Cross-sector collaboration is needed to create effective, industry-specific ESG disclosure guidelines for Chinese listed companies.
That was the key takeaway from a recent focus group co-hosted by BSR and the Shanghai Stock Exchange to gather investor perspectives on CSR disclosure by Chinese companies. The gathering, which BSR organized to help the stock exchange develop updated disclosure guidelines, included representatives from two SRI funds, an asset manager, a development finance institution, an ESG data provider, and a UN Principles for Responsible Investment signatory financial services company.
While Chinese companies are generally skeptical of ESG disclosure, which many believe is something capital markets disregard and is therefore an unnecessary expense, investors who participated in our event said they currently use ESG reports for a variety of purposes.
Some use ESG data—particularly governance data—to identify growth companies with good management teams. Others use ESG information to avoid investment missteps, either to assess risks and opportunities of pre-IPO companies, or to protect the investors’ own reputations in the event that companies they work with face future scandals. Some investors even use ESG disclosures to support their stock selection processes.
All investors, however, pointed out that the low quality of ESG reporting in China is a common problem. The challenge now is to help Chinese companies deliver this data efficiently and effectively.
Improving Report Delivery
It’s one thing to capitalize on ESG disclosure reports, and it’s another to think deeply about the way this information is delivered. Participating investors voiced a number of opinions on how report delivery could be improved.
One participant recommended integrated reporting, or combining a company’s financial and ESG reports into one. Investors noted that these types of comprehensive reports demonstrate that a company has a clear understanding of how sustainability issues are connected with the core business. Other participants emphasized the importance of avoiding over-disclosure, noting that too much information is useless to investors and possibly harmful for the company.
A number of focus group participants raised questions about the integrity of ESG reports, noting that senior-level ownership of ESG data is important, and that that many Chinese companies do not assure their data. BSR suggested that companies provide quantifiable data that has been validated by third parties. Investors agreed, adding that regulations are necessary to drive improvements.
Formal reporting regulations would resolve a number of challenges. First, published guidelines and expectations would standardize the data itself. Currently, many Chinese companies report only what they think investors want to see and may not fully understand the desire for data from investors.
Regulations would also help provide a framework for ESG reporting and could give companies direction on which requirements are voluntary and which are compulsory.
But most importantly, investors agreed that given the differences among industries, industry-specific reporting guidelines are needed to provide a complete and useful picture of each company.
Developing a new set of effective, industry-specific guidelines would involve cooperation between the Shanghai Stock Exchange, investors, and listed companies. Training and education, which can be carried out by a variety of organizations, are also important to help improve both transparency and comparability of data. Finally, government enforcement would establish the market mechanisms to encourage good ESG performance.
For all the benefits of ESG reports, many Chinese companies have yet to understand the value of good reporting and regard it merely as an expense. Participants in the BSR-Shanghai Stock Exchange focus group hope to change that, and more. The group called for reporting integrity, new regulations, and cross-sector collaboration to make this a reality. The process undoubtedly will take time. In the end, however, aligning ESG with financial incentives is important to creating a more just and sustainable world.