China Through an Esg Lens | September 2019

CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

MSCI ESG Research LLC

CHINA THROUGH AN ESG LENS MSCI China Index Constituents Start to Evolve on ESG Performance

September 2019 CONTENTS • Chinese domestic investors and issuers are moving fast to incorporate environmental, social and ESG Awareness and Performance on governance (ESG) considerations in their decision making, prodded by strong regulatory initiatives to The Rise ...... 2 promote ESG practices and disclosure. Overview 2019 vs.2018...... 2 • Incremental improvement is being seen across the market: fewer Chinese companies1 were rated CCC in ESG on The Fast Track...... 6 2019 than in 2018 (20% vs 22%). Driving Forces: A Deep Dive into Key ESG • Attention is turning to talent: Chinese companies have started to work on talent management in key Themes ...... 8 sectors. While Chinese companies in the talent-intensive technology, financials and health sectors still Climate Change: From Commitment to lag international peers, 18% of the Chinese companies in these industries that received an upgraded Implementation ...... 9 MSCI ESG Rating in the last year could attribute the change to improvement in their talent management Human Capital: Talent Upgrade in and engagement. Progress Despite Skill Shortages ...... 12 • Corporate governance highlights: 79% of Chinese companies in our peer set have controlling Product Safety: Problems Persist Amid shareholders, which maintain a strong influence. The most common concerns relate to companies failing Rising Expectations ...... 15 to have a majority of the board qualify as independent, and lack of CEO equity pay incentive policies. Corporate Governance: Controlling EXHIBIT 1 ESG PERFORMANCE OF HEAVIEST-WEIGHTED CONSTITUENTS OF MSCI CHINA INDEX Shareholders Maintain Strong (AUG. 1, 2019) LARGEST POSITIONS IN PORTFOLIO Influence...... 17 RANK ISSUER PORTFOLIO WEIGHT SECTOR ESG RATING RATING TREND Appendices...... 26 1 TENCENT HOLDINGS LIMITED 14.80% Communication Services BBB Maintain 2 ALIBABA GROUP HOLDING LIMITED 13.83% Consumer Discretionary BB Upgrade 3 CHINA CONSTRUCTION BANK CORPORATION 4.77% Financials BB Maintain 4 PING AN INSURANCE (GROUP) COMPANY OF CHINA, LTD. 4.09% Financials BB Maintain 5 CHINA MOBILE LIMITED 3.21% Communication Services BB Upgrade 6 INDUSTRIAL AND COMMERCIAL BANK OF CHINA LIMITED 2.81% Financials BB Maintain AUTHORS 7 BANK OF CHINA LIMITED 1.96% Financials BB Maintain 8 BAIDU, INC. 1.87% Communication Services CCC Maintain Xiaoshu Wang | MSCI ESG Research 9 CNOOC LIMITED 1.75% Energy CCC Maintain Jingmin Hu | MSCI ESG Research 10 CHINA MERCHANTS BANK CO., LTD. 1.30% Financials BBB Maintain Gongyu Chen | MSCI ESG Research Source: MSCI ESG Research 1 Chinese companies in our report refer to constituents of the MSCI China Index as of Aug. 1, 2019 © 2019 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI.COM | PAGE 1 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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ESG AWARENESS AND PERFORMANCE ON THE RISE

OVERVIEW: 2019 VS. 2018 The MSCI China Index is constructed based on the integrated China equity universe included in the MSCI Emerging Markets Index, providing a standardized definition of the China equity opportunity set. The index aims to represent the performance of large- and mid-cap segments with H shares, B shares, red chips, P chips and foreign listings (e.g., ADRs) of Chinese stocks. China A shares are in progress to be partially included in this index, making it the de facto index for all of China.

With a similar sector distribution, the ESG performance of the MSCI China Index constituents improved in 2019 compared with last year. There were fewer bottom-rated Chinese companies in 2019 vs. in 2018 among constituents of the MSCI China Index (20% CCC-rated companies in 2019 vs. 22% in 2018, and 36% B-rated companies in 2019 vs. 37% in 2018), and there was a small increase in BB- and AA-rated issuers.

EXHIBIT 2 MSCI ESG RATING DISTRIBUTION FOR SELECTED INDEXES

Note: n. MSCI China Index Constituents with ESG rating data as of Aug. 1, 2018= 447, Note: n. MSCI China Index Constituents with ESG Rating data as of Aug. 1, 2019 = 487, n. MSCI China Index Constituents with ESG Rating data as of Aug. 1, 2019 = 487 n. MSCI Emerging Market Index constituents with ESG Rating data = 1154, n. MSCI ACWI Index constituents with ESG Rating data= 2205 Source: MSCI ESG Research as of Aug.1, 2018 and Aug. 1, 2019 Source: MSCI ESG Research as of Aug. 1, 2019 MSCI.COM | PAGE 2 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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Financials, Industrials, Consumer Discretionary and Information Technology are still the dominant sectors, accounting for more than half of MSCI China Index constituents (Exhibit 3). The expansion of the communication services sector is due mainly to the Global Industry Classification Standard (GICS®)2 update in September 2018, which resulted in media companies (historically in the Consumer Discretionary sector) and internet services & infrastructure companies (historically in the Information Technology sector) being reclassified in the Communication Services sector. EXHIBIT 3 MSCI CHINA INDEX SECTOR DISTRIBUTION PER NUMBER OF ISSUERS (2018 & 2019)

Source: MSCI ESG Research as of Aug. 1, 2018, and Aug. 1, 2019 2 https://www.msci.com/gics

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As of Aug. 1, 2019, there were still no AAA-rated companies in the MSCI China Index, but there was a small increase in AA-rated companies. The AA-rated ESG leaders mainly included Consumer Discretionary and Information Technology companies such as Hangzhou Robam Appliances (a household durables company with improved labor and e-waste management), Geely Auto (the electrical vehicle producer) and Legend Holdings (a technology hardware company with strong supply-chain labor and conflict-minerals risk management). EXHIBIT 4 ESG RATINGS DISTRIBUTION OF MSCI CHINA INDEX CONSTITUENTS BY SECTOR

201 8

2019

Source: MSCI ESG Research as of Aug. 1, 2018, and Aug. 1, 2019 MSCI.COM | PAGE 4 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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Our analysis (Exhibit 5) shows 11% of issuers in the MSCI China Index gained a rating upgrade since their ratings were last reviewed by MSCI over the last 12 months, compared with 7% experiencing a downgrade. However, if we take the weight of index constituents into consideration, a more obvious upward momentum for the index’s ESG ratings appears. The chart below (Exhibit 6) suggests 20% of constituents by weight in the MSCI China Index received a rating upgrade over the last 12 months, compared with only 2% by weight that were downgraded. Therefore, we can conclude that heavily weighted constituents of the MSCI China Index contributed more to the upward ESG ratings momentum of the index overall than is apparent by the number of those ratings upgrades. EXHIBIT 5 RATING MOMENTUM DISTRIBUTION BY NUMBER OF CONSTITUENTS OF MSCI CHINA INDEX

EXHIBIT 6 ESG RATING MOMENTUM DISTRIBUTION BY WEIGHTING OF CONSTITUENTS OF MSCI CHINA INDEX

Source: MSCI ESG Research as of Aug. 1, 2019 Note: “N/A” means issuers were added recently to coverage by MSCI ESG Ratings as a new constituent of the MSCI China Index du e to regular index rebalancing. Therefore, there is no rating change trend to generate. MSCI.COM | PAGE 5 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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ESG ON THE FAST TRACK

REGULATORY ESG INITIATIVES IN CHINA The Chinese government has introduced several new laws and policies in recent years to promote better ESG practices and disclosure. Given the strong influence of the government in the country’s market, these regulatory initiatives are likely to further drive rapid ESG uptake by both investors and issuers.

