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Blog | Wednesday June 5, 2024

How Companies Can Navigate China’s ESG Reporting Guidelines

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This year, China released its national ESG reporting guidelines to promote sustainable development and meet global standards. This coordinated effort, in line with China's economic goals, has significant implications for businesses operating in the country.

The national ESG disclosure guidelines mandate large companies included in domestic stock indexes as well as those listed overseas (including Hong Kong), to issue sustainability reports by 2026, representing 59% of China's stock market value. The guidelines attempt to align with international reporting standards such as the Global Reporting Initiative (GRI), the International Sustainability Standards Board (ISSB) and the Task Force on Climate-Related Financial Disclosures (TCFD). This facilitates clearer and more transparent communication of a company's ESG impacts, risks, and opportunities in a standardized manner that can be easily compared and benchmarked. They emphasize double materiality, and reporting across key areas such as governance, strategy, risk management, metrics and targets for disclosure. Additionally, they suggest reporting on China-specific topics, such as pollution and climate change, along with social issues like rural development to encourage sustainable growth.

In parallel, Beijing, Shanghai, and Suzhou have issued action plans focusing on ESG transparency and developing supporting infrastructure and governance to enable sustainable business practices. While Shanghai aims to ensure that all export-oriented state-owned enterprises listed on stock exchanges publish ESG reports by 2027, Beijing is emphasizing policy frameworks and establishing ESG rating systems. We anticipate more cities to follow.

Business Implications

The new ESG guidelines spur urgency among businesses to strengthen their ESG practices and governance, as failure to do so could result in heightened operational risks, loss of investor confidence, and diminished competitiveness in the Chinese market. By embracing these guidelines, businesses can enhance transparency while strategically aligning with China's sustainable development priorities.

We have identified four key steps to maximize your company's potential in this evolving landscape:

1. Balance Global ESG Integration with China Priorities: Rather than purely aligning with international norms, the new ESG guidelines anchor distinct national issues. On the one hand, companies need to align with global ESG benchmarks, particularly climate action and human rights, to facilitate seamless compliance and credibility. Given that their operations leave a significant impact on the local market and supply chain, companies will have to consider China's specific material issues such as environmental protection and common prosperity. Many multinationals are now engaging in initiatives to tackle income inequality, a key aspect of China's common prosperity agenda. As we anticipate more policy changes in these areas, companies need to adjust their strategies accordingly to remain compliant and contribute positively to local priorities.
2. Enhance Data Accuracy and Due Diligence: As the new guidelines mandate sustainability reporting for numerous firms, company ESG data will become more accessible via increased disclosures. There's a potential for heightened investor enthusiasm and engagement with business opportunities across various sectors within the country, due to more performance regulation and increased global investment within the country. However, robust due diligence is necessary to verify data quality and accuracy, especially for financial institutions evaluating investment opportunities. It will be necessary to implement advanced data verification technologies to ensure the accuracy and reliability of ESG data, such as blockchain-based systems or AI-powered data analytics tools.
3. Foster a Collaborative ESG Approach: As the new ESG guidelines take effect, China's overall ESG landscape will continue maturing. Amid this context, awareness among business partners like suppliers and industry partners will rise rapidly. By adopting a common regulatory approach to ESG, it could open China up to global cooperation regarding ESG issue areas like sourcing and value chains. Engaging local suppliers to collaboratively address scope 3 emissions, and working with local partners to ensure ESG data accuracy, alongside understanding and adapting to local regulations and market trends, will be increasingly crucial.
4. Anticipate Growing Sustainability Awareness and Expectations: As the ESG landscape develops further under the new guidelines, public understanding of ESG and sustainability issues will increase, especially in frontrunner cities like Beijing and Shanghai. Numerous innovations in business models and technology are already underway, focusing on areas such as carbon reduction and the circular economy. Companies should prepare for heightened consumer awareness, employee expectations regarding sustainability efforts, and scrutiny of their ESG commitments. This dynamic presents both challenges and opportunities, prompting companies to develop robust ESG strategies, governance structures, and reporting mechanisms to effectively engage with and meet market and internal expectations.

In summary, China's new ESG reporting guidelines and municipal-level guidance aim to advance sustainable business practices while aligning with international norms. For companies operating in China, adhering to these regulations is essential for mitigating risks, enhancing transparency, building stakeholder trust, and driving sustainable growth opportunities. By proactively integrating ESG across operations based on global and local ESG priorities, businesses can navigate this landscape more effectively.

