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China suspends climate and military ties with US – a signal for ESG investors?

China suspends climate and military ties with US - a signal for ESG investors

Beijing announced on August 5 that it would halt cooperation with the US in climate and military-related areas due to US House Speaker Nancy Pelosi’s visit to Taiwan. Furthermore, China decided to sanction Ms. Pelosi after her visit, prompting a show of military force from the Chinese around Taiwan.  

Meanwhile, on Twitter, market participants voiced their concerns about how this development might impact Environmental, Social, and Governance (ESG). This buzzword represents an organization’s actions to minimize environmental, social, and governance impact across the globe. 

Moreover, western-style shareholder activism is rare in China; however, the conventional awakening to corporate and social responsibility (CSR) is usually linked to years after the 2008 Sichuan Earthquake, when local companies pledged $1.5 billion in recovery funds. 

Greenhouse gas cap and electrification 

China’s president Xi Jinping pledged to reach carbon neutrality by 2060, making China the first major emerging market to commit to putting a cap on its greenhouse emissions. For now, China’s ESG focus is climate-driven, with most of the ESG funds linked to clean energy.

As China is the biggest producer and exporter of solar panels, the break with the US could see prices for solar panels rise and slow down the transition towards green energy that Europe is racing to achieve as it tries to wane itself off of Russian gas and coal. 

On the other hand, China’s sprawling electric vehicle (EV) market might be affected, as supply chain issues have already slowed the production and delivery of new EVs. Namely, the US still holds a dominant number of auto chips under its umbrella; therefore, avoiding cooperation on climate issues could see China’s supply dry up. 

Lack of information

ESG needs a lot of fine-tuning in China, with muddled reporting practices and requirements, which make ESG investing harder than it needs to be. Additionally, onshore companies publish reports in China only and often focus on qualitative rather than quantitative metrics, thus creating more information gaps. 

It remains to be seen whether this new development will further hamper ESG efforts in China and across the globe, as the lack of standardized ESG frameworks and accountability mechanisms in China were already putting up ceilings to its development and improvement.  

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