How can companies do ESG well in 2023?

What exactly is ESG?

ESG includes environmental, social and corporate governance, and is an important criterion to measure whether a listed company has sufficient social responsibility. The concept of ESG was first proposed by the United Nations Environment Programme in 2004 and has become an important reference for influencing investment decisions in the capital market. As of the end of 2021, there were about 200 "pan-ESG" public funds in China, with a total scale of more than 260 billion yuan, nearly doubling from the end of 2020, and the number of new products was close to the sum of the past five years.

ESG refines various indicator systems on the basis of environmental, social and governance, and is used by companies to regulate and supervise their own behavior, which is a kind of focus on environmental, social and corporate governance performance, and is a new value concept and evaluation tool, which will profoundly affect the direction of the development of the real economy.

ESG focuses on sustainable development, advocating that companies pay more attention to environmental friendliness (E), social responsibility (S) and corporate governance (G) in their operations. ESG investment refers to the integration of ESG concepts into investment practice, on the basis of traditional financial analysis, through the environmental, social, corporate governance three dimensions of the enterprise through the three dimensions of environmental, social and corporate governance to find investment targets that create both economic benefits and social value, with sustainable growth ability. A number of energy-saving and emission reduction indicators, such as carbon emissions, included in environmental indicator E, are important considerations to measure the "carbon neutrality" of enterprises.

China's carbon finance market is still in its infancy, and the internationalization of ESG investment products can provide an effective supplement to the market to achieve the strategic goal of low-carbon development and "carbon neutrality". ESG is an important supporting support for the achievement of the "30·60 goals", and further improving the green financial system will be an important next step for China.

At present, the core concept of ESG is highly consistent with China's "dual carbon" development strategy, and China's ESG development will usher in a new wave in the future.In 2023, what are the key factors of corporate ESG work, is ESG work only related to listed companies, and what pitfalls need to be avoided?

01

ESG information disclosure is not as simple as a paper report

Whether it is ESG investment or practice, it is necessary to refer to the ESG information disclosure of enterprises, which is the "infrastructure" to achieve ESG development. Through the improvement of ESG information disclosure, enterprises have strengthened communication with investors and capital markets.

On December 19, 2022, the China Association of Public Companies released the ESG Development Report of China's Listed Companies (2022). According to the report,The ESG information disclosure rate of A-share listed companies has increased year by year. However, it also pointed out that the standardization and professionalism of ESG-related reports of A-share listed companies are constantly improving, but the quality of ESG-related information needs to be strengthened.

The ESG information disclosure rate of A-share listed companies has increased year by year

Image source: ESG Development Report of China's Listed Companies (2022)

Improving the quality of information disclosure is a more challenging and important thing.

For example, when some companies voluntarily disclose ESG information, they selectively disclose information that is beneficial to the company, resulting in incomplete information disclosure. Different companies in an industry also have uneven quality due to the inconsistency of the caliber and unit of the evaluation index.

On the one hand, some companies lack sufficient quantifiable data, on the one hand, there is a lack of data systems, and the ESG data management capabilities of enterprises need to be strengthened, and on the other hand, it is also related to the imperfection of systems and guidelines. At present, there is no unified ESG rating system and standard in the world, whether it is MSCI, the Standard & Poor's system, or domestic rating agencies, they all have their own scoring and quantitative methodologies.

When disclosing ESG information, companies need to look at who the audience of the report is and whether the audience recognizes it. Different stakeholders have different information to obtain, so there are differences in materiality and materiality in the disclosure standards. Otherwise, it is difficult to make horizontal comparisons in the industry.

The overall quality of ESG information disclosure of Chinese enterprises needs to be improved, but it is not without merit. Many companies have begun to set up ESG committees or leading groups to be responsible for the formulation of ESG policies, information collection, analysis and report disclosure, which is a good direction for strategic decision-making and organizational structure. In the future, this industry still needs more professional talents to join.

02

Carbon reduction, from the enterprise itself to the upstream and downstream of the supply chain

Supply chain management is an important part of enterprise operation and management.

