Seizing the ESG opportunity in China

China’s green transition creates unprecedented opportunities for companies with effective environmental, social and governance strategies and communications. The right messages and engagement strategies can help businesses build stronger relationships with their investors, Chinese consumers and policy makers – supporting both their valuation and growth.

This was the unanimous conclusion from Finsbury Asia’s latest webinar “Pulse: Getting to the Heart of ESG; ESG Communications in Greater China” which was hosted in partnership with Syntao, China’s leading CSR consultancy. The webinar’s panel of experts featured representatives from the Hong Kong Exchanges and Clearing Limited (HKEX) and CDP (formerly the Carbon Disclosure Project, a leading international non-profit) and was attended by more than 100 senior managers from multinational and Chinese companies in the automotive, e-commerce, fashion, finance, food and hospitality industries.

The panel emphasised that ESG done well creates value for companies by lowering costs, mitigating risks and enhancing brand value. As consumers give greater weight to corporate behavior in purchasing decisions and government prioritizes green development and digital transformation, companies with strong reputations and ESG strategies will benefit from new growth opportunities.  And the new ESG disclosure regulations introduced by domestic stock exchanges will help investors back the best performers. 

The panel also noted companies face considerable challenges around ESG in China – knowledge around disclosure requirements, as well as involvement from leadership, remains low, while risks around supply chain management are growing daily.

five takeaways

1. Set ESG priorities that are specific to the firm and local operations 

Finsbury’s global head of ESG, Ruban Yogarajah, explained that when sitting down with a client to develop an ESG strategy, the conversation begins by identifying what topics are most important to their stakeholders and the financial performance of the business. With these priorities clearly outlined, it is possible to develop an effective ESG strategy and turn it into a narrative that can seamlessly connect to the corporate story. Dr. Peiyuan Guo, co-founder of SynTao, agreed and added that, for China, the national agenda must be taken into account given that China’s upcoming 14th Five-Year Plan will focus on sustainability, the economic transition and high-quality growth.

2. Involve the board of directors in forming the company’s purpose

Kelly Lee, Vice President of Policy and Secretariat Services Unit of HKEX’s Listing Division, explained that the lack of involvement in ESG governance by the board of directors was one of the key areas HKEX aimed to address with its new ESG rules. The new rules, effective from July 2020, emphasise the board’s leadership role and accountability in ESG and the governance structure for ESG matters by requiring an explicit statement from the board outlining its consideration of ESG issues. This principle applies to other aspects of corporate communications: Finsbury’s Yogarajah explained that a strong statement of purpose from the board of directors will also facilitate cross-operational communication within the company and ensure alignment.

3. Develop a technical understanding and knowledge around ESG issues

Syntao’s Dr. Guo encouraged Chinese companies who are just beginning their ESG journey to better understand pivotal ESG topics such as carbon emissions. This will help them better communicate with international firms and investors. Similarly, the changes to ESG reporting requirements for Hong Kong-listed companies reflect HKEX’s commitment to enhance Hong Kong’s regulatory framework and meet investor and stakeholder expectations for international best practices. The new ESG rules include disclosures on climate related issues, targets for certain environmental KPIs, materiality assessments and upgraded social KPIs. Fiona Lang, partner at SynTao, also stressed the importance of optimizing ESG performance for ESG Ratings, which will set the company apart in the eyes of investors. Fiona shared that many Chinese companies fall short because their ESG report is prepared only in Chinese and not accessible on English platforms – this lack of accessibility and poor communication will reduce their ratings score. On-going communication on ESG and proactive response to a reputation crisis will also help a rating organization effectively assess the company and potentially increase the rating score.

4. Use ESG as a point of leverage for supply chains and procurement to drive down risk

Syntao’s Dr. Guo highlighted that, for China, labour issues along supply chain and community issues are the key ‘social’ issues of ESG in the short-to-medium term. Sabrina Zhang, China Country Director at CDP, explained that investors are very focused on de-carbonisation. As a result, more MNCs are integrating ESG requirements into procurement KPIs. By clearly communicating ESG priorities and rationale to suppliers, a firm can choose a supplier that aligns with its values, thereby reducing downstream risks. 

5. Go beyond disclosure to build confidence and
unlock value

Ruban Yogarajah explained that reporting ESG data is an essential step to building confidence but it’s not enough. To build support, companies need to proactively take their messages to their stakeholders in a way that conveys the character of the organization as well as its performance. Businesses that do this best link a clearly defined purpose with their strategy, values and KPIs. Bringing ESG commitments with stories on product, public policy priorities and broader ESG programs can help gather support from officials, regulators, investors, customers and employees.

To learn more about Finsbury’s ESG Communications offer and how we can work with you, please contact Kendall Bitonte, Finsbury Asia ESG Lead: kendall.bitonte@finsbury.com or Ruban Yogarajah, Finsbury London ESG Lead: Ruban.Yogarajah@Finsbury.com