Better environmental disclosure requirements from the Hong Kong Exchanges and Clearing Limited (HKEx) not only would help reduce investment risk and protect investor interests, but could strengthen environmental protection in China, says a report, Hong Kong’s role in mending the disclosure gap, released by the Asia Water Project ( China Water Risk pilot stage ) in Hong Kong today.
Fifteen percent of companies listed on the HKEx have environmental violation records on the mainland and many are repeat offenders, reveals the report, authored by the Institute of Public and Environmental Affairs (IPE), a Beijing-based NGO, and Civic Exchange, a Hong Kong based think tank.
“According to our findings, of that 15% Hong Kong-owned companies have the largest number of companies with violation records,” says Ma Jun, IPE’s director. “H-share companies, meanwhile, have the highest total number of violations” since more of these companies registered multiple infractions.
The report cites, among others, Hong-Kong owned companies Kingboard Chemicals Holdings Ltd (KINGBOARD CHEM148) and Kingboard Laminates Holdings Ltd. (KB LAMINATES1888) whose subsidiaries have repeated environmental violation records. In May 2009, the Guangdong Provincial Oceanography and Fishery Administration censured a Kingboard Laminate factory for exceeding permitted levels of wastewater discharge into the Pearl River Estuary for two consecutive years. Three of Kingboard Chemical Holding’s factories are on Guangdong EPB’s polluters watch-list this year.
Tsingtao Brewery Co. Limited (TSINGTAO BREW168), an H-share company, was reported to have more than 20 environmental violation records in its operations across China from 2004 to 2009. Its factory in Chongqing committed environmental violations in 2006, 2007 and 2008.
Limited disclosure brings growing risks
The report reveals that most companies such as Huaneng Power International (Huaneng Power902), PetroChina Company Limited (PETROCHINA857) and Datang International Power Generation Co., Ltd (DATANG POWER991)failed to disclose subsidiaries’ multiple environmental records, whether through annual or sustainability reports, or official websites.
This lack of transparency, says Ina Pozon, manager of the Asia Water Project ( China Water Risk pilot stage ) “presents a growing risk to companies and shareholders. Investors seeking to consider water-related risks when making investment decisions just don’t have the data to compare and contrast,” says Pozon.
And the risks to investors are growing, states Ma, who also predicts that business as usual will only get more costly for polluting companies. “While, historically, violation of environmental laws in China has been of little financial consequence to companies because of poor enforcement and low fines, the trend is veering towards tighter enforcement and higher fines,” says Ma.
According to the IPE/CE report, Yulin’s Environmental Protection Bureau imposed a fine of RMB 1 million on China Shenhua Energy Co. Ltd’s. (CHINA SHENHUA1088) coal mines for violating wastewater standards in 2008. The same company was fined an additional RMB 1 Million in 2009, when the mine again failed to meet environmental standards.
Beyond increasing punitive fines, the Ministry of Environmental Protection (MEP) also has ramped up efforts to sanction company initiatives that are environmentally non-compliant. In a 2008 report, MEP revealed that in 2007, 621 papermaking companies were closed for violating national industrial policy and total discharge standards. In 2008, MEP denied or suspended projects based on the results of Environmental Impact Assessments (EIA).
According to the IPE/CE report, in 2008 a subsidiary of China Resources Enterprise Ltd (CHINA RESOURCES (291)located in Nantong was ordered to halt production, costing the factory 300,000 RMB per day. In 2009, the government shut down the factory for continued non-compliance.
Transparency Trend
The Chinese government recognizes that transparency is a key tool in environmental protection, states Ma, and this is evident in the disclosure trend supported by Beijing. In 2008, both the MEP and the Shanghai Stock Exchange began requiring companies publicly to disclose information on legal violations, penalties and whether the companies have been ordered by local governments to suspend production, move, or shut down. “These regulations represent a watershed in improving environmental governance,” says Ma.
While globally investors are showing increased interest in corporate disclosure as the environmental risks to business increase, “corporate disclosure in China will inevitably take time,” according to the report’s co-author, Christine Loh, CEO of Civic Exchange. “And change will only accelerate if financial institutions and investors join the government and NGOs in applying pressure.”
Recently HKEx drafted proposals to update the Listing Rules for mining companies and develop a Corporate Social Responsibility Code. While this is a step in the right direction, says Loh, there is more that HKEx might do to facilitate greater disclosure, “such as requiring listed companies to notify HKEx of environmental violations on the mainland committed by any of its subsidiaries, corrective measures taken, and their latest monitoring data.”