China’s coal-fired power companies are failing to respond strategically to climate change, with little evidence they have adjusted their strategies to facilitate a clean energy transition. This has left major power companies in the Chinese energy market lagging behind international and regional players.

This report, an expert review, analyses China’s six largest listed coal-fired power companies: Huaneng Power International, Huadian Power International, Datang Power International, China Resources Power, China Power International and China Shenhua Energy. They accounted for 20% of Chinese power generation in 2018.

From these companies,

• Only one has provided strategic information on how they are addressing climate change.
• Five out of six companies provided greenhouse gas emission intensity data for the first time in 2017. The change in intensity figures between 2017 and 2018 shows mixed trends.
• All six companies are falling behind China’s power industry in transitioning to wind and solar energy. Between 2015 and 2018, the six companies increased their wind and solar generation mix by two percentage points, compared to the national 3.9 percentage points for China as a whole.

While China has clear policy goals to aid the transition towards clean energy production under the Paris Agreement, and as reflected in China’s 13^th Five-Year Plan, it is the world’s largest emitter of CO2 emissions, contributing up to 29% of the global total. The six companies analysed in this report were responsible for 2.8% of global CO2 emissions in 2017, largely due to the use of coal as its primary energy source.

Due to all six companies being subsidiaries under state-owned parent companies, any climate-based policy is applied by the parent company across the whole portfolio. Minority investors are put in an unfavourable position, as exposed portfolios may put them at a disadvantage due to this strategy. Without a transition pathway to developing cleaner portfolios, these companies will face challenges in marketing shares to international investors who are pressured to reduce their exposure to coal.

The report contains several recommendations.

1. Investors must be assertive in their expectations for assessing climate-focused risks created through strategic and governance-orientated processes. Investors should push companies to explicitly prove how they are developing portfolios of long-term assets resilient to climate change impacts and constraining absolute growth in emissions and not just intensity.
2. Portfolio managers and analysts should demand that companies provide clear explanations of long-term strategy. When companies do not, investors should communicate their dissatisfaction, possibly by voting against debt issuance, capital spending plans and directors. Investors should also encourage relevant stock exchanges to impose listing rules featuring appropriate risk management disclosure.
3. Investors should encourage consistent reporting of carbon emissions. Data comparability remains an issue, as many companies provide different metrics. Additionally, ESG data (environmental, social and governance), is often assured rather than audited. In the long term, companies need to use consistent reporting methodologies and strengthen their data collection and assurance methodologies to fully serve investors’ interests. This would also serve to show alignment with government mandates and goals on capping coal use in power in favour of renewable energy.

1. Company strategies are misaligned with government policy, showing little appetite for renewable transition. While there is basic environmental reporting and an improvement in air quality performance, the gaps in strategic disclosure point to misalignment with government policies on managing carbon intensity, and present fundamental concerns that risks are being mismanaged.
2. The six companies reviewed all have listings in Hong Kong and four are dual-listed in Shanghai. All have international shareholders and on average, represent 35% of the capacity of their state-owned parent company.
3. The Chinese government continues to use regulatory nudges to encourage a slowdown in coal growth and a shift towards renewables. That said, in terms of capacity growth, the power companies of this analysis added more coal than wind and solar in 2018.
4. The listed Chinese power companies are in a tough position to address climate change and secure aligned investors because of the power generation mix directives imposed by the state-owned parent companies, plus renewable energy companies are sometimes listed separately, the latter appealing to investors who wish to back ‘green’.
5. In terms of the power generation mix, China has a target of 55% coal-fired capacity by 2020. China also provides absolute capacity targets at the national level for each major form of renewable energy source, as well as targets for the proportion of non-fossil energy. While such targets have stimulated renewable capacity expansion, there has not always been appropriate infrastructure and policy incentives to ensure renewable generation reaches the grid.
6. Air pollution, rather than climate change, has been the primary driver for regulation in the sector. Plant design and treatment of exhaust gases help manage air pollution for which the government provides generous subsidies.