Sustainable Investment in China | Decoding Chinese CSR Reports

For investors interested in the ESG performance of Chinese businesses, a CSR report is generally a good first stop for gathering information. China has experienced a huge spike in CSR reporting in recent years: Guidelines issued by the State-owned Assets Supervision and Administration Commission of the State Council (SASAC), the Shanghai Stock Exchange, business associations, and even local government agencies such as the Shanghai Pudong government have all advocated for improved CSR reporting as an important mechanism for companies to disclose their ESG information. According to statistics from the China Sustainability Reporting Resource Center, 446 sustainability reports were released from January to October 2009. However, the quality of these reports varies, and the increase in quantity has not always been matched by an improvement in quality.

Given this trend, how can investors read between the lines to determine the quality and credibility of CSR reports? Having written several of these reports with companies in China, here are a few key elements to look for:

• Disclosure of challenges: Any company willing to produce a CSR report that is more than a public relations piece—one that is actually a management tool used to disclose key challenges and the steps taken to fix them—should receive gold stars. Disclosure of even a few concrete challenges (and corresponding solutions) is a clear indicator that the management culture and the levels of openness and sophistication needed to manage ESG issues exist at a company. If you don’t know the company well, run a quick media scan. Both Chinese and international press are becoming more adept watchdogs for corporate irresponsibility. Challenges that are significant enough to have appeared in the news should be addressed in the pages of a CSR report.
• Connection to profit: Effective ESG management isn’t just about avoiding risk. It is also about doing what business does best: create profit. A great CSR report will tell a compelling story that shows how good ESG management strategically contributes to cost-savings—or even better, revenue generation. Without this connection, ESG management might just sit in a separate silo of a company with minimal impact on how the business is run overall.
• Room for stakeholders: With an increasingly complex and interconnected set of external factors impacting business performance, it’s critical for companies to have good “feelers" to help them understand, forecast, and respond to increasingly complex operating environments. For CSR, this means that companies need to have established systems for regular engagement with key stakeholders. In CSR reports, these systems are best demonstrated through the inclusion of stakeholders' views throughout the report and not just in a commentary note stuck at the back.
• Data integrity: Reading through a report’s assurance process does not mean that the disclosed ESG data is perfect, nor does it mean that un-assured data is unreliable. Assurance does, however, mean that the company has gone the extra mile to be clear about data accuracy. This type of due diligence is usually a good indicator that there’s a slightly more mature (and reliable) set of systems behind the disclosed data.

Recent cases in both China and abroad—like Zijin Mining’s chemical spill, BP’s oil spill, and Toyota’s safety scandal—underscore the value of ESG information for investors. If investors can better interpret ESG warning signals from a range of information sources to discern “sustainable"companies, they will not only mitigate their financial risks but also make a positive impact through their investment behaviors. These tips on decoding CSR reporting will help improve investment analysis and lead to more informed decision making from investors.