Jenn-Hui Tan

2023 was the planet’s hottest year in recorded history, and Antarctic Sea ice coverage also dropped to a record low. With climate change one of the world’s most pressing risks, its social and financial impact is already visible in the increasing costs of climate disasters for countries where events occur and for their supply chains. As more governments and business entities have announced net zero carbon ambitions and launched climate disclosures, it is critical to ensure their transition roadmaps are robust and credible enough to lead us to a net zero future.

According to the International Renewable Energy Agency, US$5 trillion of global investments are needed per year from 2030-2050 to keep global warming on the 1.5-degree Celsius pathway. This means that investments must more than triple 2022 levels to meet this growing financing gap. However, transition financing remains a significant hurdle for corporates and financial institutions alike, as challenges like a lack of climate mitigation and adaptation planning, and fragmented climate data and disclosures remain. This is especially urgent in Asia as the region accounts for half of global carbon emissions and produces about 85% of its energy from fossil fuels but it is not on track to deliver its 2030 climate targets. It is therefore in Asia’s long-term interest to invest in a transition to more a sustainable business model.

Jenn-Hui Tan, chief sustainability officer, Fidelity International comments: “Unlike green finance where funds are allocated to projects that are already meeting ESG criteria, transition finance is about helping carbon intensive sectors become more sustainable over time. However, clearer definitions of credible improvements are needed to reduce greenwashing risks and improve investor confidence in the ‘transition’. Asia will play a significant role in supporting global energy transition efforts and doing so will also unlock investment opportunities.”

“As a global asset manager, Fidelity International has been actively monitoring investment opportunities in Asia including operational efficiency, renewable energy generation, electric vehicles and related materials and infrastructure, as well as supporting global regulatory and framework development related to transition finance. The next phase of economic growth in Asia needs to be cleaner, healthier and more sustainable. The region is well placed to capitalise on the potential of the transition by leveraging its rich natural and human capital as well as technological innovation.”

Global investors are acknowledging that clear disclosure guidance and a favourable regulatory environment, in addition to funding, are required to address systemic climate issues and catalyse transition finance. A range of initiatives has emerged to tackle the climate crisis, and we are seeing an accelerating response from governments, regulators, corporates and the financial sector. Gradually, frameworks are emerging to help companies put in place robust strategies to meet their net zero targets.

Governments are also seeking to close policy gaps to make green technologies cheaper while regulators are working to channel transition financing to the right places. System-wide initiatives such as the United States’ Inflation Reduction Act provide support to develop technologies like green hydrogen and sustainable aviation fuels. The Transition Plan Taskforce in the UK aims to standardise private sector climate transition planning by providing general and sector specific best practices. Global regulations on fund products such as the UK Sustainability Disclosure Requirements (SDR) also recognises ‘transition’ as an investment category. These developments are expected to drive improvements in corporate transition planning and disclosures as well as speed up relevant capital allocation.

Stewardship is key to supporting corporates to prioritise transition

Transition planning and implementation may involve broader stakeholders such as regulators, resulting in additional hurdles for corporates. Investors are well-placed to support investees to understand systemic climate risks and opportunities and share their expectations of robust transition roadmaps. While investors conduct extensive research to analyse the technical nuances of climate transition, stewardship activities such as engagement and voting also play a significant role in highlighting the uniqueness of individual corporate transition plans and allowing investors to make decisions accordingly. Where companies’ actions and efforts are deemed inadequate, investors can escalate engagement intensity and express their position through voting, emphasising the board’s role in ensuring a credible transition through cultivating an enabling corporate culture and behaviour, right incentive structures, and transparency to investors.

Tina Chang, Associate Director, Sustainable Investing at Fidelity International comments: “Transition often does not happen in a linear fashion and requires a strategy that is unique to the market, the industry, and the company. Our engagement with companies focuses on the local challenges and opportunities presented and highlight the importance of effective communication for investors to evaluate whether a transition strategy is credible. Such communication is especially important in Asia because climate and ESG disclosure is relatively nascent, so companies are often tackling the dual challenge of building out disclosure capacity while setting targets.”

“Fidelity’s transition pathway mainly focuses on bottom-up investment research integration and top-down stewardship engagement. Our proprietary ESG rating tool coupled with our climate rating allows the investment teams to consider long-term transition prospects of companies in a holistic manner. Our thematic engagement prioritising thermal coal phase-out on the other hand starts from the top-down identification of material thermal coal exposure to strategize and conduct timebound engagements with companies with the aim to phase out thermal coal.”

In line with Fidelity’s ambition to achieve net zero across its investment portfolios by 2050, including halving its portfolios carbon footprint by 2030, and to phase out investment in thermal coal in OECD countries by 2030 and globally by 20401, Fidelity continues to reinforce its approach to addressing climate issues.

Jenn-Hui Tan, Chief Sustainability Officer, Fidelity International comments: “At Fidelity, we continue to evolve our approach as the sustainable landscape changes. As more businesses publish credible transition plans, it is important for asset managers to champion further developments in transition finance and engage with regulators and governments to close policy gaps to make green technologies cheaper and channel transition financing to the right places.”

