ESG

Off the scale

Norges Bank dumps TCM firm on ESG concerns

Pangolin-w

Pangolins: facing extinction

Pangolins – or ‘scaly anteaters’ – have a history of being hunted for their supposedly medicinal properties. These included the treatment of “excessive nervousness in children, women possessed by devils and ogres, malarial fever and deafness”, the Hong Kong Naturalist explained in 1937.

Demand for the animal’s scales was having an impact on pangolin populations in Southeast Asia, the magazine noted, as hunters sent shipments back to China.

Much more recent studies have warned that the trade has brought the species close to extinction, with at least 200,000 of the animals consumed each year. But where campaigners seem to have failed in protecting the pangolin, might some of the world’s largest investors ride to its rescue?

That’s the hope of proponents of environmental, social and governance (ESG) standards, after Yunnan Baiyao, a pharmaceutical firm with a focus on Chinese traditional medicine, was dropped from the portfolio of Norway’s sovereign wealth fund owing to its use of pangolin parts in its products. Norges Bank Investment Management, which runs Norway’s $1.4 trillion wealth fund, announced last month that it was dumping Yunnan Baiyao’s shares due to the “unacceptable risk that the company contributes to serious environmental damage”.

The Kunming-headquartered producer, which boasts a market capitalisation of about $20 billion, is the latest of a group of Chinese TCM firms to be dropped by the fund on the advice of the Council of Ethics, an independently run body, on fears that their use of threatened animals contributes to the illegal trade in wildlife and increases the risk of these species becoming extinct.

The Shenzhen-listed firm’s position is that it purchases the pangolin scales legally from government-approved stockpiles. (China’s wildlife protection laws have carve-outs that allow the sale of other items such as leopard bones, antelope horns and bear bile for medicinal purposes as well.) Campaign groups like the Environmental Investigation Agency have castigated the stockpiling system as being “shrouded in secrecy”, claiming that it “never seems to run out”, and the Norwegians were also unconvinced, demanding more information on how Yunnan Baiyao was getting the animal parts and how the stockpiles were being replenished.

The Chinese media was generally sympathetic to the local firm’s stance, arguing that there was no evidence that it had broken domestic laws. Some pointed out that Yunnan Baiyao had released its first social responsibility report last March and that MSCI had upgraded the company’s ESG rating last summer, ranking it at the highest level of ‘average’ in areas including corporate behaviour and product quality.

But a few commentators added veiled criticism over the failure of all five of the TCM producers on the Norwegian blacklist to respond to requests for further information, which date back well over a year.

Others warned that global asset managers are going to demand a lot more of this type of disclosure as ESG principles take wider hold – a situation that Chinese firms will have to accept if they want to get international investment.

ESG campaigners are also hoping that the opening of China’s markets to global investors will help companies see the benefits of making more of an effort in information disclosure. Whether they will be willing to respond to queries from overseas about their environmental impact, or corporate governance standards, is still open to question, however.

They are more likely to respond to the promptings of the Chinese government, which has started a push to promote ESG disclosures, albeit on a voluntary basis. Initiatives like the plan from the Ministry of Ecology and Environment to mandate environment-related reporting as part of efforts to achieve carbon emission targets could get more traction. A programme like this could then be extended to a fuller range of companies and might even provide the basis for a more comprehensive set of ESG criteria in future.

But in the meantime, ratings agencies have warned that the level and quality of ESG disclosure in China is likely to fall short of that in the US and Europe for the foreseeable future. The world’s pangolins will need that to change soon, if they are to survive as a species.


© ChinTell Ltd. All rights reserved.

Sponsored by HSBC.

The Week in China website and the weekly magazine publications are owned and maintained by ChinTell Limited, Hong Kong. Neither HSBC nor any member of the HSBC group of companies ("HSBC") endorses the contents and/or is involved in selecting, creating or editing the contents of the Week in China website or the Week in China magazine. The views expressed in these publications are solely the views of ChinTell Limited and do not necessarily reflect the views or investment ideas of HSBC. No responsibility will therefore be assumed by HSBC for the contents of these publications or for the errors or omissions therein.