For more insights into China’s evolving regulations landscape, please reach out to BSR’s local team.

Audio | Tuesday June 4, 2024

Responsible and Sustainable AI

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Lale Tekisalp, Associate Director, Technology Sectors, chats with David Stearns on the topic of Responsible and Sustainable AI, exploring:

• The latest developments, including the latest regulatory developments, that listeners should be aware of.
• The risks that companies should be aware of when designing, developing and deploying these models.
• What a responsible and sustainable approach to the development and deployment of AI would look like.
• Are there ways that AI can be used to help us (companies and society more broadly) achieve a more just and sustainable world?

Audio | Tuesday June 4, 2024

Regulating AI

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Richard Wingfield, Technology and Human Rights Director, chats with David Stearns on the topic of Regulating AI, exploring:

• What the newly passed EU AI Act is, and what it regulates.
• Why the Act takes a risk-based approach and how different types of risks are categorized.
• What type of advice BSR is offering to companies on steps they should be taking to come into compliance with the AI Act.

Audio | Tuesday June 4, 2024

The Human Rights Impacts of AI

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Hannah Darnton, Technology and Human Rights Director, chats with David Stearns on the Human Rights Impacts of AI, exploring:

• How the use of AI may impact human rights and where we might see examples of this.
• Are there ways that AI can be used as a tool to protect human rights?
• In BSR’s experience, are companies receptive to conducting human rights risk assessments of their AI practices?
• Recommended resources for companies looking to get started.

Audio | Tuesday June 4, 2024

Applying a Future Lens to AI

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Jacob Park, Transformation Director and head of BSR’s Sustainable Futures Lab, chats with David Stearns about Applying a Futures Lens to AI, exploring:

• Why futures thinking techniques can be particularly useful to discussions about responsible AI.
• How scenario planning exercises work, who is typically involved within a company, and how they might be applied to mitigate a potential outcome of AI such as worker displacement.
• Some of the opportunities and innovations offered by AI that have the potential to advance sustainable business.
• How futures thinking can help to address challenges emerging from the rapid advancement of AI.

Audio | Tuesday June 4, 2024

The Environmental Impacts of AI

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Ameer Azim, Climate Change Director, chats with David Stearns on the Environmental Impact of AI, exploring:

• Why it’s important to assess the environmental impacts of a technology like AI.
• Through what type of activities or upgrades does the use of AI increase a company’s CO2 emissions?
• Beyond carbon emissions, what are some of the other environmental impacts associated with the rise of AI that companies should anticipate dealing with as they embrace this technology?
• What are some of the steps that companies can take to address these negative impacts?
• Can AI be used to combat climate change?

Blog | Monday June 3, 2024

Double Materiality and Decision Quality: An Opportunity for the Courageous

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Sustainability impacts have always presented business risks, but they’ve often struggled to gain traction in the face of more obvious and shorter-term operational and financial concerns. Emerging sustainability regulations have driven greater alignment and integration between practices in sustainability and risk management. The likes of the EU’s Corporate Sustainability Reporting Directive (CSRD) and its Corporate Sustainability Due Diligence Directive (CSDDD) will force a deeper integration of sustainability topics into the job descriptions of risk management practitioners.

On the face of it, this is a positive development—more alignment between how we understand different kinds of risk is a good thing. But, ensuring that integration results in better decision-making presents several challenges that companies will need to navigate.

First, traditional approaches to managing risk are often not equipped to handle the increasingly wide array of interconnected uncertainties—from climate change, to geopolitics, and societal polarisation. These defy the often ‘neat’ risk categories which are used to treat risks in discrete and self-contained ways as part of Enterprise Risk Management (ERM) frameworks. They raise difficult trade-offs, challenge values, and cut across organizational structures and siloes.

In addition to this is a second challenge that has long plagued traditional risk management. Approaches to ERM are—in the main—practiced separately from when and how companies make decisions. Risk information is too often collated, reported, and discussed as a compliance and governance exercise after companies decide to enter or exit markets, launch products, acquire competitors, set budgets, make operational changes, or major investments.

In spite of decades of ERM practice, the signs of strain are apparent. For instance, a recent study reveals that not only do the vast majority (83%) of risk professionals state that interconnected risks are emerging more rapidly, but 72% say that their capabilities have not kept pace.