Voluntary or Practice or Year Initiative Institution Commentary Mandatory Disclosure For issuers Shanghai Stock Exchange (SSE) Mandatory ESG Information Shenzhen Stock Exchange (SZSE) Chinese government plan to introduce mandatory ESG disclosure requirement 2019 mandatory Disclosure Disclosure Under Discussion China Securities Regulatory Commission for all listed companies and bond issuers in China by 2020. (CSRC) The Ministry of Ecology and Environment of 2018 Environmental Tax Law mandatory Practice The law puts stricter tax on environmental pollution. China Updated Corporate China Securities Regulatory Commission The updated code introduced a code of corporate conduct for environmental 2018 voluntary Practice Governance Code (CSRC) and social responsibility.

Program of Reform of Compensation System for General Office of the Communist Party of This law specifies how companies should compensate if they damage the 2018 mandatory Practice Ecological Damage to the China, General Office of the State Council environment. Environment

Guidelines on Constructing This proposal specifies the government's initiative for adopting price National Development and Reform 2018 the Price Mechanism of mandatory Practice instruments to limit environmental pollution and encourage reduced resource Commission (NDRC) Green Development consumption. The key pollutant-discharge companies or their subsidiaries announced by the Update on Environmental China Securities Regulatory Commission Ministry of Ecology and Environment are required to disclose their main 2017 mandatory Disclosure Information Disclosure (CSRC) environmental information in the companies’ annual reports and semi-annual reports. For investor/financial institutions

This guideline is focused on the E pillar of ESG integration and encourages Green Investment Guideline Asset Management Association of China 2018 voluntary Practice investors to integrate environmental consideration into investment decisions for Asset Managers (AMAC) and encourage regular self-evaluation/disclosure.

Green Finance Committee of China Society for Environmental Risk The initiative assumes banks should follow principles of responsible Finance and Banking, Investment Association Practice Management Initiative for investment. Financial institutes and companies should better their ESG 2017 of China, CBA, IAMAC, China Trustee voluntary and China's Overseas disclosure and build collaborations with environmental NGOs and third-party Association, Foreign Economic Cooperation Disclosure Investment agencies. Office of Ministry of Ecology and Environment

Sources: China Securities Regulatory Commission http://www.csrc.gov.cn/pub/newsite/ ;State Council of China http://www.gov.cn/ ; Ministry of Ecology and Environment of China http://www.mee.gov.cn/ ; National Development and Reform Commission http://www.ndrc.gov.cn/ ; Asset Management Association of China http://www.amac.org.cn/

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MSCI ESG ISSUER COMMUNICATION: BUILDING AWARENESS AND DIALOGUE MSCI observed that our ESG ratings coverage expansion to China A shares The percentage of covered Chinese companies contacting MSCI doubled also raised ESG awareness among local issuers and regulators. between 2017 and 2019. Over the past three years, we observed a sharp uptick in issuer contact with MSCI ESG Research, both responses to our There are a growing number of ESG events for issuer education organized outreach and proactive contact by companies. in the China market by both regulators and suitability consultancies. MSCI ESG Research was involved in some of those events to explain the The corporate response rate among constituents of the MSCI China Index processes and methodology that determine MSCI ESG Ratings for Chinese doubled, from 13% in 2017 to 26% in 2018. For the majority of Chinese issuers. companies, 2018 was their first exposure to the ESG Ratings Issuer Communication process, given that more than 200 China A companies MSCI ESG Research also has a robust issuer communication process to were newly added to the MSCI China Index and covered by MSCI ESG allow and encourage companies to review our data sets and provide Ratings for the first time as of May 2018. In H1 2019, we contacted 401 out comments and additional information, as long as all sources are in the of 491 Chinese companies in our universe and had a response rate of 19% public domain. in that half. EXHIBIT 7 ISSUER TRAINING EVENTS MSCI DELIVERED IN THE EXHIBIT 8 CORPORATE RESPONSE RATES CHINA MARKET (2017-2019)

Note: n, MSCI China Index as of end of 2017 = 152, n, MSCI China Index as of end of Source: MSCI ESG Research 2018 = 459, n. MSCI Emerging Market Index as of end of 2018 = 1,125, n. MSCI ACWI Index as of end of 2018 = 2,433

Source: MSCI ESG Research

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DRIVING FORCES: A DEEP DIVE INTO KEY ESG THEMES We have observed three transformative forces in China: EXHIBIT 9 CHINA CO2 EMISSIONS (KG PER PPP $ OF GDP)

1. Economic transformation paired with increasing environmental awareness give rise to stricter environmental mandates and conservation efforts, especially regarding climate change

Source: World Bank, China’s 13th Five Year Plan, MSCI ESG Research Notes: 2015 data is not publicly available and thus estimated based on the average of the first three years. The yellow line represents the required reduction to achieve 2020 target.

EXHIBIT 10 1 EMPLOYMENT IN CHINA BY SECTOR 2. Economic and technological transformation drive

potential skill shortages, leading to more production pressure and overtime and growth in income (GDP per capita grew by 7% during 2008 to 2019), leading to higher product quality expectations

Source: National Bureau of Statistics of China Notes: Primary sector includes agriculture, mining etc; secondary sector refers to manufacturing and industry sectors. Tertiary sector means the service sector. EXHIBIT 11 ANNUAL FOREIGN CAPITAL NET INFLOW VIA HONG

3. Greater inclusion of the Chinese capital market KONG, SHENZHEN, AND SHANGHAI STOCK CONNECT internationally creates more pressure to align shareholder rights and governance policies with global

standards

Source: Hong Kong Exchanges and Clearing Market, MSCI ESG Research, *2019 data is as of Aug. 21, 2019.

