Chinese Companies Paying More Attention ESG for Sustainable Development

By Liu Xinwei

Recently， the CSRC （China Securities Regulatory Commission） issued Guidelines on Investor Relations Management for Publicly-Listed Companies （2022）， which incorporated the ESG （environmental， social and governing） performance for the first time as a part of the communication between listed companies and investors for investor relations management. The Shanghai Stock Exchange （SSE） and Shenzhen Stock Exchange （SZSE） also revised the Rules Governing the Listing of Stocks early this year， clarifying the requirements for the disclosure of non-financial information， such as social responsibility reports， marking the advent of ESG information disclosure becoming a regulatory and market focus.

Three out of ten listed companies have issued ESG reports

According to Wind ESG， as of December 31， 2021， there were 4，681 listed companies in the A-share market， and by May 9， 2022， a total of 1，413 listed companies had issued their annual ESG reports for 2021， making up a share of up to 30.19%. Specifically， 53% and 29% of companies in the SSE and SZSE main board market issued ESG reports respectively， while the ratio of GEM （growth enterprise market） and STAR （sci- ence and technology innovation board） market players came to 11% and 7%. Geographically， the top five provincial administrative regions in terms of the number of ESG reports were Guangdong （191）， Zhejiang（176）， Beijing （164）， Shanghai （157） and Jiangsu （110）， of which Guangdong Province ranked first for two consecutive years.

Many listed companies have released ESG reports for the first time. In 2021， Kweichow Moutai was rated CCC by MSCI ESG， dow ngraded from B， becoming the company with t h e l o w e s t rating among t h e t o p 2 0 global companies with the highest market capitalization. On March 31 this year， Kweichow Moutai published its ESG report in both English and Chinese for the first time， reflecting the fact that Chinese companies are paying more and more attention to their international reputation and influence.

Currently， its still an optional rather than a compulsory task for enterprises to issue ESG reports. Therefore， the rate of such information disclosure varies for Chinese listed enterprises from different industries， with different market capitalization and of different ownerships. According to a study by CITIC Securities， by industry， all listed banking companies had issued ESG reports， while less than 15% in the machinery and automobile industries had； in terms of market capitalization， only 14% of companies with a market capitalization of below RMB 10 billion had published special ESG reports， while 82% above RMB 100 billion had； and in terms of ownerships， more state-owned enterprises than private companies had disclosed such information.

Overall， there have been more A-share listed companies that issued ESG reports in the last three years， up from 1002 in 2020 to 1413 in 2021. Meanwhile， the number and the disclosure rate are on the rise too， namely with 275 new companies issuing ESG reports in 2022， up from 140 in 2021， while the ratio of companies disclosing such information rises from 26.93% in 2020 to 30.19% in 2022.

Enterprises usually issue three types of ESG reports， i.e. a social responsibility report， a sustainability and environmental report， and a social and governing report. According to statistics collected by Time Business School of Time Weekly， social responsibility reports took up a proportion of the total that declined year by year， while sustainability reports and ESG reports increased gradually between 2020 and 2022. For example， four companies， including IFlytek， Inovance， Jiangxi Copper and ENN Ecological， issued both an ESG report and a social responsibility report in 2021 respectively， but only an ESG report in 2022.

Ratings for Chinese enterprises by foreign rating agencies are systematically low

“Comprehensively fulfilling our social responsibility and carrying out ESG ideas is historically the duty and mission for centrally administered state-owned enterprises， and it is also the way for centrally administered state-owned enterprises to achieve high-quality development and accelerate the construction of world-class enterprises，” said Li Jun， Director of Social Responsibility Bureau of Stateowned Assets Supervision and Administration Commission of the State Council， at the 2022 Spring Summit of the ESG China Forum which was held recently.

The CE-CE （CHN Energy？& CSR Energy） corporate social responsibility （CSR） system was unveiled at the summit. Peng Huagang， member and Secretary General of the SASAC Party Committee， said：“China Energys release of a CSR system is an innovative exploration of centrally administrated SOEs in terms of social responsibility and ESG.” At the same time， he also pointed out that Chinese listed companies still face lots of challenges. Firstly， Chinese enterprises have received systemically low ESG ratings from foreign rating agencies. As of the fourth quarter of 2021， when examining MSCI ESG ratings for 202 Chinese state-owned enterprises， the highest rating was A （3rd grade of 7 grades in total）， and 63.9% were B or CCC. Secondly， most A-share listed companies have not issued ESG reports yet， while the quality of ESG reports that were released was not satisfying either. Thirdly， many listed companies have no ESG governance mechanism at the board level， nor a sound ESG management system.

