Can Market Mechanisms Clear China’s Air?

Publishing Environmental Records of Companies Seen As New Way to Fight Pollution

The Chinese government recently responded to rising public discontent over environmental degradation by introducing tougher rules for industrial emissions.

Meanwhile, a non-governmental organization and a state-run newspaper are coordinating a parallel fight against industrial pollution based on market mechanisms.

Trusting that the equities market can push companies to do good, the environmental track records of publicly listed companies are now being compiled and publicized by the Beijing-based NGO Institute of Public and Environmental Affairs (IPE) and the state-run Securities Times newspaper.

The first data report released on January 6 focuses on 20 companies listed on mainland, Hong Kong, or overseas stock markets whose facilities or factories were potential violators of the government's new emissions standards. IPE and Securities Times researchers picked the 20 from an initial list of about 1,000 companies and have been updating the list every Tuesday since.

Names included on the debut list were the central government's metals giant Aluminum Corp. of China Ltd., also known as Chinalco; Boshan-headquartered glassmaker Shandong Jinjing Science & Technology Stock Co.; and Urumqi-based Guanghui Energy Co., a processor of petrochemicals and liquefied natural gas.

IPE Director Ma Jun said the list is designed to help stock investors evaluate companies from an environmental risk perspective in hopes they'll see a financial incentive to backing responsible companies. The hope is that companies will put more work into pollution prevention to please investors.



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Stock investors "care about the environment, but they care more about the costs of environmental issues," he said. "If a pollution problem can't be fixed, investors will eventually have to consider the possible risks."

Chinese companies have faced a higher risk of being hit with a fine for polluting since January 1, when the government raised the bar for industrial emission standards by revising the national Environmental Protection Law. One change means a company can be fined daily for a pollution problem until it's fixed. The government also added environmental evaluations to routine job performance assessments of local officials in hopes bureaucrats will want to do more to protect the nation's land, air, and water.

It's unclear what, if any, long-term effects the investor data project and revised emissions standards will have in the fight against pollution. Some environmental experts have applauded the initiatives, while others say they're withholding applause while waiting to see what happens next.

Some observers argue that IPE-Securities Times project in itself will have little impact on investor behavior and pollution unless the government strictly enforces the revised law.

But if the law is fully implemented, Ma said, pollution fines "will increase a lot, raising financial risks for companies. That will be the real risk the capital market is looking at."

Investor Interest?

The use of market mechanisms to goad a company into cleaning up its act is new to China, but the approach is common in many other countries. Firms whose pollution sins have been exposed to the investment community have faced lawsuits, business losses, or slumping stock values around the world.

In China, Ma said, investors have shown general interest in previous IPE reports about listed companies with pollution problems. He said the IPE looked at releasing lists of polluting companies several years ago, but held back while the government revised the law.

However, it's rare for a Chinese stock investor to make decisions based on a company's environmental performance, Ma said. An analysis of stock market trends within six weeks of the first IPE-Securities Times report suggests the data had little or no immediate impact on share prices for targeted companies, he said.

"The overall [Chinese stock] market is in good shape now," said a research team member who asked not to be named. "Some companies that were high on the pollution risk list have seen their share prices perform very well."

The researcher said that firms are ranked according to a risk index based on data from local government environmental agency websites and company data. Information may include the timing, densities, and volumes of factory emissions, along with data on past or current violations of pollution standards.

For example, emissions data from environmental authorities in the southern city of Zhangzhou was reviewed by researchers who added to their polluter list the Ningbo-headquartered, Shanghai-listed glass manufacturer Kibing Group. Officials say nitrogen oxide emissions at a company plant in Zhangzhou were about twice the legal limits for several weeks recently. Residents angered by the pollution protested in mid-December.

Despite the negative publicity, Kibing's share price has changed little since the controversy erupted. The stock barely budged during the five weeks that the company ranked high on the IPE-Securities Times list, bourse records show.

Zhang Wang, director of a research office at the Securities Times, said researchers plan to fine-tune future reports by considering comments from affected companies, including reactions to any charges of legal violations. Moreover, he said, in the future water pollution data will be added to supplement what's now a report that focuses on air emissions.

Some firms on the list of 20 polluters were quick to respond, Zhang said, while others asked to have their names removed. The operator of Shanghai Shenergy's power plant, Shanghai Xinghuo Thermo Power Co. Ltd., for example, submitted fresh data after it was cited for excessive emissions in an IPE-Securities Times report.

Most of the companies on the polluters list, however, have said nothing. Their silence mirrors the lack of interest in environmental concerns in some investment circles.

One fund manager who asked that his name not be used said he does not factor environmental concerns into his investment decisions, even though he cares about the environment. He said his attitude would change only for a company slapped with a major fine for violating environmental rules.

Ma said investors generally see China as a land with low fines for emissions violations, which to investors means companies can pollute without facing serious financial risks.

Guo Peiyuan, a general manager at the corporate responsibility consultancy SynTao Co. Ltd. in Beijing, said institutional and individual investors in China care most about how pollution-fine risks affect share prices. But since companies are rarely penalized for pollution, he said, many investors think environmental problems have little impact on stock value.

The changed environmental law, however, has the potential to change investor attitudes since "uncertainty is the market's top concern," said Guo. Not only did the revision raise fine levels, he said, but it also cleared the way for environmental-damage lawsuits that may target polluting companies.

And the IPE-Securities Times reports will help market players interpret government data and react to the risks facing listed companies, Guo said.

Among the first market players with a chance to see how the new law affects investments are holders of Hong Kong-listed shares in China Glass Holdings Ltd., which was recently fined for violating air emissions rules. Environmental authorities in the eastern province of Shandong slapped the glass maker with a 1.9 million yuan fine for breaking the law over a 19-day period ending February 3.