Corporate sustainability on the rise in China

originally written for chinadialogue, but now a blog post

In Asia’s first-ever ranking of top 100 sustainability companies, launched by Channel NewsAsia (CAN) back in September, just two mainland Chinese companies have been included, both below top 50. Their performance has hardly been better on other major international sustainability ratings. In an era where increasing number of corporations around the globe are starting to lay out their environmental records in plain sight, such ratings are a constant reminder that Chinese companies, too, cannot remain shrouded in corporate secrecy anymore. As has been the case with many aspects of the nation that have been scrutinized by international standards, in sustainability too, China has been making progress on its own terms; however, for now, there still remains plenty to catch up.

With the top twenty places of the CAN ranking dominated by firms in neighbouring countries like India, Singapore, Indonesia, Taiwan, South Korea, Thailand and Hong Kong SAR, the ranking places the state of corporate sustainability in China in stark contrast with its regional counterparts.  China Vanke, the country’s largest property developer and BOE Technology Group have ranked 77th and 90th respectively. In Newsweek’s 2014 Green Ranking of top 500 sustainable firms around the world just 20 mainland Chinese firms were included, with none of them making the top 100 places. China Pacific Insurance Group came 218th and Ping An Insurance Group Co of China came 230th; the other 18 all came below 350th, scattering all the way down to 477th place (PetroChina). Analysts of the rating firms contacted by chinadialogue all attributed poor Chinese performance in rankings to lack of transparency.

Annie White, an associate director at Sustainalytics, the sustainability research company that partnered with CAN for the top 100 sustainable firms in Asia wrote in an email to chinadialogue that Chinese companies were either not performing well enough across environmental, social, and governance (ESG) categories, or/ and not disclosing their ESG information with sufficient frequency and transparency.

Research for the CAN ranking was conducted by Sustainalytics on 155 publicly listed companies across 10 economies in Asia using a range of publicly available data such as financial reports, CSR reports, government sources, NGO research and direct communication with key stakeholders. Under evaluation were three broad categories—environmental, social, and governance (ESG)—which includes such issues as impact on local community, environmental initiatives, treatment of employees and supply chain management. 60 to 100 such indicators were used weighted appropriately to account for industry differences. Out of the 155 firms which were picked for the initial research pool based on each firm’s scores on Sustainalytics’ global platform, just five were based in mainland China, and two of them made it into the top 100.

Michael Yow, a Lead Analyst at Corporate Knights, which contributed research to Newsweek’s 2014 Green Rankings also pointed out that “very few [of them] disclose all of the mainstream sustainability indicators of energy use, GHG emissions, water use, waste generated, waste recycled, employee injury rates, worker fatality numbers and employee turnover rates.”

The Newsweek rankings researched into 809 largest publicly traded companies globally by market capitalization. 775 were contacted for research and 363 responded. It used eight indicators for measuring environmental performance, which includes energy (15%), GHG (15%), Water (15%), Waste (15%), Reputation (20%), executive compensation link with sustainability (10%), sustainability board committee (5%), and metrics audit by third party (5%). Data was taken from Bloomberg’s professional service which includes sustainability information on over 5,000 public securities and the CDP with supplements from Corporate Knights Capital that collected information directly from corporate reports. If a company fails to report its energy use, it will receive zero points for that category.

Dr. Guo Peiyuan, director of the Beijing-based sustainability consultancy SynTao, who has on-ground experience of working with Chinese companies to improve sustainability also pointed to a prevalence of deficient reporting practices among mainland Chinese firms. He said CSR reports compiled by Chinese firms remain far too descriptive and lack real indicators like that which were mentioned by Michael Yow. He writes in an article published by SynTao, ‘[s]ome people sneeringly say that the biggest shortcoming with CSR reports in China is that they don’t have any shortcomings.’ Nonetheless, he added that Chinese mainland firms do fall behind on actual sustainability practices, too.
Of course, just because companies do not disclose information, it does not mean that they are polluting everywhere and generally behaving irresponsibly. As Michael Yow points out that Chinese performance on Newsweek’s ranking was less to do with actual performance than with disclosure. Despite not being an endgame in itself, disclosure has been endorsed by many as the essential first step towards corporate sustainability, since without transparency there is simply no information on which to base scrutiny of performance. And it doesn’t take stretch of the imagination to

What such ratings do is to ask for and encourage disclosure. As Toby A.A. Heaps, CEO of Corporate Knights Capital, pointed out in a Forbes article, the role of such rankings is to ‘drive corporate disclosure of core social and environmental metrics, which matters because you can’t manage what you don’t measure. And from an accountability perspective, sunlight is the best disinfectant.”