In 2022, the global supply chain will be greatly impacted by geopolitical risks, global inflationary pressures, and extreme weather events, and companies need to pay attention to the importance of supply chain resilience. At present, 80% of the world's trade involves global supply chains, and Chinese companies have benefited a lot from the development of global supply chains, but the new risks under globalization have also made more companies re-examine their supply chain security.

The consideration of the sustainable development of the supply chain has increased significantly, and the impact of environmental pollution, labor health and quality and safety incidents in the supply chain on enterprises has received more and more attention. Taking supply chain carbon emissions as an example, one of the biggest differences between the two sustainability disclosure standards released by the ISSB in March last year and the previous current disclosure standards is that companies are required to disclose data on Scope 3 greenhouse gas emissions. After the release of this draft for comments, the rules have also been continuously adjusted.

As it stands, the ISSB will give a "grace period" of at least one year to companies applying the standard to make disclosures, i.e. at least one year after the final version of the disclosure standard is introduced and takes effect.

However, it is certain that Scope 3 carbon reduction will play an increasingly important role in corporate carbon neutrality commitments. At present, the global supply chain is moving towards the trend of zero-carbon management, and the management objects of corporate carbon reduction are extending from themselves, to some suppliers, and to the entire supply chain.

In the future, especially for export-oriented export enterprises in the international value chain system, the enterprise management strategy of the green supply chain should be adjusted in time, otherwise the living space of enterprises will be squeezed.

Alibaba has put forward a Scope 3+ goal to promote the formation of green products and living ecology on the consumer and supply side

Image source: Alibaba

03

When will the greenwashing stop

At present, the ESG performance of enterprises has become an indispensable consideration in investment. If it is only done to cater to the preferences of the capital market, it is easy to produce short-term behaviors and even the risk of "greenwashing".

"Greenwashing" means that companies selectively or falsely disclose ESG information and exaggerate their own ESG contributions. For example, some companies claim environmental protection concepts and net-zero goals, but there are no actual actions behind them, and even internal personnel do not know what to do, and lack effective concrete practices.

True ESG work is based on a long-term philosophy, not just based on compliance pressure or brand influence, but should be integrated with various stakeholders.

Enterprises should do a good job in ESG work from three aspects: disclosure of ESG information, improvement of ESG management level, and active interaction with the outside world. Among them, doing a good job in information disclosure is the foundation, and doing a good job in management is the core, so that the work results can be better conveyed to external media and rating agencies in an interactive form, and a good interactive relationship can be built.

The D.M.E model guides companies to do a good job in ESG

Image source: Menglang

From the perspective of the needs of the consumer market, consumers are also becoming smarter and more rational, and companies should change their predictions of consumers. In recent years, the rise of the concept of circulation, the popularity of second-hand resale platforms, and the phenomenon of leasing instead of purchasing reflect the changes in consumption concepts.

According to the 2022 China Sustainable Consumption Report released by SynTao, more than half of the respondents believe that companies need to provide clear, reliable and quantitative information on low-carbon products to impress them. In addition, "conveying a simple, high-quality, and healthy lifestyle", "responsible raw materials", "cleaner production", "attaching importance to resource recycling", and "quantifying carbon reduction contributions" still have a significant role in promoting consumers' ultimate low-carbon consumption.

It's not just about telling an ESG story well, it's about data, so what really matters is the company's practice, and the importance and order of this should not be mistaken.

04

Environmental protection is only one aspect, and more can be done at the governance and social levels

Doing a good job in ESG can reshape corporate value. However, there is also a huge complexity behind this.

Whether it is reporting, rating, carbon neutrality, new energy, or social welfare, these are all different aspects of ESG, and no single label can represent the whole picture of ESG, otherwise it will bring bias and misunderstanding.

"Carbon neutrality" has become a hot topic, and with the echo of the mainstream trend in the domestic market, many people will misunderstand ESG as just doing a good job in the practice of "dual carbon". In fact, "carbon neutrality" focuses more on the environmental (E) aspect of the ESG concept, and cannot be completely equated with the entire ESG system.

Is it enough to do a good job of environmental protection? ESG is obviously more than that.

Taking Tesla as an example, the traditional impression is that new energy companies should receive higher ESG ratings because of their more environmentally friendly products. However, Tesla was excluded from the S&P 500 ESG index in May last year.

