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To reach net-zero, Chinese enterprises must increase supply chain emissions disclosures

According to asset managers, Chinese companies must increase their disclosure of carbon emissions, particularly along their value and supply chains, for investors to appropriately analyse economic risks posed by climate change and support the country's push to meet its dual carbon objectives.

According to Graeme Baker, sustainable equity portfolio manager at asset manager Ninety One, scope-3 emissions—indirect greenhouse-gas emissions from a company's suppliers or value chain—have been particularly difficult for firms in China and other emerging-market economies that are early in their sustainability journeys.

“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.”

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.

President Xi Jinping revealed China's dual-carbon objectives at the UN General Assembly in September 2020: peak emissions before 2030 and net-zero emissions by 2060.

“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.”

Lau said FSSA has been encouraging Chinese companies it invests in to disclose and build clearer net-zero carbon roadmaps for 18 months. FSSA writes and meets with portfolio firms to encourage change and assess company culture and response.

Baker said Ninety One helps portfolio companies reduce scope-3 emissions by building relationships, meeting regularly, benchmarking against developed market peers, and identifying third-party organisations.

“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 corporations don't disclose their carbon emissions in sustainability reports, the market must rely on data provider estimations, which might underestimate or exaggerate emissions, jeopardising investors' and authorities' climate targets.

According to Mihwa Park, head of ESG analytics for Asia-Pacific at BNP Paribas Securities Services, two ESG data providers' estimates for a firm that had not disclosed differed by 200 times.

Last month's ASIFMA Scaling up Sustainable Finance in Asia conference featured her on a panel.

Park noted that half of the ASX300's carbon emissions are estimated by data suppliers. How can investors decide with these issues? Investors face these issues. Transparency is vital.”

According to Ninety One's Baker, discrepancies in estimating carbon emissions show that "we're still in the very early stages of carbon emissions data reporting." Fundamental analysis and company engagement are crucial.

The International Sustainability Standards Board (ISSB), established in November 2021 during the global climate talks in Glasgow to streamline ESG reporting requirements, will require Scope-3 emissions reporting.

According to its website, the ISSB will publish its first standards towards the end of the second quarter of 2023, effective in January 2024.

“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.”



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