For instance, Carbon Disclosure Project (CDP), an international not-for-profit organisation based in the UK takes a more incentive-driven, hands-on approach. It requests the largest companies in the world to fill out its questionnaire on sustainability practices on behalf of 767 institutional investors that represent an excess of US$92 trillion in assets. Filling out the questionnaire is itself an exercise in sustainable practices that compels companies to identify inefficiencies and evaluate operations in ways they have never done before.
Such approach is subtly different from that which is often taken by whistleblowers and other NGOs, which also have been crucial elements of the drive towards sustainability. For instance, the award-winning Institute of Public and Environmental Affairs (IPE) founded by one of China’s key environmental activists, Ma Jun, seek to publicize information about transgressing firms through innovative information platforms such as PITI and make them comply through public pressure. What rankings do is to benchmark performance and grant prestige to those that perform well, fostering a competition for sustainability.  

Such ratings have become important benchmarking tools in an era when increasing attention is turning towards sustainability issues, having multiplied over the last decade, from 21 in 2000 to 108 in 2010, according to research by SustainAbility. With global financial instability and the maturing acknowledgement of climate change, investors have become more cautious about risk, and are starting to make more demands for data on sustainability. And more high-profile companies are starting to follow suit. The New York Climate Summit in September this year saw a number of pledges from national governments and corporate sectors from around the world. High-profile global CEOs also lent their support to We Mean Business, an initiative to persuade businesses worldwide that green operations do not threaten revenues. Notably, Rockefeller Brothers Fund withdrew funds from fossil fuel investments in a highly symbolic endorsement of the US $50bn divestment campaign.
Some of the major international raters include the aforementioned CDP, ROBECO Dow Jones Sustainability Indices, FTSE4GoodIndices, and Newsweek’s Green Rankings. And now more region-based raters are starting to emerge with CAN’s Asia Top 100 being the first region-wide evaluation platform. Another region-based index, ‘2013 East Asia 30’ published by the South Korea-based Hankyoreh Economic Research Institute(HERI) has a narrower focus on three East Asian countries; China, Japan, and South Korea.
The 2013 HERI index has examined 777 Chinese firms listed on Shanghai and Shenzhen SRI Index . Just five Chinese firms made it into the top 30. Conducted together with Asia CSR Experts Committee, it also focuses on ESG performance data using a methodology that stresses ‘actual achievement and how harmoniously the system works’ over ‘management structure and system.’ Here, Chinese firms were found to have scored lowest across all ESG criteria, falling behind on Social in particular due to poor ratings on health, safety, and human rights.

In the quest for rapid economic growth, China has for long followed a developmental path in which environmental and social concerns have been on the back burner. Reports of food safety scandals and the airpocalypse in the northeastern cities continue to stream. And for many companies in China, sustainability is still perceived as a burden on business. Yet, there have been concrete signs that demonstrate China’s incremental steps towards sustainability have not been without progress.

According to the recently published, CDP China 100 Climate Change Report 2014, the number of companies responding to CDP Questionnaire has increased from 32 in 2013 to 45 this year; back in 2008, only 5 companies out of 100 largest companies listed in Shanghai exchange responded. Actual answers to the questionnaire which consists of over 80 questions on sustainability practices have significantly improved in quality, too. The report also marked an increase in companies’ initiative in addressing climate change; for instance, 32 of the 45 respondents have Board appointees to be responsible for climate change issues, 36 have integrated climate change risks into the corporate comprehensive risk management process, and 40 have integrated climate change into their corporate business strategy.

CDP’s China Director Li Rusong told chinadialogue that while progress has been slow, he is enthusiastic about the state of sustainability in China, citing leveraging power of multinationals with links in China, investor pressure, and government regulation as significant drivers of change, ‘[T]he policy push is there, they [mainland Chinese companies] have to comply with government regulations, the market incentives are also there; I am optimistic about Chinese organizations… I do think there will be a very quick learning curve.’  
Several initiatives have come from various state organs, as the central government is demonstrating more determination in tackling environmental issues. In 2012, Beijing municipal government shut down 200 companies for inefficient use of energy and excessive pollution. High-profile multinationals such as Fonterra, Apple, and BMW have all been checked by the Chinese government and public for malfeasance in 2013. Interest in sustainability has gained momentum ever since 2006 when the central government’s drive to build a ‘harmonious society’ has led increasing number of Chinese firms to measure and report on their environmental and social performances—the Corporate Social Responsibility (CSR) report. That year, only one company, State Grid, would file a CSR report.

In 2007, Ministry of Commerce started preventing socially irresponsible Chinese enterprises from foreign trade. The following year, CSR fulfillment was effectively made obligatory, making it ‘the way for state-owned enterprises to contribute to China’s national development goals.’ For instance, in 2010 large SOEs like COSCO, the shipping giant, had been awarded Global Compact. In 2012, according to the sustainability consulting company Syntao, 1,722 Chinese companies filed CSR reports.

Plans to introduce a nationwide carbon permit market and a ban on the use of ‘dirty’coal in efforts to rein in climate-changing emissions and the smog of northeastern cities like Beijing are expected in 2016 and 2015 respectively. Bottom-up initiatives have also been crucial in providing checks on corporate irresponsibility when government oversight is lacking. For instance, years of sustained pressure from Greenpeace forced China’s largest coal company, Shenhua, to alter its water-monopolizing operations in Inner Mongolia. Such developments for many have been sign for a growing momentum towards sustainability.

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