Sustainable Investing is a fast-emerging theme across regions. However, the progress towards China net zero has been slower when compared to North America, Japan, and EMEA/Latin America. In a survey conducted across 123 analysts, Fidelity International highlights the nation’s prospects of closing the gap and digs deeper into the challenges involved.

President Xi Jinping’s pledge to hit peak CO2 emissions by 2030 and to achieve net zero by 2060 has seen Chinese companies adopting Environmental, Social and Governance (ESG) factors at an accelerated pace since 2020. Though in a formative stage, China’s energy transition brings immense opportunities for investors.

In sales volumes, China ranks as the world’s biggest market for EVs. Domestic auto manufacturers are building new EV brands while battery makers are fast tapping into the energy storage solutions opportunities following the rollout of solar, wind and other renewable power installations. Some of the analysts also see expansion opportunities in waste and water management, or in the domestic banking sector resulting from increased lending to low-carbon sectors. 

However, there are several challenges in achieving China’s net-zero aim. “Chinese companies have a lot of catching up to do, and fast, if they are to get in step with the government’s targets for cutting emissions at the national level,” says Flora Wang, Head of Stewardship for Asia at Fidelity International. 

One of them is the lack of resources at a local level. One of the respondents, Wen Wei Tow, a Shanghai-based fixed income analyst, says, “companies sometimes lack action plans or resources to help them lower their carbon footprints, so improving this would be one way to accelerate the green transition.”

Fidelity further states that while there is a strong commitment to embrace greener practices, there aren’t many compelling market-based incentives for the companies to make the transition. 90% of the respondents feel that Chinese companies are least likely to see a reduction in their costs of capital because of enhancing their ESG profile. This absence of ‘greenium’ or a pricing advantage for ESG adoption discourages companies to disclose their sustainability practices to external parties.

Low usage of carbon trading is another roadblock in achieving China net zero, according to Fidelity. It is at the lowest level among all regions due as the national carbon emissions trading market being only open to the companies in the power sector. “China’s initiatives on carbon neutrality and greater development on carbon trading will help encourage enterprises to adopt more energy transition-related policy and practices,” says Theresa Zhou, a Hong Kong-based equities analyst covering Chinese industrial companies.

Fidelity infers that China, compared to other regions, could create maximum impact due to the sustainability implementation, especially in cutting greenhouse gas emissions. Chinese corporates racing to catch up is a cause of optimism for investors. While the government needs to aim for more stringent and consistent regulation, Chinese companies must ensure transparency and compare the efficacy of their efforts to their global peers, concludes Fidelity.

Download the full survey here.