Listed demands

Two think tanks are urging the Hong Kong stock exchange to tighten disclosure requirements on public companies caught polluting in mainland China. Here, the Asia Water Project summarises the arguments.

Better environmental disclosure requirements from Hong Kong’s stock exchange, the Hong Kong Exchanges and Clearing Limited (HKEx), would not only help to reduce investment risk and protect investor interests, but could strengthen environmental protection in China, says a new report, “Hong Kong’s role in mending the disclosure gap”.

Fifteen percent of companies listed on HKEx have environmental-violation records on the mainland and many are repeat offenders, reveals the report, which was authored by the Institute of Public and Environmental Affairs (IPE), a Beijing-based NGO, and Civic Exchange (CE), 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. Meanwhile, H-share companies – firms that are incorporated in mainland China and traded on HKEx – 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 and Kingboard Laminates Holdings, whose subsidiaries have repeated environmental-violation records. In May 2009, the Guangdong Provincial Oceanic and Fisheries 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 Holdings’ factories are on the pollution watch-list of the Guangdong Environmental Protection Bureau this year.

Tsingtao Brewery, 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.

The report reveals that most companies, including Huaneng Power International, PetroChina and Datang International Power Generation, failed to disclose subsidiaries’ multiple environmental records, whether through annual reports, sustainability reports or official websites.

Ina Pozon, manager of the Asia Water Project, says this lack of transparency “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.”

And the risks to investors are growing, states Ma, who 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.”

According to IPE and CE’s report, Yulin’s Environmental Protection Bureau imposed a fine of 1 million yuan (US$146,000) on China Shenhua Energy’s coal mines for violating wastewater standards in 2008. The same company was fined an additional 1 million yuan in 2009, when the mine again failed to meet environmental standards.

Beyond increasing punitive fines, China’s Ministry of Environmental Protection (MEP) has also ramped up efforts to sanction company initiatives that are environmentally non-compliant. In a 2008 report, the MEP revealed that 621 papermaking companies were closed for violating national industrial policy and total discharge standards in 2007. In 2008, the MEP denied permission to, or suspended, projects based on the results of their environmental-impact assessments (EIA).

The report from the IPE and CE says that, in 2008 a subsidiary of China Resources Enterprise located in Nantong was ordered to halt production, costing the factory 300,000 yuan (US$44,000) per day. In 2009, the government shut down the factory for continued non-compliance.

The Chinese government recognises 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.

Although, globally, investors are showing increased interest in corporate disclosure as the environmental risks to business increase, “corporate disclosure in China will inevitably take time,” says the report’s co-author, Christine Loh, chief executive 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 to develop a corporate social responsibility code. While Loh says this is a step in the right direction, she adds there is more HKEx could 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.

The Asia Water Project (AWP) is an information portal designed to provide business and investors with relevant information about China’s growing water crisis. AWP is sponsored by Civic Exchange and Hong Kong-based ADM Capital Foundation.

The full report, “Hong Kong’s role in mending the disclosure gap”, was launched by AWP in March, 2010.

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