Even though various unfavorable factors such as the COVID-19 pandemic and global economic uncertainties remain elevated in 2022, China’s efforts to advance and integrate ESG (environmental, social and governance) into its economic activity and frameworks for rules and regulations have not been adversely affected. It has organized several landmark ESG summits, forums and seminars, and has issued several standards and regulations guiding the development of Chinese enterprises as well as deepening investments in the technological and academic research to support high-quality development in the future. ESG has gained unprecedented support from both the public and private sectors, and its concept and practices are fast becoming the mainstream in China.
In Maech 2022 , the State-owned Assets Supervision and Administration Commission of the State Council established the Bureau of Social Responsibility, and announced the Work Plan for Improving the Quality of Listed Central State-Owned Enterprises (the Plan) in May2022 . The Plan aims to strengthen social responsibility awareness, and sets out objectives and guidelines for the establishment of a robust ESG system. In addition, the China Securities Regulatory Commission promulgated the Guidelines for the Investor Relations Management of Listed Companies, which mandated the inclusion of ESG information in communications between listed companies and investors, and highlighted the importance of ESG elements in maintaining investor relations. Similar to most countries in their efforts to improve transparency and quality of ESG data, such disclosure generally begins with voluntary disclosure. Furthermore, China is contemplating adopting the International Sustainability Standards Board (ISSB) after a public consultation with Chinese enterprises. This signifies China’s efforts to progressively converge its disclosure standards with that of the international community.
As the world enters a new phase of competition and collaboration, integrating ESG practices into businesses’ operations and management is considered one of the ways for companies to maintain their competitive advantages
In his work report to the 20th National Congress of the Communist Party of China, General Secretary Xi Jinping advocated Chinese-style modernization as a guiding principle for the future development of Chinese enterprises. It also serves as fundamental recommendations for establishing the ESG framework in accordance with international standards while taking into consideration Chinese characteristics. In fact, several Chinese enterprises have shown their determination to adopt and promote ESG frameworks alongside efforts to formulate a sound ESG management system and endeavor to become world-class enterprises.
‘E’ to enhance the harmonious coexistence between nature and humans
The development of ESG in China starts with the commitment to environmental preservation. The financial sector is dynamic and plays a significant role in helping the real economy to transition to a low-carbon and green economy. China’s green and sustainable finance ecosystem has been one of the fastest growing markets as green and sustainability-linked loans, green bonds and deposits, as well as green funds have all recorded remarkable growth in the past few years.
Climate change poses a variety of challenges to both the way of life of mankind and our economy. Despite numerous frameworks and measures being adopted with the aim of striking a balance between economic growth and preserving the environment, natural resources and biodiversity continue to suffer losses. Xie Zhenhua, China’s top climate diplomat, emphasized at the COP27 climate conference that the carbon emissions of China, one of the fastest-growing economies in the world, will peak before 2030, and will become carbon neutral by 2060, and that this signals China’s ambition to further develop its economic growth in a sustainable and high-quality manner. This target also reflects the principle of Common But Differentiated Responsibilities (CBDR) for countries with varying levels of economic growth.
Several forward-looking and responsible Chinese enterprises have been exploring ways to operate in a way that benefits nature and the environment while maintaining their efficiency and competitiveness. With the objectives of promoting a nature-beneficial economy and minimizing negative impacts on nature and the environment, State Grid Corp of China and China General Nuclear Power Corp, for instance, have implemented a natural capital accounting model and published green and low-carbon development reports and biodiversity development reports.
‘S’ to promote common prosperity for all while fulfilling responsibilities to three major stakeholders
In S (social) of ESG, enterprises are required to maintain healthy relationships with their key stakeholders, including government, employees, customers, suppliers, communities, etc. Accordingly, the most fundamental basis for enterprises is balancing the interests of stakeholders with different expectations.
First, responsibilities to the employees are vital for the success of the companies. Employees have always been recognized as a cornerstone of Chinese enterprises; Chinese enterprises have made great strides in keeping up with the varying expectations and development needs of their employees; various training programs have been rolled out by Chinese enterprises to upskill and reskill employees to ensure both the employees and the corporates remain competitive in an increasingly globalized economy.
Second, it is vital to establish a sustainable supply chain. Chinese enterprises are increasingly integrating ESG elements into their development strategy and operation management to encourage innovations and upgrades in the supply chain.
Third, it is essential to contribute to society and work toward achieving common prosperity. Leveraging on technological innovation and digitalization, Bank of China, for example, consistently aims to improve its customers’ experience with more convenient tools and ways of banking while safeguarding their rights and interests. The bank has committed itself to a wide-range of practices to build a better society, including alleviating poverty, educational support, cultural preservation, volunteering, etc.
A key element of ESG strategy depends on the corporates’ abilities to fulfill responsibilities to employees, suppliers and the community where it operates. Hence, enterprises’ ability in balancing the interests of key stakeholders is fundamental to the Chinese-style modernization.
‘G’ could help to shape a sound governance system
An increasing number of Chinese enterprises have developed and announced their ESG strategies and plans to integrate ESG factors into their operation and management systems and practices. With a solid and robust ESG management system, the ESG-related risks and opportunities could be more efficiently captured and managed, thereby increasing the abilities of these enterprises to obtain first-mover advantages. Several Chinese public enterprises, such as Sinochem International, have established an independent sustainability/ESG committee at the board level to drive ESG efforts from the highest level of corporate governance.
Governance is often seen as the most important element within the three elements of ESG, as it is only with a solid and robust governance system that these ESG strategies and initiatives could be effectively implemented.
Chinese enterprises are guided by ESG principles in their internationalization strategy
Chinese enterprises are increasingly integrating ESG practices and strategies in their internalization strategy. For example, since 2017, Three Gorges Brazil has cooperated with the Brazilian Bureau of Biology to launch the “Golden Mussel Management Project”, using genetic technology to control the invasion of golden mussels into local hydropower stations, effectively protecting local biodiversity and achieving win-win results for all parties.
As the world enters a new phase of competition and collaboration, integrating ESG practices into businesses’ operations and management is considered one of the ways for companies to maintain their competitive advantages. As a result, Chinese enterprises are accelerating the pace of integrating ESG practices and strategies into their internationalization strategies. The Chinese government is also emphasizing that green and high-quality development should be the concept underpinning the Belt and Road Initiative. Transitioning to a low-carbon economy while balancing the economic development needs of countries and societies with the ESG elements is a journey that the world has embarked on. Under the guidance of the Chinese government and with policies support, it is expected that the pace of integrating ESG practices into Chinese enterprises is fast becoming mainstream.
Qin Feng is Senior Researcher, Hong Kong Financial Research Institute of Bank of China.
Dong Yu is Researcher, Hong Kong Financial Research Institute of Bank of China.
The views do not necessarily reflect those of China Daily.