Over the last decade, Chinese businesses have made significant strides in incorporating environmental, social and governance (ESG) issues into their decision-making. But they still have a long way to go, and they will not get there on their own.
The idea of corporate social responsibility (CSR) is relatively new in China. Among the Chinese public, CSR began to gain traction in 2008, after a magnitude 8.0 earthquake struck Sichuan province, killing 69,181 people, injuring 374,171 more and leaving 18,498 unaccounted for. More than 15 million homes were destroyed, leaving 10 million people homeless. Total damage was estimated at US$150 billion.
After the Great Sichuan Earthquake, the Chinese public demanded that business contribute to the recovery. Companies responded, offering $1.5 billion in support -- and setting a new precedent for philanthropic CSR in China.
When Sichuan suffered another serious, though less devastating, earthquake in 2013, major multinationals were quick to offer support. Among them, Samsung committed 60 million yuan ($8.5 million) and Apple 50 million yuan, confirming that social responsibility had become an integral part of doing business.
As China's new middle class flourishes, demand for CSR will only grow. Well aware of global norms, middle-class Chinese expect safer products, better services and a healthier environment. They are no longer willing to tolerate companies that prioritise profits over human and environmental welfare.
But, as powerful as public pressure is, it is no substitute for regulations. In 2006, Chinese corporate law was revised to include the concept of CSR, and the Shanghai and Shenzhen stock exchanges issued guidelines for disclosing CSR performance. More recently, the government introduced harsher punishments for companies that fail to meet ESG standards, including significantly higher fines and jail sentences for senior officials.
External rules have also helped. The European Union requirements on electrical and electronic waste and reduction of hazardous substances are a good example. Adopted in 2003, they apply to the entire supply chain of any company operating in, or exporting to, EU countries.
Moreover, in 2016, the Hong Kong Stock Exchange made ESG reporting compulsory for listed companies. It followed up in 2018 with even more stringent disclosure requirements.
These measures have had a powerful effect. From 1991 to 2005, Chinese companies issued just 22 CSR reports. From 2006-09, the total rose to nearly 1,600. In 2018, that number was matched in just 10 months: from January to October, companies issued 1,676 CSR reports.
Listed state-owned or state-controlled companies -- which are more likely to incorporate state priorities, from poverty alleviation to pollution control, into their business models -- issue the most CSR reports. Government priorities are also reflected in the ways companies carry out CSR: for example, in 2004, when the state forestry administration launched its "National Forest City" programme, many companies focused their CSR efforts on tree-planting.
But the ESG record of Chinese business remains mixed, at best. For example, the quality of CSR reports varies widely. In fact, as the number of CSR reports has risen, the share that can be considered good has declined.
This should not be surprising, since CSR reporting is still not mandatory, and there no penalties for failing to disclose ESG information, let alone for issuing poor-quality reports. Companies listed on the HKSE generally offer much higher-quality sustainability reporting than their counterparts listed in Shanghai and Shenzhen.
Local governments further undermine China's ESG record. Despite President Xi Jinping's 2012 declaration that economic growth should no longer be pursued without regard for its social and environmental consequences, local governments remain focused on GDP. A strong growth record can, after all, lead to promotions for Communist Party officials.
According to Pan Yue, a former deputy minister of the environment, many provincial governments have openly protected, and even actively supported, their biggest corporate polluters.
The good news is that this seems to be shifting, as the central government sustains -- and deepens -- its commitment to ensuring that companies embed ESG objectives in their operations. Next year, new regulations will make ESG disclosure mandatory for 3,000 of China's listed companies and bond issuers.
China's CSR landscape has changed almost as much as its urban skylines over the last decade. But the next 10 years should bring even faster progress. China's people and their leaders are no longer willing to allow companies to shirk their social and environmental responsibilities.
Asit K Biswas is the chairman of Water Management International Pte Ltd in Singapore. Cecilia Tortajada is a senior research fellow at the Institute of Water Policy, Lee Kuan Yew School of Public Policy. ©Project Syndicate, 2019. www.project-syndicate.org