Adam Lane, Manager, Advisory Services, BSR

At BSR's recent forum in Beijing—cohosted by the UN-backed Principles for Responsible Investment (PRI), Beijing Private Equity Association, and Magic Stone Investment, and attended by 60 investment professionals—the focus was on the overall context in China for responsible investment and how private equity in China is investing responsibly. This is the first blog in a two-part series.

Awareness of responsible investment in China is still low, making the need for a clear business case especially important. Apart from the social and environmental good that responsible investment provides, it also mitigates economic losses due to legal violations, poor perception by the public, and labor unrest.

The social impacts of environmental problems caused by industry are a major concern for China’s stability and development, as the government acknowledges, according to Bie Tao, the policies and regulations department head within China’s Ministry of Environmental Protections (MEP). The government has more than 230 policies and multiple initiatives underway to protect the environment. Bie discussed the clear risks to business and investors when companies do not act responsibly, citing several examples of the adverse social and economic impacts of projects that are stalled or dragged into the limelight by protests related to environmental concerns.

The government also understands the economic opportunities for the country to direct capital toward projects that produce environmental benefits and away from those that negatively impact the environment, which Wang Qingrong, China Banking Regulatory Commission’s department division chief, explained in his address. The Shanghai Stock Exchange’s Yang Xu, from the Capital Markets Institute, elaborated on this, explaining that the exchange plays a role in improving corporate disclosure of environmental, social, and governance (ESG) issues and that it plans to expand mandatory disclosures, particularly for industries with large environmental and social footprints. The stock exchange also plans to provide detailed guidelines to address the poor quality of current disclosures—for example, only 22 of the 351 CSR reports released in 2011 by Shanghai Stock Exchange-listed companies were independently assured.

China’s regulators have made efforts to identify and support responsible investment, for which the International Finance Corporation’s (IFC) Rong Zhang commended them. These efforts include the recently revised Green Credit Guidelines, which Rong said were some of the most progressive worldwide, making China a leader in Asia. Rong also cited the IFC’s development of performance standards, detailed sector-specific guidelines, the Equator Principles, and tools and resources specifically for private equity firms. The resources are publicly available and can aid banks and investors integrate responsible investment into their investment processes.

BSR explored the implications of sustainability challenges for businesses in China and explored whether companies should regard increased transparency as an opportunity rather than a risk, in light of the MEP’s point that many protests and public criticism occur due to a lack of trust in companies’ communications about their performance—rather than companies’ actual poor performance. Furthermore, as BSR highlighted, there is a clear link between responsible, sustainable business and traditional economic success: When companies mitigate the risks related to fines for breach of environmental regulations or stopped work due to labor strikes, they avoid significant economic losses.

In the next blog, we will explore how private equity is approaching responsible investment.