This past February witnessed record-breaking heavy smog, which lasted continuously for one week, a first in Beijing’s history of infamous air pollution. For the first time, Beijing raised its four-tiered alert system to "orange". 147 industrial companies were asked to cease or reduce production, including state-owned enterprises. Beijing has a name list of polluting companies, which need to cease or reduce production, in order to reduce air pollutants by 30% during “orange” or “red” alert days. This was also the first time that companies stopped production since the regulation had come into effect.
According to China's Action Plan of Prevention and Control of Air Pollution, which was released in September 2013, Beijing’s targets in fighting PM2.5 are the companies with high energy consumption and heavy pollution. The government will close down out-dated production facilities and upgrade economic processes, aiming to lower the proportion of China’s GDP that is produced by the manufacturing industry. In addition, the government will boost the development of clean energy and guide resources into the service industry. During the National People's Congress on March 5, 2014, Premier Li Keqiang restated that the government would resolutely declare war against pollution, just as they declared war against poverty. The country has successfully reduced its poverty level from 43% in 1981 to 13% in 2010, according to World Bank.
During the 11th Five-Year Plan, the Chinese government had already announced plans to reduce out-dated production facilities. These tended to over-promise, but under-deliver when taking a closer look at the implementation of the plan. The choking smog during the past two years effectively forced the government to take tougher actions on limiting the production of heavy polluting industries, such as coal-fired power plants, steel, and cement.
Influence on polluting companies:
Besides the direct economic loss of production halts and reduction, heavy polluting and high energy consumption companies are facing the following additional risks:
Implications for investors
The heavy smog forced the Chinese government to strengthen its environmental monitoring and law enforcement, and companies will find it difficult to survive if they do not make efforts to reduce their pollutants. There will be a smaller space for small and medium-sized polluting companies. Large-sized polluting companies will be under pressure to take responsibility in protecting the environment and in improving their environmental performance.
When investing in the manufacturing industry in China, investors need to re-evaluate the environmental impacts that companies create. We advise that investors conduct prudent due diligence of companies located in areas of frequent smog, determining if these companies have already met emission targets or applied new techniques to reduce emissions. Investors can also take another look at China’s environmental protection sector, as it is estimated that the market would have a huge need for their products and services.
SynTao advices investors to take environmental factors into consideration when evaluating shares and making investment decisions. It is also suggested that investors actively encourage companies to increase disclosure of environmental information. By pushing companies to increase transparency, investors can lower the environmental, social and governance (ESG) risks of companies, and secure their stable long-term returns.
Written by Shen Xin, translated by Valentina Wu
This article was originally published in China ESG Monitor (February 2014) -- a monthly newsletter highlighting ESG trends and research relevant to sustainable investment in China.
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