In financial services, many firms are focused on providing bottom-line value to their clients. What most of them forget is how to properly communicate that value.
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MEDIA RELEASE: ESG increasingly embraced by Chinese corporates
Customer and investor expectations are the main drivers of change
ESG reporting to become the norm, with 64 per cent of companies currently reporting and 93 per cent planning to report within three years
Climate change and gender diversity feature highly on the list of Chinese companies’ future ESG goals
Environmental, Social and Governance (ESG) concerns are increasingly gaining traction among Chinese investors, corporates and policy makers, as China shifts towards an economic development model that focuses more on quality and sustainability.
According to Fidelity International’s ESG priorities in China: How companies in China are approaching ESG report, levels of ESG adoption and awareness are robust and maturing among listed companies in China, putting the market on the right track to continuing ESG advancement.
The report studies the views of 262 C-suite and director-level corporate executives based in China who work at listed organisations and aims to shed light on the current and future planned areas of ESG-related activity of Chinese companies as they rapidly evolve their ESG strategies.
According to the survey, Chinese companies are growing their ESG capabilities and developing the frameworks they need to incorporate ESG into their organisations. As domestic momentum for ESG management and integration gathers pace, and the scrutiny on ESG performance from foreign investment and export markets from increasingly stringent global regulation grows, levels of ESG engagement in Chinese companies are becoming more robust.
ESG reporting to become the norm More than half (53 per cent) of the companies surveyed have publicly announced an ESG, CSR or sustainability strategy either in a report or on their website and those that have not yet made a public announcement are working hard to address this. 18 per cent of organisations have plans to publicly announce their ESG strategy in the future while the remaining 29 per cent are addressing ESG as an internal strategic focus. Almost two thirds (64 per cent) also publish annual ESG reports, while a further 29 per cent have plans to do so within the next three years - meaning that by 2026, 93 per cent expect to have published an annual ESG report.
Chart 1: ESG is increasingly becoming a strategic priority among Chinese listed companies
Corporate ESG motivations in China are also seeing a shift, and ESG adoption is increasingly driven by multiple stakeholders.
While the development of ESG strategy in Chinese listed companies might still have further to go to reach global standards, Chinese customers and shareholders are increasingly prompting change, and this pressure is likely to continue to have a direct impact on progress.
Almost half of companies surveyed (47 per cent) said they developed an ESG strategy to meet customer expectations while 44 per cent aim to meet investor expectations. This signals that market concerns are increasingly taking a front seat in shaping corporate behaviour. The third most-cited factor was government initiatives, with 37 per cent of firms naming these as a key driver.
Tina Chang, Associate Director, Sustainable Investing at Fidelity International commented: “Amongst the surveyed companies that have yet to publish ESG reports, the second most cited reason is lack of interest from investors. Interestingly, among those already publishing ESG reports, 43 per cent also cited investor expectations as an important driver of ESG strategy, shedding light on the role investors play in promoting progress.
“This coincides with our observation that as the nation’s capital market matures, an increasing number of investors have started to take an active stewardship approach to clearly communicate expectations with investee companies, putting the market on the right track to continuing ESG advancement.”
Aligning ESG strategy to business strategy From reporting and hiring, to strategy development and implementation, firms are rapidly evolving their ESG strategies and they are increasing in sophistication. Almost two thirds (66 per cent) of companies consulted key stakeholders to align their ESG plans with their own objectives, another two thirds conducted materiality assessments, and over half (56 per cent) of companies utilised consulting or advisory services. On the other hand, international guidelines such as GRI and ISSB are to date lessor utilised, which would decrease comparability with global counterparts
Chart 2: Chinese listed companies are using more sophisticated tools to develop ESG plans
Sustained change for Chinese corporates The survey highlights that China’s appetite to bring ESG into the corporate agenda is on the rise and is here to stay.
Two thirds of companies surveyed plan to review focal areas for ESG in the coming 12 months, while over half of companies plan further investment in building tech and data capabilities to improve efficiency in ESG data collection. This will be crucial in enhancing transparency as data collection remains the key obstacle to progress on ESG disclosure, cited by 52 per cent of companies. Apart from ESG strategy review and data collection enhancement, 47 per cent plan to review their ESG quantitative targets, which is a strong signal to internal and external stakeholders on the commitment to stated goals.
When asked about the strategic ESG areas that organisations have set tangible goals to be met in the future that exceed regulatory requirements, climate change, for example, was the focal area that received the most responses for future ESG goals. Gender diversity on boards is another such area.
Chart 3: Companies are prioritising climate change and board diversity and independence when setting ESG goals for the future
The survey also found that significant progress has been made on establishing special board functions, with nearly all firms having established remuneration and nomination committees despite it not being mandatory. When it comes to outperforming current legislation, larger firms take the lead on audit, remuneration and nomination committee independence, but fall back to the average when it comes to overall board independence.
Flora Wang, Head of Stewardship, Asia, commented: “As a long-term investor in China and a firm advocate for sustainable investing, we are delighted to see ESG being embraced by more and more Chinese companies. One of the most important tools that investors can deploy to help corporates sustain momentum and achieve ESG goals is effective engagement. Compared with exclusion, engagement allows us to deliver meaningful changes for companies, track their progress and ultimately, create value for clients.
“As Chinese companies step up efforts to align with global peers, investors can inform companies on industry best practices to accelerate this process; in return, we can gain more insight into companies’ plans and actions. Effective engagement is an ongoing process where case by case analysis on the companies within the local context is crucial for deriving the relevant conclusions and feedback.
“We remain committed to sustainable investing through ESG integration and investment stewardship. Looking ahead, we will draw on our global experience and continue to work with companies, industry partners and regulators in China to contribute our part in the long-term sustainable development of the Chinese economy.”