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CLIMATE CHANGE: FROM COMMITMENT TO IMPLEMENTATION China is the largest greenhouse gas emitter in the world,3 and its climate change strategy may have enormous impact on the global plan of limiting warming to 2˚C. China has made a strong commitment to the Paris Agreement, 4 and has sought a leadership role in global climate change diplomacy.5 The Chinese government has incorporated carbon reduction targets and policies in national-level Five-Year Plans, which inform provincial- and industrial-level implementation blueprints. We analyzed carbon risk exposure for a hypothetical investment portfolio mirroring the MSCI China Index and compared it with emerging market and global benchmarks. Based on index composition as of Aug. 1, 2019, the MSCI China portfolio emissions were 16.8% lower than for an MSCI Emerging Market portfolio, but 95.6% higher than for an MSCI ACWI portfolio. The MSCI China portfolio shows a clear downward trend in carbon intensity since 2013. This finding is aligned with country-level developments and the path to decarbonization. According to official announcements, by the end of 2017, China had cut carbon emissions per GDP by 46% from 2005, putting the country three years ahead of its intermediate goal of reducing carbon intensity by 40% - 45% from the 2005 level by 2020.6 EXHIBIT 12 PORTFOLIO CARBON RISK EXPOSURE COMPARISON EXHIBIT 13 CARBON INTENSITY TREND

Notes: MSCI ESG Research defines portfolio carbon footprint as the carbon emissions of a portfolio per $million invested. Portfolio carbon intensity measures the carbon efficiency of a Notes: Carbon Intensity measures the carbon efficiency of a company as total carbon portfolio and is defined as the total carbon emissions of the portfolio per $million of portfolio emissions normalized by total sales. At a portfolio level, carbon intensity is the ratio of sales; while weighted average carbon intensity is a measure of a portfolio’s exposure to carbon - portfolio carbon emissions normalized by the investor’s claims on sales. related potential market and regulatory risks and is computed as the sum product of the portfolio *Reflects the most recently available data for each company on the date of running the companies’ carbon intensities and weights. report. Source: MSCI ESG Research as of Aug. 1, 2019 Source: MSCI ESG Research as of August 2019

3 "China now No. 1 in CO2 emissions; the U.S.is in second position". PBL Netherlands Environmental Assessment Agency. https://www.pbl.nl/en/dossiers/Climatechange/Chinanowno1inCO2emissionsUSAinsecondposition 4 "Paris climate deal: US and China formally join pact", BBC News, Sept.3, 2016. https://www.bbc.com/news/world-asia-china-37265541 5 “Guide to Chinese Climate Policy”, Colombia Center on Global Energy Policy.https://energypolicy.columbia.edu/research/report/guide-chinese-climate-policy 6 “China meets 2020 carbon target ahead of schedule,” Thomson Reuters https://www.reuters.com/article/us-china-climatechange-carbon/china-meets-2020-carbon-target-ahead-of-schedule- xinhua-idUSKBN1H312U © 2019 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI.COM | PAGE 9 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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Carbon-heavy Utilities, Materials, and Energy sector companies in the MSCI EXHIBIT 15 MSCI CHINA PORTFOLIO SECTOR CONTRIBUTION TO China portfolio contributed 9.2% of the weight and 89% of the carbon CARBON EMISSIONS emissions. After running pilot programs in several cities for years, China has started to build a national carbon trading scheme and expects the first trading in 2020, which will initially include electricity producers and gradually expand to other carbon-intensive industries. According to the data from the National Statistics Bureau, China’s 2018 coal usage in the national total energy mix for the first time fell below 60%, bringing the country closer to the target of 58% by 2020. The coal-fired power producers and largest coal reserve holders may face more regulatory scrutiny while China is pushing to meet its carbon reduction goals.

The top five thermal coal reserve holders in the MSCI China portfolio owned more than 87% of thermal coal reserves associated with the portfolio.

Source: MSCI ESG Research August 1st, 2019 EXHIBIT 14 TOP FIVE THERMAL COAL RESERVE HOLDERS OF MSCI CHINA PORTFOLIO EXHIBIT 16 SECTOR CARBON INTENSITY

Largest Contributors to Portfolio Thermal Coal Reserves

Contribution Thermal Coal to Portfolio Portfolio Reserves Thermal Coal Company Sector Weight (Tons/$M Invested) Reserves

1 China Coal Energy Com Energy 0.05% 12,672,000 32.68%

2 China Shenhua Energy Energy 0.43% 6,442,800 21.86%

3 Yanzhou Coal Mining C Energy 0.10% 1,864,320 12.67%

4 INNER MONGOLIA YITAI Energy 0.07% 1,473,743 12.07%

5 Huadian Power Interna Utilities 0.04% 2,200,000 7.97% Top 5 Contributors 0.69% 87.24%

Source: MSCI ESG Research August 1st, 2019 Source: MSCI ESG Research Aug. 1, 2019

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In the MSCI China portfolio, the top 10 most carbon-intensive issuers comprised 1.1% of the portfolio’s weight and 63.4% of weighted average carbon intensity; eight of these 10 companies were from the utility sector. Datang, GD Power, Huadian, SDIC and Shenzhen Energy are most at risk, given their high carbon intensity and limited carbon mitigation efforts.

EXHIBIT 17 TOP TEN ISSUERS WITH HIGHEST CARBON INTENSITY IN MSCI CHINA PORTFOLIO Contribution to Portfolio Issuers with Highest Carbon Intensity Wtd Ave Portfolio Carbon Carbon Company Sector Weight Intensity Intensity Total Carbon Emissions Source Carbon Risk Management

1 CHINA RESOURCES POWER HOLDINGS COMPANY LI Utilities 0.16% 18,823 10.95% Estimated - Does not Disclose Low

2 DATANG INTERNATIONAL POWER GENERATION CO. Utilities 0.04% 17,023 2.70% Estimated - Does not Disclose Minimal

3 ANHUI CONCH CEMENT COMPANY LIMITED Materials 0.49% 16,861 29.54% Reported Low

4 GD POWER DEVELOPMENT CO., LTD. Utilities 0.01% 15,895 0.72% Estimated - Does not Disclose Minimal

5 CHINA RESOURCES CEMENT HOLDINGS LIMITED Materials 0.14% 14,907 7.31% Reported Minimal

6 HUANENG POWER INTERNATIONAL, INC. Utilities 0.13% 14,352 6.97% Reported Low 7 HUADIAN POWER INTERNATIONAL CORPORATION L Utilities 0.04% 12,206 1.91% Reported Minimal

8 CHINA POWER INTERNATIONAL DEVELOPMENT LIM Utilities 0.06% 12,065 2.69% Estimated - Does not Disclose Low

9 SDIC POWER HOLDINGS CO., LTD. Utilities 0.01% 8,928 0.43% Estimated - Does not Disclose Minimal

10 SHENZHEN ENERGY GROUP CO., LTD. Utilities 0.01% 8,475 0.16% Estimated - Does not Disclose Minimal

Top 10 Companies 1.10% 63.38%

Notes: Carbon intensity measures the carbon efficiency of a company as total carbon emissions normalized by total sales (t CO2e/$M Sales) The portfolio-level Weighted Average Carbon Intensity is the sum product of the constituent weights and intensities. The contribution to weighted Average Carbon Intensity reflects individual issuers’ contributions to portfolio-level Weighted Average Carbon Intensity of MSCI China Index Assessment of carbon risk management includes a look at emissions intensity trend and performance relative to industry peers, as well as the company’s reduction targets (if any) and mitigation efforts. We flagged companies with minimum practice in carbon risk management, which represented 23.6% of MSCI ACWI constituents as of Aug. 1, 2019.

