Over the past decade, Chinese businesses have made significant strides in incorporating environmental, social and governance (ESG) issues into their decisionmaking.
However, they still have a long way to go and they will not get there on their own.
The idea of corporate social responsibility is relatively new in China. Among the Chinese public, it began to gain traction in 2008, after a magnitude 8 earthquake struck Sichuan Province, killing 69,181 people, injuring 374,171 more, and leaving 18,498 unaccounted for.
More than 15 million homes were destroyed, leaving 10 million people homeless. The total damage was estimated at US$150 billion.
After the so-called Great Sichuan Earthquake, the Chinese public demanded that business contribute to the recovery. Companies responded, offering US$1.5 billion in support — and setting a new precedent for philanthropic corporate social responsibility in China.
When Sichuan suffered another serious, though less devastating, earthquake in 2013, major multinationals were quick to offer support. Samsung’s 60 million yuan (US$8.6 million at the current exchange rate) contribution, and Apple’s 50 million yuan, confirmed that social responsibility had become an integral part of doing business.
As China’s new middle class flourishes, demands for corporate social responsibility will only grow. Well aware of global norms and developments, middle-class Chinese expect safer products, better services, and a healthier environment. They are no longer willing to tolerate companies that prioritize profits over human and environmental welfare.
However, as powerful as public pressure is, it is no substitute for regulations. In 2006, Chinese corporate law was revised to include the concept of corporate social responsibility, and the Shanghai and Shenzhen stock exchanges issued guidelines for disclosing corporate social responsibility performance.
More recently, the Chinese government introduced harsher punishments for companies that fail to meet ESG standards, including significantly higher fines and jail sentences for senior officials.
External rules have also helped. For example, in 2003, the EU adopted new regulatory requirements on waste electric and electronic equipment, and reduction of hazardous substances, which apply to the entire supply chain of any company operating in, or exporting to, EU countries.
Moreover, in 2016, the Hong Kong Stock Exchange (HKSE) made ESG reporting compulsory for listed companies. It followed up last year, when it introduced more stringent disclosure requirements.
These measures have had a powerful effect. From 1991 to 2005, Chinese companies issued just 22 corporate social responsibility reports. From 2006 to 2009, the total rose to nearly 1,600. Last year, that number was matched in just 10 months: From January to October, companies issued 1,676 reports — an 8.5 percent year-on-year increase.
Listed state-owned or state-controlled companies — which are more likely to incorporate the government’s priorities, from poverty alleviation to pollution control, into their business models — issue the most reports.
Government priorities are also reflected in the ways companies implement corporate social responsibility: For example, in 2004, when China’s state forestry administration launched its “National Forest City” program, many companies focused their corporate social responsibility efforts on tree-planting.
However, the ESG record of Chinese business remains mixed, at best. For example, the quality of corporate social responsibility reports varies widely, as do their rates of publication. And as the number of reports has risen, the share that can be considered good has declined.
This should not be surprising, as reporting is still not mandatory and there are no penalties for failing to disclose ESG information, let alone for issuing poor-quality reports.
Companies listed on the HKSE generally offer much higher-quality sustainability reporting than their counterparts listed in Shanghai and Shenzhen.
Local governments further undermine China’s ESG record. Despite Chinese President Xi Jinping’s (習近平) 2012 declaration that economic growth should no longer be pursued without regard for its social and environmental consequences, local governments have remained focused on GDP. A strong growth record can, after all, lead to promotions for Chinese Communist Party officials.
According to former Chinese deputy minister of the environment Pan Yue (潘岳), many provincial governments have openly protected, and even actively supported, their biggest corporate polluters.
The good news is that this seems to be shifting, as the central government sustains — and, indeed, deepens — its commitment to ensuring that companies embed ESG objectives in their operations.
Next year, new regulations are to make ESG disclosure mandatory for 3,000 of China’s listed companies and bond issuers.
China’s corporate social responsibility landscape has changed almost as much as its urban skylines over the past decade. However, the next 10 years should bring even faster progress. China’s people and its leaders are no longer willing to allow companies to shirk their social and environmental responsibilities.
Asit K. Biswas is distinguished visiting professor at the University of Glasgow and chairman of Water Management International, Singapore. Cecilia Tortajada is a senior research fellow at the Lee Kuan Yew School of Public Policy’s Institute of Water Policy, National University of Singapore.
Copyright: Project Syndicate
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