Equity index provider MSCI, which will add 234 China-listed stocks to its flagship emerging markets index on June 1, said that the inclusion of Chinese stocks into a global equity benchmark would also add challenges to investors. These range from market volatility to poor corporate governance, the Financial Times reported May 17.
Compared with other stocks in the MSCI Emerging Markets index, MSCI said the 234 Chinese companies ranked poorly on environmental, social and corporate governance, or ESG, a measure that helps asset managers mitigate risk.
The index provider said 37% of the 234 domestic Chinese companies scored the lowest ESG rating of CCC compared with 8% of companies already in the index, said the FT report.
Only 3% of the Chinese companies secured a place in the top three out of seven ESG categories compared with 22% of the stocks that are already in the MSCI EM index, said MSCI.
"There is a skew in the distribution, so we have more laggards compared to leaders," said Sebastien Lieblich, managing director for research at MSCI. "Although the Chinese government is pushing a lot of green policies, nevertheless at a company level the ESG consideration has not yet been really embraced."
MSCI plans to launch China ESG indices later this year to help investors screen and filter out the risky companies, said the FT report.
A second tranche of stocks is set to be added to the index in late 2018, after which 0.8% of the MSCI EM index will comprise A-shares. MSCI said "full inclusion" will be achieved when A-shares account for 16% of the MSCI EM benchmark.
After the "full inclusion" of A-shares, Lieblich said, the total number of Chinese companies in the EM benchmark index will be close to 45%, said the FT.