Source: MSCI ESG Research as of August 1st ,2019

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HUMAN CAPITAL: TALENT UPGRADE IN PROGESS AMID SKILL SHORTAGES As we highlighted in our June 2018 report, “China A Shares: MSCI ESG Ratings Overview,” China strives to develop new high-skill talent to foster the transformation to a more service- and technology-oriented economy. Meanwhile, excessive overtime remains a challenge, 7 now especially among tech employees.

SKILLS UPGRADE AMID DIGITALIZATION China has been gradually moving away from labor-intensive traditional manufacturing industries to talent-intensive service sector endeavors such as finance, technology8 and health care, evident in the rise of e-commerce and tech giants like Alibaba, the rapid adaption of fintech, 5G9 and digital health. These industries have the highest exposure to challenges in attracting and nurturing talent (Exhibit 18), and also experienced the highest growth in employment during 2014-2017 (Exhibit 19). Meanwhile, manufacturing, which has been the focus of China’s economic growth in the past, experienced a sharp decline during the same period, second only to mining.

EXHIBIT 18 HUMAN CAPITAL RISK EXPOSURE BY SECTOR IN EXHIBIT 19 CHANGE IN EMPLOYMENT IN CHINA, CAGR 2014 - CHINA 2017 Description: We used risk exposure scores on a scale of 0 (lowest risk) to10 (highest risk) to gauge companies’ exposures to the challenges of attracting and nurturing human capital, based on our evaluation of required skills and annual salaries

Source: MSCI ESG Research, China based constituents of MSCI ACWI, JULY 22, 2019 Source: National Bureau of Statistics of China, CAGR 2014-2017

7 China Labor Bulletin https://maps.clb.org.hk/strikes/en 8 Scope of technology-sector analysis includes information technology, telecommunication services sectors and internet & direct marketing retail sub industry from Consumer Discretionary due to presence of highly innovative and digitalized companies such as Amazon globally and Alibaba in China. 9 Hsu, S., 2017, China takes another step toward a service economy, Forbes https://www.forbes.com/sites/sarahsu/2017/02/21/china-takes-another-step-towards-a-service-economy/ Zhang, B., 2016, Easing China’s transition to a service economy, Paulson Policy Memorandum http://www.paulsoninstitute.org/wp-content/uploads/2017/01/PPM_Services_Zhang-Bin_English_R.pdf Oliver Wyman, 2017, Fintech in China hitting the moving target https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2017/aug/fintech-in-china-hitting-the-moving-target_cn.pdf Notice of China State Council issuing guidance for national digitalization of the 13th five year plan http://www.gov.cn/zhengce/content/2016-12/27/content_5153411.htm

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Chinese companies in the financials, health care, information technology Among the Chinese companies, Tencent Music's focus on investing in and telecommunication sectors appear to be catching up (Exhibit 20 and employee development through in-house structured training programs, 21) with global peers in the strength of their talent management and coupled with compensation and benefits at par with market peers, may development programs. For 18% of the China-based constituents of the aid its retention efforts in an industry where skilled talent is at a premium. MSCI ACWI Index in the talent-intensive technology, financials and health In contrast, Beijing Shiji does not appear to offer comprehensive training sectors with an ESG Rating upgrade since 2018, that improvement was opportunities or certification programs to its employees, despite being driven by better talent management and engagement, as of Aug. 7, 2019. dependent on highly skilled software engineers.

EXHIBIT 21 TALENT DEVELOPMENT INITIATIVES EXHIBIT 20 INITIATIVES TO ACQUIRE TALENT

Source: MSCI ESG Research, MSCI ACWI Index as of July 26, 2019 Source: MSCI ESG Research, MSCI ACWI Index as of July 26, 2019 Global peers include constituents of MSCI ACWI Index in information technology, Global peers include constituents of MSCI ACWI Index in information technology, telecommunications, financials, health care sectors as well as internet & direct marketing telecommunications, financials and health-care sectors, as well as internet & direct retail sub industry, excluding China. marketing retail sub industry, excluding China.

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‘996’ WORK SCHEDULE POWERING ECONOMIC EXHIBIT 22 CHINESE CONSTITUENTS OF MSCI ACWI INDEX IN TRANSFORMATION? THE EXCESSIVE-OVERTIME BLACKLIST

Engagement Grievance reporting Overtime blacklist As tech companies try to outpace each other against a backdrop of limited survey mechanisms skilled resources, the “996” work schedule (9-to-9, 6 days a week) has Goertek l l become a new norm. The 996 work schedule concept sparked public Alibaba Pictures l l outrage when Jack Ma from Alibaba openly endorsed it, labeling Tecent l l employees who do not work that hard as “slackers.” The 996.ICU project Hikvision l l l l launched on Microsoft’s GitHub code-sharing community in March 201910 DHC Software Alibaba l l has been a prominent locus for protest. Chinese state media have also Kingsoft l l criticized such labor rights violations, as Labor Law of the People’s Pinduoduo l l Republic of China mandates an average working week of 44 hours. Netease l l Excessive overtime may lead to mental and physical health problems for Dahua l l employees, reduce productivity and, in the end, damage innovation, which Xiaomi l l is vital for tech companies.11 Meituan Dianping l l 58.com l l Among the companies on the GitHub overtime blacklist (Exhibit 22), a Baidu l l majority do not indicate having employee engagement surveys to gauge JD.com l l employee satisfaction or grievance reporting mechanisms through which employees can raise excessive-overtime complaints. None of the 996 Engagement Survey Grivance reporting offenders had evidence of offering a formal confidential grievance Annual employee survey, performance Formal and confidential grievance l reporting channel. Notably, JD.com was discovered by the Financial Times tracking and responsive actions escalation channel to be forcing interns to work overtime while paying only minimum wage.12 Escalation channel but grievance Sporadic survey and general statement l procedures or confidentiality about employee engagement. unknown, or no confidentiality

l No evidence No evidence

Source: China-based constituents of MSCI ACWI, as of July 22, 2019, that have been cited in the blacklist in Microsoft’s GitHub. The blacklist includes all types of excessive overtime, for example, 996, 995 (9am to 9pm, 5 days a week), 10106 (10am to 10pm, 6 days a week) etc. https://github.com/996icu/996.ICU/tree/master/blacklist

10 "Work by '996', sick in ICU" https://github.com/996icu/996.ICU Goden, L., 2011, The effects of working time on productivity and firm performance: a research 11 Carmichael, S., 2015, The Research Is Clear: Long Hours Backfire for People and for synthesis paper, International Labour Office https://www.ilo.org/wcmsp5/groups/public/--- ed_protect/---protrav/---travail/documents/publication/wcms_187307.pdf Companies, Harvard Business Review https://hbr.org/2015/08/the-research-is-clear-long- 12 hours-backfire-for-people-and-for-companies Hancock T., Yang, Y, 2018, Illegal student labour fuels JD.com ‘Singles Day’ sale, Financial Verite, 2004, Excessive overtime in Chinese supplier factories https://www.verite.org/wp- Times content/uploads/2016/11/Excessive_Overtime_in_Chinese_Factories.pdf

