China embraces ESG leapfrog moment

The World Economic Forum (WEF) in collaboration with PwC China has just released, A Leapfrog Moment for China in ESG Reporting. According to the white paper, corporate environmental, social and governance (ESG) reporting in China is at an inflection point, with a surge of activities from regulators, exchanges, investors and corporate leaders. Having experienced increasing demands for ESG reporting from investors, as well as several years of ESG reporting requirements from the Hong Kong Stock Exchange (HKEX), China’s listed companies are increasingly familiar with both the challenges and benefits of ESG reporting. The conditions are right for a leapfrog moment for ESG reporting in China.

Driving one of the world’s largest and most dynamic economies, China’s companies have a leading role to play in delivering environmentally friendly and socially responsible prosperity, both domestically and around the world. ESG metrics can guide capital flows, help regulators make timely policy decisions and enable customers to make informed supply-chain management decisions that foster sustainable growth.

Raymund Chao, PwC Asia Pacific and China Chairman said, “China’s ambition to reach peak carbon emissions before 2030 and achieve carbon neutrality by 2060 will require companies to transform to a lower-carbon business model. Quality ESG reporting that makes emissions data visible, comparable and accountable, is a key ingredient for this transition. In the search for new solutions to climate change and other environmental challenges, ESG measurement and reporting will help harness the power of innovation, entrepreneurship and the capital markets,”

Drawing on WEF-convened workshops and interviews with ESG practitioners and other leaders from China’s business community, the white paper reveals six key insights from China’s ESG journey and identifies the main drivers behind the ongoing improvement in both the quality and quantity of corporate ESG reporting in China, i.e. regulators, investors and policymakers. These six key insights include:

1. Board-level commitment is a primary and indispensable key to a company’s effective reporting and management of ESG issues.
2. High-growth companies must graduate from a focus on near-term revenue to a purpose-driven strategy that considers a wide range of stakeholders and their interests. Investors are increasingly a driver of this progression.
3. The integration of ESG factors into business strategy formulation fosters better management of ESG-related risks and opportunities and provides more meaningful information for investors than the traditional corporate social responsibility (CSR) approach.
4. Successful companies focus their ESG efforts on the issues that are most relevant to their business, as identified in their materiality assessment.
5. As Chinese companies ramp up their ESG reporting, they often find a shortage of ESG professionals and a lack of ESG knowledge across their business units and supply chains.
6. There are increased demands for supply-chain sustainability practices and disclosure, particularly from global brands.

Thomas Leung, Markets Leader, PwC China noted, “Investors know that companies who integrate ESG factors into their strategy and operations are better equipped to identify risks and capture opportunities, improving their prospects for long term profitability and value creation.”

China’s environmental, social and governance (ESG) ecosystem is maturing rapidly, requiring local and global stakeholders to recognise some important nuances. While regulators, investors and policymakers are actively raising the bar for sustainable corporate performance, Chinese business leaders are increasingly aware of the importance and benefits of measuring performance not only through financial indicators but also with ESG metrics. Some businesses are already seizing the commercial and strategic opportunities to become leaders and early movers in ESG measurement and disclosure; this is not only in response to pressure from investors and capital providers to communicate and report on their ESG approach but also because strong ESG practices pave the way for more resilient businesses and can even open up new markets for sustainable products and services.

The ever-growing focus on ESG performance and reporting presents enormous opportunities for Chinese businesses. The world is eager to hear from leaders about how they will shape China’s growing global footprint and how they contribute to the communities in which they operate. It is now incumbent on all stakeholders to embrace these opportunities and become champions for ESG in China.