ESG Driving Change in China

The environmental, social, and governance (ESG) landscape in China is ripe with opportunity and rapidly improving, especially after China announced its target to achieve net zero carbon emissions by 2060.  The potential for ESG performance growth emerges as China is taking the lead in clean technology and, according to a September 2021 report by PricewaterhouseCoopers (PwC), “the conditions are right for a leapfrog moment for ESG reporting in China.”¹

Despite some unfavorable ESG ratings, such as low ratings from MSCI and Cambridge Associates, the outlook for ESG in China is promising.² For instance, according to global investment firm Franklin Templeton, “capital flows into ESG-themed exchange-traded funds (ETFs) in China increased 464% between 2018 and 2019.”³ A December 2021 UBS study noted, “Chinese companies are sometimes considered laggards in sustainability, but…these lower scores are often less due to actual performance differences and more a reflection of lower levels of disclosure of traditional sustainability metrics.”⁴ This is promising because amplifying disclosure efforts is arguably more feasible than fundamentally changing actual business practices.

Additionally, the opening of China’s markets helped Chinese companies recognize the benefits of information disclosure as a means to attract foreign capital. From 2009 to 2018, the percentage of Chinese companies in the Shanghai-Shenzhen CSI 300 Index that voluntarily disclosed ESG data rose from 43 percent to 82 percent.³

Corporate ESG reporting in China is at an inflection point, with a recent surge of activities from regulators, exchanges, investors and corporate leaders.¹

In June 2021, the China Securities Regulatory Commission (CSRC) issued a set of risk disclosure rules requiring companies to disclose procedures for preventing pollution, managing waste and reporting on environmental incidents.⁵ One year later, the China Banking and Insurance Regulatory Commission (CBIRC) issued further guidelines that take a holistic, top-down approach to comprehensively drive new development and promote green finance for the strategic long term.⁶ The guidelines require both prevention of further environmental damage as well as innovation of new products in support of the low-carbon and circular economy. Regarding organization and management, the guidelines state the need to incorporate ESG requirements into risk management, credit granting and investment approval processes.⁷ Therefore, a purely ratings-based approach may not capture a complete picture when it comes to ESG evaluation. 

Moreover, the trajectory of clean technology is already changing. According to PricewaterhouseCoopers, China leads the world in developing clean technology through electric vehicles, batteries, solar panels and wind turbines. China had a fifth as many electric vehicles on the road as the U.S. in 2013, but by 2021, China had twice as many as the U.S.¹ China has also recently surpassed other economies in the implementation of wind and solar energy, and in 2019, China took the lead globally.² Such progress demonstrates that China is on track to offset its carbon emissions through technologies that absorb more carbon from the atmosphere than they emit. 

While China is the world’s second-largest economy and a dominant player in the global clean technology market, it is still a developing country. Nevertheless, as regulation and globalization evolve, many Chinese companies will likely progress in becoming more accountable for the wider stakeholder.² With raised awareness and keen interest in ESG implementation principles, Chinese companies like BOC remain proactive in ESG measures, setting out agendas that disclose how sustainability is featured in long-term strategy. Additionally, the bank issues its own annual ESG Corporate Social Responsibility report. Consequently, the auspicious opportunities and ambitious efforts to meet carbon neutrality are paving the way for BOC and other Chinese companies to truly be in line with, and even surpass, their Western counterparts.