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EXHIBIT 23 PRODUCT-SAFETY-RELATED CONTROVERSIES IN PRODUCT SAFETY: PROBLEMS PERSIST AMID RISING EMERGING MARKETS SINCE 2003 EXPECTATIONS Consistent with our findings in 2018,13 we continue to observe rising vulnerability to costs from product recalls or false advertising penalties as the Chinese government implements increasingly stringent regulatory requirements for product safety. At the same time, economic and demographic transformation are making for stronger purchasing capacity and a higher level of awareness among consumers. China’s new middle- class has increased demand for premium products that are of high quality and safe to use.14

This shift in consumer demand presents business opportunities to companies willing to invest in stronger safety controls, improved quality Source: Beyond Basic Needs: Rising Chinese Middle-Class Demands Higher Product Quality and a broader range of product offerings tailored to the new buyers’ (MSCI ESG Research, April 2019). expectations. Such issues are more financially relevant than ever in China, a country with the third-highest number of controversies per constituent in EXHIBIT 24 PRODUCT SAFETY SCORE COMPARISONS the MSCI Emerging Markets Index universe across all industries (Exhibit 23). Description: We used key issue scores on a scale of 0 (lowest risk) to10 (highest risk) to gauge companies’ management of product safety; for example, supplier audits, given the risks that companies expose to, such as regulatory action and consumer backlash due to unsafe Overall, China-based MSCI ACWI constituents still fall behind their products. international market peers in in the adoption of product-safety measures (Exhibit 24). Supplier audit scope generally appears limited, and we have seen little evidence of robust programs adopted to ensure product safety including adherence to quality standards, processes for tracing and tracking raw materials. Using the healthcare sector as an example, foreign healthcare companies operating in China display a wide range of practices but on average perform better than Chinese peers (Exhibit 25).

Source: Company disclosure, MSCI ACWI index as of July 26, 2019 Chinese companies include China-based constituents of MSCI ACWI index 13 China A Shares: MSCI ESG Ratings Overview in 2018. Weinswig, D., 2018, What Chinese consumers want from Western Retailers (Hint: it’s not just 14 Zipser, D., Chen, Y., Gong, F., 2016, The modernization of the Chinese consumers, fashion and technology), Forbes. McKinsey. Greenstein, T., 2018, Quality over price, consumers are increasingly choosing quality over price, according to recent studies.

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However, we have observed positive development in this area among Chinese companies where Product Safety & Quality is identified as a key issue.15 Among these companies, one-third of the nine Chinese companies that experienced a rating upgrade received these due to improvement in product safety measures. China Overseas Land & Investment has improved its product safety controls by checking the quality of raw materials sourced from suppliers and improving post-sale service. On the other hand, Zhejiang China Commodities City Group was the only company in this set that experienced a downgrade due to worsening transparency of its warranty payments. EXHIBIT 25 HEALTH CARE SECTOR CASE STUDY

The health-care sector in China is projected to grow to RMB 8 trillion (approximately USD 1.15 trillion) by 2020, representing a 13% compound annual growth rate (CAGR) from the 2017 level of RMB 5.2 trillion (approximately USD 800 billion).1 Without safer products, domestic Chinese health-care companies may risk losing customers. For example, after the Changsheng vaccine scandal in 2018, there was an influx of Chinese visitors to Hong Kong for vaccines.

Comparison of product quality-control mechanisms among selling goods in China, constituents of MSCI ACWI Index as of April 19, 2019 Description: The y-axis shows the practices score assessed on a scale of 0 (lowest) to 10 (highest), which includes programs adopted to ensure product safety, including adherence to quality standards, processes for tracing and tracking raw materials. Companies’ average total revenue during 2015-2017, indicated by the size of the bubbles, is used to indicate the visibility of the brands. The GICS industries include biotechnology, health-care equipment & supplies, health-care providers & services, life sciences tools & services, pharmaceuticals in the health-care sector.

Source: May 2019 MSCI ESG Research report ‘Beyond Basic Needs: Rising Chinese Middle-Class Demands Higher Product Quality.’ Thomson Reuters Eikon, company reports, MSCI ESG Research 1.China’s Healthy China 2030 Plan by National Health and Family Planning Commission, P. R. China, 2016, Yearbook of Health in the People’s Republic of China, 2017; Thomson Reuters Eikon for exchange rates 2. South China Morning Post

15 This includes 114 Chinese companies, constituents of the MSCI ACWI Index as of Aug. 7, 2019, where Product Safety and Quality was identified as a key issue, contributing to their ESG Ratings. © 2019 MSCI Inc. All rights reserved. Please refer to the disclaimer at the end of this document. MSCI.COM | PAGE 16 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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CORPORATE GOVERNANCE: CONTROLLING SHAREHOLDERS MAINTAIN STRONG INFLUENCE China, the world’s second-largest economy, is becoming more attractive to global investors, given its growing consumer base and improved accessibility of China’s capital market16. Yet the market still shows relatively high stock price volatility, low transparency of issuer disclosure and high exposure to political influence17, underscoring the importance of corporate governance practices.

In 2018, the government revised the China Corporate Governance Code for Listed Companies, which included greater emphasis on ESG disclosure, dividend distribution, accountability and diversity of board members, as well as restriction of the power of controlling shareholders. However, our analysis of MSCI China index constituents found that the presence of a controlling shareholder continued to be the key characteristic of the MSCI China Index (79% of constituents in 2019 had them vs.78% in 2018). Most Chinese firms are state-owned, with founder firms the next most sizable group. Minority shareholder influence is limited in all of these scenarios. EXHIBIT 26 GOVERNANCE SCORE DISTRIBUTION (MSCI CHINA INDEX VS. MSCI ACWI INDEX)

Source: MSCI ESG Research as of July 2019

16Two Big Reasons Why I Believe China Looks Attractive Right Now, Forbes, Sep 25, 2018 https://www.forbes.com/sites/greatspeculations/2018/09/25/two-big-reasons-why-i-believe-china-looks- attractive-right-now/#287459095a25 SH – HK Connect: New Regime, Unprecedented Opportunity, Goldman Sachs, 2014 https://www.goldmansachs.com/insights/pages/stock-connect/report.pdf China scraps QFII and RQFII investments quota to allow unrestricted access to world’s second-largest capital market, South China Morning Post, Sep 10, 2019 https://www.scmp.com/business/companies/article/3026561/china-scraps-qfii-and-rqfii-investments-quota-allow-unrestricted 17 Carpenter, J.N., Lu, F., Whitelaw, R.F., 2019,The Real Value of China’s Stock Market, http://people.stern.nyu.edu/jcarpen0/pdfs/Carpenter%20Lu%20Whitelaw%20- %20The%20Real%20Value%20of%20China%27s%20Stock%20Market.pdf

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The most common concern we observed for board performance relates to independence, with many companies lacking an independent majority (49% for MSCI China Index constituents without this board attribute vs. 34% for MSCI ACWI Index constituents). The presence of a controlling shareholder combined with the lack of an independent board majority can reduce the influence of minority shareholders. The most common CEO pay concern was related to the lack of CEO equity incentives (81% of MSCI China Index constituents lacked this vs 58% of MSCI ACWI Index constituents), but we note improvement since August 2018, when 94% of MSCI China Index constituents had been flagged as lacking CEO equity incentives.

