Employees from a subsidiary of China Shipbuilding Industry Corp install clean-energy equipment in Nantong, Jiangsu province. (Photo: Xinhua)
The introduction of the Company Law in 2006 prompted Chinese companies to pay greater attention to corporate social responsibility, especially when it is related to environmental, social and governance (ESG) issues.
Corporate social responsibility was further strengthened when the Shanghai and Shenzhen stock exchanges issued guidelines for companies to disclose their CSR performance, with large companies such as CNPC, Sinopec and the State Grid publishing their CSR reports. In fact, between 2006 and 2009, Chinese companies issued nearly 1,600 such reports.
Despite that, only a limited number of companies issued CSR reports because it was not mandatory to do so. More important, no penalties were imposed on the companies not issuing such reports. Also, there were wide variations in the quality of the published CSR reports and the frequencies of their publication. In addition, many of the companies targeted by the Shanghai and Shenzhen stock exchanges did not publish such reports, while many not obliged to do so issued them voluntarily.
ESG issues influenced by domestic factors
Both domestic and international factors have influenced companies to prepare their environmental, social and governance reports. Domestically, President Xi Jinping's emphasis on building an ecological civilization with Chinese characteristics was the main factor affecting the publication of such reports. The concept, first articulated in 2012, has received increasing importance over the years. As a result, despite economic growth remaining a national priority, it now has to be achieved without causing social and environmental damage.
But before that, many provincial governments continued to prioritize GDP growth over ESG considerations, which contributed to continued large investments in heavily polluting industries. For many provincial governments, genuine considerations of ESG requirements were an unnecessary distraction which contributed to lowering of their GDP growth rates. It seemed the central government's increasing focus on ESG issues was incompatible with many provincial governments' goal of achieving a high economic growth at any cost.
Local officials protected polluters in the past
Pan Yue, vice-minister of environmental protection from 2008 to 2015, has noted that many provincial governments openly protected their biggest corporate polluters. A retrospective analysis shows those companies whose chief executives were deputies to the National People's Congress or members of the Chinese People's Political Consultative Conference generally published reasonably good CSR reports.
Increasing requirements of China's main trading partners on ESG issues, too, had a profound impact on Chinese businesses. For example, in 2003, the European Union issued two legislative directives that prompted many Chinese companies to improve their ESG performances, especially if they had business dealings with or in EU countries.
The two directives－one on electrical and electronic equipment waste, and the other on reduction of hazardous substances－mandated that any enterprise operating in or exporting products to EU countries must meet the directives' requirements. They also required supply chain activities in China to comply with the requirements. The net result has been that Chinese suppliers are meeting the ESG requirements of the EU, irrespective of whether or not their products are exported to EU countries.
Another impetus to improve ESG practices came from the Hong Kong Special Administrative Region. Those Chinese mainland companies listed on the Honk Kong Stock Exchange were obliged to meet higher levels of ESG disclosures compared with those listed on the Shanghai or Shenzhen stock exchanges. In 2018, the HKSE's guidelines for reporting on ESG issues entered its second phase, making it obligatory for companies to disclose their key ESG performance indicators. As a direct result of the stricter ESG requirements of the HKSE, the reporting of all mainland companies listed on the HKSE have been of a better quality.
Corporate philanthropy after Wenchuan quake
The Wenchuan earthquake in Sichuan province on May 12, 2008, had a profound impact on the CSR landscape. The earthquake－which killed 69,181 people, left 18,498 people missing and 374,171 injured, and destroyed more than 15 million homes, leaving 10 million people homeless－contributed to an outpouring of public appeal for companies to come to the aid of the victims. The result: companies contributed an estimated $1.5 billion for relief and rehabilitation of the quake victims.
The earthquake added philanthropy to CSR in China. Such was the impact of the Wenchuan earthquake that after a less-devastating quake in Sichuan in 2013, multinational companies such as Samsung and Apple contributed 60 million yuan ($8.61 million) and 50 million yuan respectively to the relief fund. Which showed businesses have an important role to play in disaster relief operations.
Another important factor contributing to the strengthening of ESG considerations is China's rapidly growing middle-income group. Members of this group are better educated, and more aware of global norms and developments compared with the earlier generations. They seek a better quality of life, safer products, improved services, and a cleaner and healthier environment. Therefore, they have become vociferous critics of irresponsible companies.
This, too, has compelled companies to improve their ESG practices. Add to that the fact the Chinese government has vowed to severely punish the errant companies by imposing significantly higher fines on them, even jailing their senior officials, and you will realize why Chinese companies have become more ESG-conscious.
Good progress on ESG front
China is a newcomer to CSR reporting compared with many Western countries. The Chinese public, in general, may not be very concerned about the companies' CSR performance. Perhaps that's why many Chinese companies still do not publish CSR reports of reasonably good quality.
A recent study indicates that between Jan 1 and Oct 31, 2018, companies released 1,676 CSR reports, up 8.5 percent year-onyear. However, despite the increase in the number of reports, the percentage of "good-quality" reports has declined.
Another interesting fact is that the listed companies that issue such reports are mostly State-owned. These companies often accord priority to national political issues such as poverty alleviation, pollution control and climate change. For example, in 2004, a major government priority was planting of billions of trees. So, many companies decided to focus on tree planting as part of their CSR practice.
Chinese companies are not forced to follow any political priorities, yet they do it voluntarily. But then the government has been encouraging companies to include social and environmental values in corporate activities in recent years. This is because companies can promote societal development by adopting enlightened policies, making strategic investments and holding regular dialogue with governments and the public, which would allow them to better understand and appreciate the requirements, expectations and aspirations of both the government and the public.
China's understating of companies' ESG requirements has undergone a sea change in the past decade. It is almost as dramatic as China's economic transformation. And the advances Chinese companies have made in ESG practices are likely to be even more dramatic in the next decade.
(Asit K. Biswas is a distinguished visiting professor at the University of Glasgow and chairman of Water Management International Pte Ltd, Singapore. And Cecilia Tortajada is a senior research fellow at Lee Kuan Yew School of Public Policy, National University of Singapore. The views don't necessarily represent those of China Daily.)