As Peng Huagang suggested， it should be the first step for enterprises to have a good top-level design for corporate ESG governance， and to establish a complete and practicable organizational system through top leadership to management and executive layers.

After this， enterprises should build an ESG key index system based on its own condition， and formulate quantifiable layered， graded and classified standards for key ESG elements and a core index system， in order to provide quantifiable tools for element assessment and risk control.

The third is to establish a closed-loop management system to improve the corporate ESG performance. Enterprises should not only integrate ESG concepts into business planning and management， investment decision making， and other operation processes， but should also incorporate ESG into the assessment and evaluation system， forming a closed-loop ESG performance management system.

Meanwhile， governments should also encourage the construction of local ESG rating systems. State-owned listed companies with a higher influence should strengthen their communication with domestic and foreign ESG rating agencies， participate in the construction of local ESG rating systems supporting international integration and being based on national conditions， and contribute to expanding the international influence of China in the ESG field.

In addition， enterprises should strengthen ESG information communication and dissemination. With increasingly strict regulatory requirements， Chinese listed companies should pay more attention to ESG information disclosure， take the initiative to release reports and steadily improve the quality of reports， and promptly study and understand the latest developments in ESG policies， rule revision and rating evaluating principles， while disseminating and sharing their experiences by making use of their own platforms and resources.

ESG information disclosure provides a comprehensive corporate check-up

Not only centrally administrated SOEs， but many digital technology companies are also carrying out ESG plans too. Recently， at an ESG salon entitled “Digital Passion”， Ao Ran， Executive Vice President and Secretary-general of the China Audio-Video and Digital Publishing Association， said： “Nowadays， the rapidly developing digital economy has brought about new challenges due to new forms of employment， such as the protection of employees rights and interests， information disclosure and privacy protection， and technical ethics， which have been practical topics of ESG management in related industries and enterprises， as well as governmental and social focuses.”

Over the last 20 years， digital technology companies have seen a great influx of talent， capital and data， and have also gained first-mover advantages in many fields. Ao Ran believed that new technologies including 5G， big data and artificial intelligence are turning into new driving forces for social development， and that Chinese digital technology companies should establish a perfect localized ESG system.

ESG reports are being seen as noteworthy for more and more digital technology enterprises and investors， and have become a very important and integral part of corporate strategies. Especially， while the development of digital technology boosts enterprises to grow quickly， it will be a challenge for an enterprise to improve their ESG performance and to gain new motives from the integration of the ESG concept throughout the organization.

In May 2021， at the IPO of Megavii， SSE made the first inquiry about science and technology ethics， requiring Megavii to disclose its organizational structure， core principles， and internal control and implementation for artificial intelligence ethics. Ao Ran suggested that in the future， technology companies should further explore mechanisms， practices and tools to put ethical principles into practice， including conducting business self-examination， carrying out ethics training， developing ethics standards and certification， etc.， and integrating technology ethics into corporate governance and the whole life cycle of product services.

At the salon， Professor Zhu Rui from the Cheung Kong Graduate School of Business proposed that good business practices refer to entrepreneurs exploring the social value in their business activities and seeking a better business value through creating social value by integrating such concepts into corporate strategies， business development， resource allocation and other processes. Taking the game industry as an example， Zhu Rui hopes that the industry will focus on ESG performance for sustainable and healthy development， through youth protection， Internet game literacy cultivation， cross-border promotion of social innovation， civilization inheritance and cultural dissemination， etc.

“By establishing ESG-related departments and issuing ESG reports， an enterprise can make a comprehensive self-examination， not only providing employees， users， the board of directors， investors and regulators with an insight into its business practices， but also enabling itself to understand the external world and move on steadily，” said Xie Fei， President of the Century Huatong Group.

As Xie Fei pointed out， in order to secure a better future， the digital technology industry should promote the advancement of data computing， processing and flow technology， in accordance with national strategies， while creating new value in new application scenarios in integrated innovative ways， by taking into account its own conditions and social needs， and following the major trends of green， low-carbon， and environmentally friendly development.