The Chinese government launched a round of reforms for state-owned enterprises (SOEs) in 2014, aimed at enhancing SOE productivity and operational efficiency through a mix of ownership and pay-structure reform. However, our data shows limited improvement on shareholder returns for Chinese SOEs over the past five years. In 2018, the Chinese government launched a new work plan to further expand and speed up SOE reform. With “strengthen party leadership” and “build diversified shareholder structure” both on the agenda of Chinese SOE reform, the misalignment of interests within SOEs could be an ongoing issue.

We also highlight the key person risks for founder firms in this peer set. Unexpected events linked to founder misconduct have already caused significant shareholder value loss at several of these companies in the past 12 months (see company case studies on page 21-22). Further, equity pledge has become a common way for major shareholders to raise funding in the Chinese market18. In particular, the high pledge ratio of a few founder firms has raised the concern of other shareholders, as it may expose minority shareholders to the risk of liquidation avalanche and stock price decline. EXHIBIT 27 GOVERNANCE PERFORMANCE OF MSCI CHINA INDEX CONSTITUENTS COMPARED WITH GLOBAL MARKET PRACTICE

Source: MSCI ESG Research as of July 2019

18“Why China Is Worried About Forced Selling of Company Shares,” Bloomberg News, Oct. 24, 2018. https://www.bloomberg.com/news/articles/2018-10-24/what-s-share-pledging-and-why-is-china- concerned-quicktake

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EXHIBIT 28 OWNERSHIP STRUCTURES: MSCI CHINA VS. MSCI ACWI INDEX

Largest Owner Classification Key Owner Types Control Enhancing Structures

Presence of a controlling shareholder was 51% of Chinese firms in the peer set are state-owned, Companies listed in the mainland Chinese stock market characteristic of 79% of constituents of MSCI China often controlled by other state companies via are not legally permitted to issue multiple share classes Index versus 43% of MSCI ACWI Index. The presence intermediate holding companies. At 32%, founder firms with unequal voting rights. of a controlling shareholder combined with other are the next most significant group, and many of these However, N-shares listed in the U.S. can have multiple governance concerns can reduce the influence of are VIEs (variable interest entities). VIE structure is a share classes with different voting rights, a tool minority shareholders. device designed to avoid foreign investment restriction commonly used by founder firms to strengthen the laws in China. Please refer to our October 2017 founder’s control. publication, “China Governance Country Report” for more details. The Hong Kong Stock Exchange followed the one-share one-vote rule in the past but opened the door for dual- class shares in April 2018.

Controlling – Largest shareholder or shareholder group Founder – The founder/s of the company play an active role Multiple share classes with unequal voting rights – (or no holds 30% or more of the voting rights. in the company – e.g. serve as Chair and/or CEO, is a voting rights for one or more classes) or classes that carry director or senior executive, is a current shareholder different rights to vote on director appointments. Principal – Largest shareholder or shareholder group holds (regardless of amount). between 10% and 30% of the voting rights. Family – Family holds 10% or more of the voting rights and Voting rights mechanisms – Includes ceilings on ownership or voting rights, voting rights limits based on nationality or Widely Held – No shareholder or shareholder group holds maintains at least one board seat. additional voting rights based on ownership duration. more than 10% of the voting rights. State – State directly or indirectly controls 10% or more of the voting rights. Golden shares – Government veto rights for transactions or

Corporate Parent – Issuer is a subsidiary (30% or more) of a changes to governing documents. corporate parent, which itself may also be listed * Ownership types may overlap with key ownership classification.

Source: MSCI ESG Research as of July 2019 MSCI.COM | PAGE 19 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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EXHIBIT 29 BOARD REVIEW Governance risks vary widely, depending on the nature of the company’s ownership and on the separation of ownership and management, and on the design of the capital structure and its impact on the voting rights of shareholders.

Board Types Leadership Independence Committees

The constituents of the MSCI China Index 24% of Chinese companies had combined Based on MSCI independence criteria, Most companies had established all three with Chinese incorporation have a Board chair/CEO roles, despite global best about 51% of boards were majority key standing committees – Audit, Pay and of Directors and a Board of Supervisors, practice standards that don’t recommend independent of management. However, Nomination. Based on MSCI as required by Chinese company law. this. Lead Independent Directors are non- many directors were characterized as not independence criteria, “independent of Other companies have a unitary board existent. independent of other interests, being management” excludes any “inside” or model with a Board of Directors only. linked to major owners and/or the company executive directors, and Chinese state. outside-related directors.

32%

68%

Board of Directors

Board of Directors & Board of Supervisors

Per the China Corporate Governance The Code contains no requirement or best The Code recommends that boards The Code recommends that the Audit, Pay Code (the ‘Code’) the role of the board of practice recommendation for the include independent members. For and Nomination Committees be chaired supervisors is to supervise corporate appointment of an independent chairman companies with shares listed in Hong by an independent director, and finance, the legitimacy of directors, or for a lead independent director. There Kong, the HKEX Listing Rules require at independent directors should also managers and other senior management is also no recommendation regarding the least three independent directors and constitute a majority of the three personnel's performance of duties, and to separation of the role of CEO and chair. one-third of the Board to comprise committees. protect the company's and shareholders' independent directors. legal rights and interests.

Source: MSCI ESG Research as of July 2019 MSCI.COM | PAGE 20 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019

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KEY PERSON RISK AT FOUNDER FIRMS Key person risk is a governance risk faced by minority shareholders in controlled companies, particularly if the controlling shareholder has a leadership role on the board or in management. We have found that there is a trade-off between having a controlling visionary leader and exposure to key person risk, and some investors may be willing to accept inferior corporate governance structures or restrictions on shareholder rights to enjoy the potential financial benefits of a visionary leader’s strategy.19

Figure 2: Control Skew at select Chinese firms Case Study | JD.COM: VIE Structure & Unequal Voting Rights

Similar to other major internet companies in China, JD.com maintains a VIE structure, which helps maintain tight founder control while weakening minority shareholders’

rights, highlighting a vulnerability of its governance structure. JD.com's ownership structure deviates from one-share, one-vote, and gives unequal voting rights (80% voting power) to its founder, CEO and Chair Richard Liu, who owns only about a 15% economic interest. Its articles and bylaws provide that the company's board cannot muster a quorum in Liu’s absence. As such, he can veto anything by simply staying home. Also, as a Cayman Islands-incorporated company, JD.com is exempted from holding annual general meetings and the company requires in its articles one-third of voting rights to convene an extraordinary general meeting (EGM). These practices suggest that Liu can essentially defeat any resolution that he is not legally required to abstain from, and minority shareholders are effectively deprived of the opportunity to engage with management and the board over the company’s governance matters.

