Honggang Xue (et al.) from the Xi’an Jiaotong University uses the lens of ESG benefits to take on the sensitive issue of whether or not Party involvement in running companies in China is a good thing.
Since 2018 Company Law in China has mandated a Party structure inside State Owned Enterprises (SOEs) and many Privately Owned Enterprises (POEs) have voluntarily gone down the same road.
The paper looks initially at the beneficial stock price effects of Environmental, Societal and Governance (ESG) policies and concludes the stocks of companies that promote ESG do perform better than peers. They note in addition the effect appears more significant in POEs.
On the issue of ‘Party Building’ they’re more circumspect but a read between the lines suggests this is mostly not a good thing. The paper refers specifically to the ‘moderating’ effects of Party involvement on ESG driven gains.
The analysis is flawed due to the sample period, 2011~2019, when the ESG trend hadn’t fully developed and Party Building activities weren’t mandated throughout. It’s possible the latter may have had beneficial consequences from 2018 to today but that’ll have to be the subject of analysis (by other brave souls!) in subsequent work.
For investors the takeaway is companies pursuing a constructive ESG agenda in China and whose Party overseers aren’t meddling too much are generally to be preferred, especially if they’re POEs. Good luck finding them!
You can access the full note here ESG, Party Building Activities and Stock Market Performance.
Happy Sunday.