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The importance of aligned ESG reporting standards

Earlier this week I met with the China country manager of a European manufacturer with significant operations in China. They produce both for European and Chinese customers. We were discussing ESG related issues when he told me something very interesting: The company was for sure working on ESG reporting, particularly carbon emission management and reporting. Both the headquarter in Europe and the European customers had started requesting detailed information both about the baseline and for plans on how to reduce emissions going forward. What was interesting was that a major Chinese customer had also requested carbon emission calculations, but based on a totally different framework than that used by the international stakeholders (that is Scope 1, 2 and 3 emissions, and how to relate to these).

The first observation is of course that the new European regulations for listed companies and financial institutions on carbon emission reporting is already becoming visible in China through the supply chain demands. The second observation is that Chinese companies are following this trend, but that alignment is needed.

The proposed new guidelines for ESG reporting by Chinese companies is indeed very much aligned with international standards, using the scope 1,2,3 framework etc, but what knowledge about this is likely still limited in China.

If reporting standards are not aligned, it will require a lot of extra and unnecessary work for the companies required to report. Not only is this a waste of time, it is also likely to reduce the resources available for the most important task, namely finding and implementing ways to reduce emissions.

I know the challenges of different reporting standards very well from when I worked with the Norwegian Development Finance Institution (DFI) Norfund. We were active equity investors in highly demanding projects in some of the poorest countries in the world. Our co-investors where other similar funds, but with different (politically defined) priorities and hence reporting requirements for impact measure ("impact" roughly = ESG). It would be impossible for many of the projects to report according to many different standard, and the European DFIs set up a harmonisation project to ensure a more efficient and aligned approach.

The current situation in China seems to be that the importance of harmonisation is understood at the top level, by the regulators and others working on defining national standards, but that some market players are not aware and driven by a wish to be proactive, they develop their own approaches.

Hopefully, with increased education about the topic and knowledge about the existing standards, we will see increased alignment on reporting standards also in China, so that everyone in the value chain can focus on what really matters: Implementing change for reduced emissions.

Painting by Han Bo, Round is not Round

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