In September 2018, Liu was detained and later released from custody in Minneapolis, in the U.S. after an allegation of sexual misconduct, which caused a share price plunge at the company of over 14% in a week. This incident is another example of “key person” risk.

th Source: MSCI ESG Research as of September 5 , 2019 19 “Ownership Forms & Governance Control” by Ric Marshall (June 2015) https://www.msci.com/www/research-paper/ownership-forms-governance/0254448434 MSCI.COM | PAGE 21 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019 MSCI ESG Research LLC

Case Study | Seazen Holdings: 30% Share Price Drop Following the Arrest of CEO Key Governance Metrics Flags of Seazen Holdings

Board Independence Pay Figures

Independent Board Majority Executive Pay Disclosure

Executives on Board Ownership Structure

Related Party Transactions Controlling Shareholder Concerns Chair not Independent & No

Independent Lead Director

Seazen Holdings is both a founder and a family firm, with Zhenhua Wang serving as the chair of the board and CEO. He also held more than two-thirds of the company’s voting rights through a stock pyramid scheme as of June 30, 2019.

Following Mr. Wang’s arrest on child molestation allegations on June 30, 2019, there was a sharp stock sell-off by investors. By the end of July 9, 2019, Seazen Holdings’s share price had declined by 30%.

In an attempt to mitigate the temporary loss of Seazen’s leader while maintaining family control, Mr. Wang’s 32-year-old son, Xiaosong Wang, took over the chair position. This move was approved by the board, which had only 33.3% independent directors at the time of publication. The company subsequently announced a shift in strategy from growth through aggressive land acquisition to maintaining its cash flow over fears of worsening credibility with investors and weakened financing capability.

CHINA THROUGH AN ESG LENS | SEPTEMBER 2019 MSCI ESG Research LLC

STOCK PLEDGE RISK OF FOUNDER FIRMS Case Study| Compulsory Liquidation Equity pledge financing refers to lending extended to key shareholders of Beijing Dabeinong Technology: High Ratio of Stock Pledged by Founder listed companies in return for pledging their shareholdings as collateral, Could Lead to Liquidation Avalanche which is a common way of fundraising in the China A market. Based on our Key Governance Metrics Flags of Dabeinong analysis of the data from the China Securities Depository and Clearing Corp., by the end of 2018, about RMB 4.23 trillion (USD 615 billion) of China Board Independence Ownership Structure A-shares had been pledged in this way, representing about 10% of the China A market’s total capitalization. Independent Board Majority Controlling Shareholder Concerns

Although it’s an easier and cheaper way for key shareholders to raise Executives on Board funding, this financing method carries risk, especially for minority shareholders.20 If pledged stock’s price falls below liquidation value, and Related Party Transactions the company is unable to close out the position or buy it back, the Founder, Chief Executive and Chairman Genhuo Shao held 41.25% of the voting power at animal feed and seed supplier Dabeinong Technology Group Co. as of Aug. 1, 2019. The company also brokerage holding the stock can force liquidation, likely leading to stock price declines with losses borne disproportionately by minority faced several other governance risks: the absence of an independent board majority, multiple company executives on the board and involvement in related-party transactions with other shareholders. We found that founder firms accounted for the majority of companies controlled by Shao. These factors raise concerns that the interests of minority high stock pledge ratios, with the founders most likely to be pledging their shareholders may be subordinated to those of the dominant shareholder, a worry heightened by the share-pledging practices of its founder. own holdings as collateral. To support Dabeinong’s business expansion plan, Shao has pledged stock from his own holdings EXHIBIT 30 CHINA A-SHARE ISSUERS INVOLVED IN STOCK as collateral to raise funding. His stock-pledge ratio increased from 58.2% to 93.6% in Q1 2016 PLEDGE and reached 99.9% by Q3 2018. Due to the China A-share market’s downturn and poor financial performance by the company, Dabeinong’s stock price fell more than two-thirds between 2016 and 2018, contributing to a growing risk that brokerages would be forced to offload Shao’s pledged shares.

At the same time, the company failed to disclose how it used the funds raised from Shao’s pledged

stocks. By the end of the 2018 fiscal year, Dabeinong reported RMB 2.3 billion in monetary assets, against RMB 3.4 billion in interest-bearing liabilities, with interest costs in FY 2018 representing 51% of net profit.

In May 2019, the Shenzhen Stock Exchange asked the company to explain its high interest-bearing liabilities and hefty financial costs with a large amount of monetary assets on hand, and whether the controlling shareholder and his related parties were improperly in possession of funds from the company. Our data shows that in 2017 and 2018, Dabeinong provided loans to related-party interests controlled by the founder, representing 6% and 14.4% of the parent company’s total assets, respectively, in each year. Source: http://www.chinaclear.cn/zdjs/gpzyshg/center_mzzbhg.shtml Scope: China A -share issuers on the MSCI China Index Under regulatory scrutiny, Shao has tried to reduce the risk of being forced to liquidate pledged stock by leveraging state support and selling some of his Dabeinong stock. However, at the end 20 “China Stocks share pledge loans pose risk to equity market”, CNBC News, October 2018 of June, Dabeinong’s overall stock pledge ratio remained above 40%, with more than 98% of the https://www.cnbc.com/2018/10/24/china-stocks-share-pledge-loans-pose-risk-to-equity- stocks in Shao’s ownership being pledged as collateral. markets.html

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STATE-OWNED ENTERPRISES AND REFORM During the 19th party Congress in 2017, Chinese President Xi Jinping pledged further SOE reforms and aimed to foster world-class competitive MSCI ESG Research identifies state-owned enterprises (SOEs) as those in enterprises. 22 In August 2018, the State-owned Assets Supervision and which the state directly or indirectly controls at least 10% of the voting rights Administration Commission of State Council (SASAC) launched a new work or has the right to appoint a majority of the directors. Based on this definition, plan called “Double Hundred Action,” aiming to accelerate reform among about 51% of companies in our MSCI China Index data set are SOEs. In our 400 subsidiaries (it involved 110 listed companies) from central SOEs and June 2015 report, “China’s Economic Transformation: A New Era of ESG local SOEs, during 2018-2020, expanding the reform to a broader group. Opportunity,” and October 2017’s “China Governance Country Report,” we reviewed the governance risks facing investors in Chinese SOEs and the SOE In the reform campaign, the Chinese government plans to balance state reforms aimed at enhancing corporate efficiency through mixed ownership goals and commercial goals. SOEs will be classified as “commercial- and incentivized pay. oriented” and “public-oriented,” and different reform targets and performance measurements will be introduced: Our previous research highlighted that the ownership structure of SOEs was characterized by lower shareholder returns, possibly driven by misalignment SOE Description of the classification Reform Goals 21 Classification of interests within SOEs. There is little indication of improvement since the Commercial- SOEs in the commercial sectors - Reduce state ownership and build launch of SOE reform by Chinese government in 2013 (Exhibit 31). oriented such as: diversified shareholder structure SOEs in fully tourism, real estate, general - Enhance profit generation capacity EXHIBIT 31 RETURN ON EQUITY MSCI CHINA INDEX SOES competitive manufacturing, agriculture, and boost innovation VERSUS NON-SOES (2013-2018) sectors pharmaceuticals, investment, professional services, and general trade Commercial- SOEs hold important - Maintain state ownership while oriented infrastructure, nature resources, opening competitive business for SOEs in key national confidential data and non-state shareholders sectors linked technology, and state reserves in - Promote public resource allocation to national sectors such as: through marketized approach security and Defense, Oil & Gas, Coal, - Separate government functions economy Shipping, Rail, Aviation, Telecom, from corporate management Mining, Electric Grid and so on

