Why ESG is relevant also for non-listed companies in China
This week someone asked me why ESG is becoming such a hot topic in China - “Isn’t the reporting regulations only relevant for listed companies?” she added. She is of course correct: The mandatory requirements for reporting on Environmental, Social and Governance issues will only directly impact the companies listed in Shenzhen and Shanghai (Hong Kong stock exchange has already implemented such reporting requirement). But the importance of managing ESG will trickle down on many more companies in China, mainly in the following ways:
Regulations for large companies in the EU require ESG reporting which also cover relevant supply chain issues. This means that Chinese companies selling to large companies in the EU will soon be asked to supply more ESG information, particularly on carbon emissions. Since regulations in Europe also cover financial institutions, and banks have to understand their customers ESG positions, also smaller companies in Europe will be met with increasing information demands. Not from the stock exchange or regulators, but from their banks and insurance companies etc. So smaller European customers might also ask for more documentation of how ESG is handled by partners in China.
It is a clear that the Chinese Government see green finance as a key to reaching the carbon emission targets for 2030 and 2060. It was the publicly stated main priority for the Central Bank in 2021: To develop green financing mechanisms. Increasingly, Chinese banks and investors will ask clients and investment targets for ESG information, particularly related to the E and carbon emissions.
Across different surveys, the Chinese consumer is far behind the European when it comes to preference for sustainable products. But as with most consumer trends in China, change happens fast. When it comes to sustainability there are also strong government incentives to change people’s behaviour - and fight greenwashing. So for companies that wish to take part in the rising trend of the sustainable consumer in China, and not risk being caught for greenwashing - proper ESG management and reporting should definitively be a priority.
And of course, like with anything else which becomes hot in China there will be a lot of bogus… So to be able to understand what ESG ratings are actually telling you, which ESG areas are really relevant for you and which ESG consultants you should engage, you should get some basic understanding. Even if it is just so you can confidently say: ESG is not relevant for my company.
Illustrated by a photo from a wall at the Beijing based artist Lu Yi exhibition in 2021. Clearly, if your company experiences flying whales or drowning people, you do have some ESG issues!