China energy providers behind on carbon targets
14 May, 2021
China currently accounts for almost 28% of global carbon emissions, almost double the emissions of the United States. In accordance with international trends, most of China’s emissions are generated by the energy sector.
China has set targets to reduce its energy-related carbon emissions, but will the energy sector be able to deliver? Minerva has asked Asia Research & Engagement to share their perspective on some recent developments.
Contributor: Asia Research and Engagement
In early 2021, China’s state power companies made their first meaningful statements on how they will address climate change, reach peak carbon emissions by 2030 and achieve carbon neutrality by 2060. China and the world cannot transition without strong action from these enterprises.
For investors with holdings in listed power subsidiaries there is a strong need to act. These companies are failing to provide meaningful information on how they will navigate the energy transition that is underway.
China’s new commitments in support of the goals of the Paris Agreement are reflected in national level policies like the targets for 20% non-fossil based primary energy within the 14th Five-Year Plan. The National Energy Administration also launched a consultation for increasing power purchased from non-fossil generation sources to 40% by 2030.
Reducing coal power generation, which accounted for half of the country’s CO2 emissions in 2018 according to International Energy Agency, will be key to the transition that China’s policy makers are pushing.
The state power giants are finally responding to the transition, putting reduced greenhouse gas emissions at the center of their strategies. Huadian Corporation and Datang Corporation have both announced 2025 as their estimated date for peak carbon emissions. Huaneng Corporation has instead set a renewable energy installation target of up 80GW in the next 5 years.
In each case, these targets apply at the parent company level and set the agenda for the listed subsidiaries. However, each of the following companies hold more than a third of their parents’ generation capacity and have portfolios with far more coal power and less renewable generation than the national averages:
- Huadian Power International (1071.HK)
- Datang International Power Generation (991.HK)
- Huaneng Power International (902.HK)
Following the commitments made by the parent companies of these subsidiaries, investors should expect climate considerations within their annual and ESG reports. After a history of ignoring climate risks in ESG reporting, the companies provided subtle shifts in language for their 2019 reporting, but 2020 has only seen limited improvements. Their reports do not enable investors to assess the implications or response of the company to the new national or parent company targets.
Given the short lead time for companies to align to such a critical shift and the long asset life of power infrastructure, the companies must go further faster to assure shareholders they are adequately prepared for the increasing climate transition risk.
Investors should also demand more and exercise their rights accordingly. All three entities allow for votes against the Directors and Supervisor Reports in shareholder resolutions. Additionally, approval for capital raising proposals are raised separately at EGMs.
With governments acknowledging the urgency of achieving global climate goals, the transition risks are crystalizing quickly. Strong but supportive engagement tactics can help companies clarify the considerations and timelines they need to mitigate these business risks.
Asia Research and Engagement has led collaborative efforts on the Chinese utility and banking sector since 2016 and is able to support investors with analysis of updated reporting. For our latest insights please contact us at firstname.lastname@example.org.
Further reading – China’s top three coal-based power utilities
Huaneng Power International (902.HK) is the largest generation fleet from the listed companies and provides relatively more information than the others, including details where it has written down assets. Its 2020 reporting notes risks relating to carbon targets and regulation and highlights that declining utilisation hours could lead to plant shutdowns. It then mentions the importance of developments such as the national carbon targets, carbon trading, and carbon capture and utilisation. However, there is no quantitative link between these developments and company fundamentals. In some places the reporting is merged for coal and gas making it harder to project the fuel mix, for instance there will be RMB8.6 bn of capex for thermal projects in 2021.
Huadian Power International’s (1071.HK) 2020 reports have improved but are still incomplete. Greenhouse gas (GHG) emissions have now been identified as a material risk in the ESG report and they have identified the Board Level Committee with oversight over ESG matters. The discussion on industry trends mentions the national carbon targets, but the climate change section has no reference to the national or parent greenhouse gas emissions targets. While recognizing the carbon quota they acquired from the government as financial assets, Huadian hardly comments on the risk of continued addition of thermal capacity. For example, there is 2 GW of thermal power under construction.
Datang International Power Generation (991.HK)’s AR includes a Q&A section where the first question is a response to the company’s plans in respect of the national carbon targets. The answer is vague, with a focus on “green and low carbon” that contradicts the installation of 2.4 GW of coal capacity in 2020, which was more than half of capacity installation during for the year. Research into “hydrogen energy and CCUS” does not indicate a current plan. The sustainability report states that the company will contribute to the national goals but falls short of adopting these commitments.