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According to Fidelity International’s ESG priorities in China: How companies in China are approaching ESG report, levels of ESG adoption and awareness are robust and maturing among listed companies in China, putting the market on the right track to continuing ESG advancement.

The report studies the views of 262 C-suite and director-level corporate executives based in China who work at listed organisations and aims to shed light on the current and future planned areas of ESG-related activity of Chinese companies as they rapidly evolve their ESG strategies.

According to the survey, Chinese companies are growing their ESG capabilities and developing the frameworks they need to incorporate ESG into their organisations. As domestic momentum for ESG management and integration gathers pace, and the scrutiny on ESG performance from foreign investment and export markets from increasingly stringent global regulation grows, levels of ESG engagement in Chinese companies are becoming more robust.

ESG reporting to become the norm

More than half (53 per cent) of the companies surveyed have publicly announced an ESG, CSR or sustainability strategy either in a report or on their website and those that have not yet made a public announcement are working hard to address this. 18 per cent of organisations have plans to publicly announce their ESG strategy in the future while the remaining 29 per cent are addressing ESG as an internal strategic focus. Almost two thirds (64 per cent) also publish annual ESG reports, while a further 29 per cent have plans to do so within the next three years – meaning that by 2026, 93 per cent expect to have published an annual ESG report.

Chart 1: ESG is increasingly becoming a strategic priority among Chinese listed companies

Corporate ESG motivations in China are also seeing a shift, and ESG adoption is increasingly driven by multiple stakeholders.

While the development of ESG strategy in Chinese listed companies might still have further to go to reach global standards, Chinese customers and shareholders are increasingly prompting change, and this pressure is likely to continue to have a direct impact on progress.

Almost half of companies surveyed (47 per cent) said they developed an ESG strategy to meet customer expectations while 44 per cent aim to meet investor expectations. This signals that market concerns are increasingly taking a front seat in shaping corporate behaviour. The third most-cited factor was government initiatives, with 37 per cent of firms naming these as a key driver.

Tina Chang, Associate Director, Sustainable Investing at Fidelity International commented: “Amongst the surveyed companies that have yet to publish ESG reports, the second most cited reason is lack of interest from investors. Interestingly, among those already publishing ESG reports, 43 per cent also cited investor expectations as an important driver of ESG strategy, shedding light on the role investors play in promoting progress.

“This coincides with our observation that as the nation’s capital market matures, an increasing number of investors have started to take an active stewardship approach to clearly communicate expectations with investee companies, putting the market on the right track to continuing ESG advancement.”

Aligning ESG strategy to business strategy

From reporting and hiring, to strategy development and implementation, firms are rapidly evolving their ESG strategies and they are increasing in sophistication. Almost two thirds (66 per cent) of companies consulted key stakeholders to align their ESG plans with their own objectives, another two thirds conducted materiality assessments, and over half (56 per cent) of companies utilised consulting or advisory services. On the other hand, international guidelines such as GRI and ISSB are to date lessor utilised, which would decrease comparability with global counterparts

Chart 2: Chinese listed companies are using more sophisticated tools to develop ESG plans

Sustained change for Chinese corporates

The survey highlights that China’s appetite to bring ESG into the corporate agenda is on the rise and is here to stay.

Two thirds of companies surveyed plan to review focal areas for ESG in the coming 12 months, while over half of companies plan further investment in building tech and data capabilities to improve efficiency in ESG data collection. This will be crucial in enhancing transparency as data collection remains the key obstacle to progress on ESG disclosure, cited by 52 per cent of companies. Apart from ESG strategy review and data collection enhancement, 47 per cent plan to review their ESG quantitative targets, which is a strong signal to internal and external stakeholders on the commitment to stated goals.

When asked about the strategic ESG areas that organisations have set tangible goals to be met in the future that exceed regulatory requirements, climate change, for example, was the focal area that received the most responses for future ESG goals. Gender diversity on boards is another such area.

Chart 3: Companies are prioritising climate change and board diversity and independence when setting ESG goals for the future

^{Note: Orange bars indicate Environmental ESG goals.}

The survey also found that significant progress has been made on establishing special board functions, with nearly all firms having established remuneration and nomination committees despite it not being mandatory. When it comes to outperforming current legislation, larger firms take the lead on audit, remuneration and nomination committee independence, but fall back to the average when it comes to overall board independence.

Flora Wang, Head of Stewardship, Asia, commented: “As a long-term investor in China and a firm advocate for sustainable investing, we are delighted to see ESG being embraced by more and more Chinese companies. One of the most important tools that investors can deploy to help corporates sustain momentum and achieve ESG goals is effective engagement. Compared with exclusion, engagement allows us to deliver meaningful changes for companies, track their progress and ultimately, create value for clients.

“As Chinese companies step up efforts to align with global peers, investors can inform companies on industry best practices to accelerate this process; in return, we can gain more insight into companies’ plans and actions. Effective engagement is an ongoing process where case by case analysis on the companies within the local context is crucial for deriving the relevant conclusions and feedback.

“We remain committed to sustainable investing through ESG integration and investment stewardship. Looking ahead, we will draw on our global experience and continue to work with companies, industry partners and regulators in China to contribute our part in the long-term sustainable development of the Chinese economy.”

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