks stemming from climate change and support the nation's push to reach its dual carbon goals, according to asset managers.
The complexity of reporting indirect greenhouse-gas emissions from a companies' suppliers or value chain - known as scope-3 emissions - has been particularly challenging for firms in China and other emerging-market economies that are relatively early in their sustainability journeys, according to Graeme Baker, sustainable equity portfolio manager at asset manager Ninety One.
"When we speak to some companies [in China] who don't report scope 3 at the moment, they could have a supply chain that includes 1,000 companies all across the world or in different regions," Baker said. "It is highly complex to try and pull together all of that information."
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He added that about 75 per cent of carbon risk in global equities sits within scope-3 emissions. "If you're not understanding the carbon intensity of a supply chain or the entire value chain, you may be missing some carbon risk within a company or associated with a company," Baker said.
Employees work on an assembly line producing speakers at a factory in Fuyang, in China's eastern Anhui province, on March 31, 2023. Photo: AFP alt=Employees work on an assembly line producing speakers at a factory in Fuyang, in China's eastern Anhui province, on March 31, 2023. Photo: AFP>
"Chinese companies are increasingly taking [carbon emissions reporting] quite seriously, and that's in part related to the overall government ambition in achieving [the dual carbon goals]," said Martin Lau, managing partner at FSSA Investment Managers. "In China, when President Xi says something, you better do it."
FSSA has been working with Chinese companies that it invests in for the last 18 months to encourage them to make disclosures and create clearer road maps to net-zero carbon, Lau said. FSSA reaches out to portfolio companies through letters and in-person meetings, not only to encourage change but also to gauge company culture and reactions to the effort.
Martin Lau, managing partner of FSSA Investment Managers, pictured in Central on March 30, 2023. Photo: Yik Yeung-man alt=Martin Lau, managing partner of FSSA Investment Managers, pictured in Central on March 30, 2023. Photo: Yik Yeung-man>
Ninety One engages with portfolio companies to improve scope-3 emissions by establishing ongoing relationships with the companies, having regular meetings, benchmarking against developed market peers, and suggesting third-party organisations that those companies can work with, Baker said.
"We see some very strong regulatory moves as we look across the planet, such that we will start to see an acceleration of businesses understanding their own emissions, which are really someone else's scope-3 emissions," Baker said. "That will all come together as we work forward in time."
When companies do not disclose their carbon emissions in sustainability reports, the market will need to turn to estimates by data providers, which can underestimate or overestimate emissions, jeopardising efforts by investors and jurisdictions to reach their climate targets.
In one past example, estimates by two ESG (environmental, social and governance) data providers differed by a factor of 200 for a company that had not made its own disclosures, according to Mihwa Park, head of ESG analytics for Asia-Pacific at BNP Paribas Securities Services.
She spoke on a panel at the Scaling up Sustainable Finance in Asia conference organised by Asia Securities Industry & Financial Markets Association (ASIFMA) last month.
"Even in the ASX300, about half of the companies' carbon emissions are actually estimated by the data providers," said Park, referring to the stock market index of 300 of the largest companies listed in Australia. "When faced with these kinds of issues, how can investors make a decision? These are the real challenges that investors are facing. Disclosure is really very important."
Discrepancies in estimating carbon emissions highlight that "we're still in the very early stages of carbon emissions data reporting", said Ninety One's Baker, adding that it is important to perform fundamental analysis and engage with the companies.
Scope-3 emissions reporting will be required under proposed standards from the International Sustainability Standards Board (ISSB), a new body set up in November 2021 during the global climate talks in Glasgow to consolidate various standards for ESG reporting.
The ISSB plans to issue its first standards at the end of the second quarter of 2023, which would become effective in January 2024, according to its website.
"Disclosure ... is a strategic tool for companies to explain the value-creation scenario in the engagement with investors over the long term in a capital market," said Hiroshi Komori, a member of the ISSB, at a panel at the ASIFMA conference. "Disclosure is indispensable on both sides in terms of the journey of value creation in a capital market."