Public- Companies providing public - Maintain state ownership while oriented goods and services in sectors introducing diversified shareholder SOEs such as: utilities, public structure transportation, public facilities, - Introduce social impact assessment and so on in performance evaluation - Strengthen government supervision Source: Ownership Structure/TSR Data - MSCI ESG Research. and Thomson Reuters Data as of July 8, 2019, Company Reports Source: The State Council of China, MSCI ESG Research 21 “Ownership Forms & Governance Control” by Ric Marshall (June 2015) at pages 11-12 22 ”Xi calls for furthering SOE reform”, China Daily October 2018 https://www.msci.com/www/research-paper/ownership-forms-governance/0254448434 http://www.chinadaily.com.cn/china/2017-10/18/content_33403609.htm MSCI.COM | PAGE 24 OF 29 CHINA THROUGH AN ESG LENS | SEPTEMBER 2019 MSCI ESG Research LLC

Mixed Ownership Reform

The mixed ownership reform will allow non-state capital to share ownership Among the constituents of the MSCI China Index, 27 issuers were included of SOEs together with SASAC-controlled state-owned parents, with a view to in the “Double Hundred Action” SOE reform plan, covering a wide range of sharing board control with non-state interests. Commercial-oriented SOEs in sectors. Exhibit 32 lists the firms that we believe are mostly likely to be fully competitive sectors may have more freedom and flexibility in this new classified as commercial-oriented SOEs in competitive sectors. round of reforms, and they are more likely to reduce government influence through mixed ownership reform, strengthen governance structure, and introduce marketized pay structure. EXHIBIT 32 LIST OF COMMERCIAL-ORIENTED SOES IN COMPETITIVE SECTORS INVOLVED IN NEW REFORM PLAN The State Council also launched its wage determination reform plan in May 2018, which introduced special policies for this group of SOEs, giving boards Involvement in jurisdiction over wages at the company without requiring SASAC approval. Issuer Name Sector Double Hundred This initiative may help commercial-oriented SOEs in competitive sectors to Action attract talent by offering a marketized wage level and performance XCMG Construction Industrials Directly involved assessment system, as well as introducing long term incentives. Machinery China National Chemical Subsidiary Industrials Case Study | Gree Electric Mixed Ownership Reform Engineering Involved China State Construction Subsidiary In April 2019, Chinese appliance giant Gree Electric announced a stake sale plan. Industrials Engineering Involved Gree Group, the parent company of Gree Electric, which is fully owned by the Zhuhai China Merchants city government, planned to sell 15% of its 18.22% stake in Gree Electric. Gree Group Financials Directly involved hosted a meeting in May with 25 interested investors including Baidu, Temasek, Hopu Securities Investment and Hillhouse investment. Huatai Securities Financials Directly Involved China International Travel Subsidiary Consumer Discretionary The reform was well-received by the market, and Gree Electric’s stock price increased Service Involved Shanxi Xinghuacun Fen more than 30% within a month of the announcement. Investors considered this Consumer Staples Directly involved transaction could help Gree Electric improve ownership structure, bring in strategic Wine Factory investors and increase its market competitiveness. 23 In particular, the potential Dong-E-E-Jiao Health Care Directly involved involvement of Baidu as a shareholder may help Gree gain access to new technologies related to big data, cloud computing, artificial intelligence and the internet of things to support its future development. Source: Guosen Securities, MSCI ESG Research as of Aug. 1 , 2019, JRJ.COM http://stock.jrj.com.cn/hotstock/2018/08/17065324964743.shtml

23 China Securities Daily May 2019 https://finance.sina.com.cn/roll/2019-05-23/doc- ihvhiqay0868921.shtml

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APPENDIX

ESG RATING FRAMEWORK MSCI ESG Ratings are designed to help investors understand ESG risks and opportunities and to integrate these considerations into their portfolio construction and management process. Our global team of research analysts assesses thousands of data points across 37 ESG Key Issues, focusing on the intersection between a company’s core business and the industry issues that can create significant financial risks and opportunities for the company. Companies are rated on a AAA-CCC scale relative to the standards and performance of their industry peers. EXHIBIT 33 ESG RATING FRAMEWORK AND PROCESS OVERVIEW

Source: MSCI ESG Research

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ESG RISKS AND OPPORTUNITIES Environmental, social, and governance (ESG) risks and opportunities are posed by large-scale trends (e.g. climate change, resource scarcity, demographic shifts) as well as by the nature of the company’s operations. Companies in the same industry generally face the s ame major risks and opportunities, though individual exposure can vary. We identify economically relevant risks and opportunities for each industry through a quantitative model that looks at ranges and average values for each industry such as carbon intensity, water intensity and injury rates. Companies with unusual business models for their industry may face fewer or additional key risks and opportunities. Company-specific exceptions are allowed for companies with diversified or unique business models, or those facing controversies, in accordance with the stated ESG Ratings methodology. EXHIBIT 34 MSCI ESG RATINGS KEY ISSUE HIERARCHY

3 Pillars 10 Themes 37 ESG Key Issues

Climate Change Carbon Emissions Financing Environmental Impact Product Carbon Footprint Climate Change Vulnerability Water Stress Natural Resources Raw Material Sourcing Environment Biodiversity & Land Use Toxic Emissions & Waste Pollution & Waste Electronic Waste Packaging Material & Waste Opportunities in Clean Tech Environmental Opportunities Opportunities in Renewable Energy Opportunities in Green Building Human Capital Labor Management Human Capital Development Health & Safety Supply Chain Labor Standards Product Safety & Quality Privacy & Data Security Product Liability Chemical Safety Responsible Investment Social Financial Product Safety Health & Demographic Risk Stakeholder Opposition Controversial Sourcing Social Opportunities Access to Communications Access to Health Care Access to Finance Opportunities in Nutrition & Health Corporate Governance* Board* Ownership* Pay* Accounting* Governance Business Ethics Corruption & Instability Corporate Behavior Anti-Competitive Practices Financial System Instability Tax Transparency * Corporate Governance Theme carries weight in the ESG Rating model for all companies. In 2018, we introduce sub-scores for each of the four underlying issues: Board, Pay, Ownership and Accounting.

Source: MSCI ESG Research

For further information, please access MSCI ESG Rating Methodology Summary or contact [email protected]

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