Tesla's ESG rating was downgraded due to a lack of a low-carbon strategy, product safety risks, and accusations of racial discrimination, which did not meet the inclusion criteria of the S&P 500 ESG Index.

Subsequently, Tesla CEO Elon Musk even bombarded the ESG index as the "devil's incarnation", which is also related to his incomplete understanding of the ESG concept.

With the development of ESG concepts, many factors that were previously not taken seriously or directly linked to financial performance are taken into account. In summary, ESG cannot simply be equal to environmental protection, it is a systematic consideration of the comprehensive performance of an enterprise's environmental, social and corporate governance, which requires the attention of more than one department of the company, but the recognition and implementation of the entire management structure.

05

ESG should be sooner rather than later, turning a cost center into a profit center

In the ESG industry, there has always been a discussion about cost and profit, and some voices in the industry have always associated ESG with "spending money" and "high cost".

In fact, ESG is essentially a more ethical way to make money.

Regardless of whether it is a listed company or an unlisted company, the goal of the enterprise is to make a profit, but the listed company is subject to more supervision than the non-listed company. However, the fact that the number of unlisted companies is much higher than that of listed companies does not mean that they do not need to carry out ESG work.

Companies should start by changing their mindset to identify opportunities to make profits and reduce costs, which is to leverage market-driven forces to drive ESG efforts. For example, when a company is engaged in carbon transition, after figuring out its own "carbon background", it also needs to use quantitative methods to estimate the cost of the transition, as well as the return on investment of green production capacity, and refer to the situation of competitors. When it comes to the actual revenue and costs of the company, the company can truly realize the importance of ESG work.

Therefore, it is not only about pure regulatory requirements, but also about the importance of ESG work and finance, and take the initiative to do it in order to do it well.

Companies should strive to shift their ESG efforts from a cost center to a profit center. Enterprises should do a good job in ESG work, do a good job in information disclosure is the foundation, pay attention to rating improvement, and combine ESG concepts with daily operation and management, avoid risks in advance, reduce unnecessary losses, and at the same time is expected to improve profit margins.

Of course, since ESG involves issues at all levels, enterprises should give priority to issues closely related to their own business activities and development strategies, and gradually carry out them in terms of priorities, which is also conducive to enhancing their own enthusiasm and practicality.

For example, at the environmental level, energy companies can start by improving the energy efficiency of internal operations, focusing on energy and water conservation, so as to reduce resource waste, and e-commerce logistics companies can start with the green transformation of packaging materials and adopt more environmentally friendly recycling packaging materials. At the social level, catering and e-commerce enterprises can purchase unsalable agricultural products to increase farmers' income.

Nowadays, the importance of ESG performance is also becoming stronger in peer competition, which is often referred to as peer pressure. For example, the improvement of a company's CDP carbon disclosure rating is undoubtedly a competitive advantage among peers, and it is easier to gain recognition from investors, customers and consumers. For those competitors whose ESG work results are relatively slow, this has become a major new advantage and innovation.

In summary, whether ESG work is carried out or not has little to do with whether the company is listed or not, and if it is not compliant in the areas of ESG concern, the company will still have legal risks. It can also be understood that some companies do not require ESG reports to be published, but any company can carry out ESG measures at any time, sooner rather than later, which is necessary for the long-term development of the company.

China's ESG development is still in its early stages, and building a healthy and complete ESG ecosystem requires the joint efforts of different stakeholders.

ESG evaluation system and guidelines

At present, the international ESG concept and evaluation system mainly includes three aspects: the regulations of various international organizations and exchanges on ESG disclosure and reporting, the ESG rating of enterprises by rating agencies, and the ESG investment guidelines issued by investment institutions. In the corporate ESG rating system, different rating agencies focus on different indicators, and some common ESG indicators are shown in the table below.

The group standard "Guidelines for the Preparation of Corporate ESG Reports" (co-edited by Saifit Group) and the "Guidelines for Corporate ESG Disclosure" have been issued and implemented. 

Various community organizations and local governments have launched guidelines for ESG information disclosure rules with Chinese characteristics, which provides a reference for the preparation of corporate ESG reports!