(Yicai Global) Oct. 30 -- MSCI has given a lower-than-average Environmental, Social and Governance rating to Chinese shares that were included in its indexes due to transparency issues. The stock benchmark composer is still considering adding Chinese firms' weighting up to 20 percent in its global indexes.
A relatively low ESG rating is normal, and will not impact the decision of increasing Chinese share weighting in the index, Guido Giese, executive director Applied Equity Research team at MSCI's Zurich office, said to Yicai Global.
MSCI has finished the assessment for 423 mainland-listed companies which make up the MSCI China A International Index and 86 percent of them got a rating below the median BBB. The US-based financial firm said it will consider quadrupling the weighting of Chinese big-caps in its global benchmarks from 5 percent to 20 percent in September.
Big international institutional investors pay much attention to ESG scores, as they may help investors gain more protection and excess earnings, as well as avoid risks in a volatile market.
MSCI's rating has warned about fishy financials long before a stock price dip, such as in September 2016 with Hong Kong-listed Huishan Diary Holdings. The stock compiler lowered the dairy firm's rating to B from BB, prior to the news about the company's mounting debt broke out. MSCI was also ahead of the market with Volkswagen's emissions scandal and Facebook's data breach.
Giese said that the low score is partly caused by a lack of communication. These companies should gradually reach a level which is on par with emerging markets, he said. Only 2 percent of Chinese A-share companies currently publish corporate social responsibility reports, while the average level in emerging markets is from 10 percent to 20 percent.
Chinese mainland-listed firms need more transparency, Giese said. Salary composition, including management salary and equity incentives, should be published since analysts focusing on corporate governance need to see this data, and the disclosure also helps upgrade the ESG rating, he said.
If the weighting is increased to 20 percent, investors will put forward higher requirements for risk management, such as utilizing derivatives like futures and options, Xie Zhengbin, MSCI Asia Research Director and Managing director said to Yicai Global earlier.
MSCI has consulted institutional investors about the increase in weighting, and their opinion varies, Giese said, adding that the final decision is still pending.
Editor: Emmi Laine