As sustainability practices and risk practices converge, sustainability professionals need to ensure that their activities don’t similarly become perceived as a box-ticking exercise, struggling to keep up with the pace of change in the world. But this moment also presents an interesting opportunity for both sustainability and risk management practitioners to reexamine and reimagine how they influence the decisions that organizations make.

The CSRD’s mandatory Double Materiality Assessment (DMA)—which identifies sustainability topics most material to both companies and their key stakeholders—and the CSDDD’s requirement to identify, assess, prevent, and mitigate sustainability impacts together have the potential to provide the much-needed refresh to how companies navigate these challenges. 

Doing so, however, requires an approach to assessments that treats them as a strategic exercise, incorporated within—and as a key component of—organizational decision-making. DMA’s are in many ways the most comprehensive examination of a company’s sustainability-related impacts, risks, and opportunities. They can help companies identify tough trade-offs, prioritise sustainability initiatives, and navigate uncertainty and complexity successfully. However, doing so requires courage, and involves treating compliance as the by-product, not the objective of the assessment process.

With this in mind, we recommend three essential ingredients for success: 

1. Integrate and align internal approaches—Internal risk, sustainability, compliance, and other functions can get in their own way via the use of separate and sometimes contradictory methodologies and approaches, replete with their own jargon. Frameworks, processes, criteria and supporting systems can and should be designed with decision-makers in mind. That means the use of common understandable terms, methods, processes, decision-making criteria, heuristics, rules, tools, and related approaches that “join-up” clearly with one another. They should make the complexities faced by decision-makers more understandable. In integrating DMA, this may mean ensuring that a long enough time horizon is considered, external stakeholder views are incorporated and that both the upside and downside of outcomes are adequately reflected. 
2. Focus on decision quality—“Decision quality” is all about making the best possible decisions, based on what is known when decisions are made, not after the fact. A DMA can be an invaluable source of decision quality—but only if there is adequate focus placed on this. While DMA’s are often conducted as annual strategic exercises, their findings can have profound and positive reverberations throughout an organisation’s decision-making practices. For example, for large-scale, one-off decisions such as entering a new market or launching a new product, a review of the DMA findings or point-in-time DMA refresh can reveal a potential negative reaction from a key stakeholder, which may not have been identified otherwise. Similarly, the findings from a DMA can improve the quality of recurring decisions, such as choosing suppliers or dealing with customer contracts by integrating material stakeholder concerns into those operational decisions. However, to unlock these areas of value, both risk and sustainability practitioners must find ways to get involved in organisational decisions, when those decisions get made. 
3. Leverage the uncomfortable benefits of outside-in perspectives—One of the most powerful benefits of a DMA is its ability to surface alternative perspectives from key external stakeholders. Decision quality within organizations suffers adversely from a range of biases such as ‘groupthink,’ optimism bias and something called the “false consensus effect” in which we frequently overestimate how much others share our beliefs and values. Great decision-making involves seeking challenging views. This can be uncomfortable, but ultimately leads to better decisions and over time, better outcomes. By actively and regularly seeking views from a variety of critical stakeholders, a strategic approach to DMA can incorporate these benefits as a matter of regular practice. 

It is fortuitous that regulatory trends to align and integrate sustainability and risk management practices are occurring at a time in which a refresh in the latter is overdue. Businesses that lean into the challenge of getting this right—driving assessment results deep into decision-making—will ultimately empower choices in an uncertain world for themselves and their key stakeholders, while simultaneously doing their part to create a more just and sustainable world. 

If you’d like further information on BSR’s approach to double materiality or to discuss what’s right for your organization, please don’t hesitate to reach out to us. Wherever you are in your sustainability journey, we’d love to help! 

People

Ben Cattaneo

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Blog | Thursday May 30, 2024

1.5°C Targets: The Business Case for a Climate Transition Plan

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The future of corporate climate targets has been a theme of fierce debate recently, especially in relation to announcements and steps taken by the main corporate climate target-setting framework, the Science Based Targets Initiative (SBTi), which generated uncertainty in the market, and some signs of companies watering down ambition in an uncertain environment. But don’t be fooled—in 2024, 1.5°C aligned corporate targets are here to stay, and for most companies, different drivers such as regulations and customers have moved the conversation beyond targets, and toward developing 1.5°C aligned climate transition plans.

SBTi momentum has steadily grown over the past three years, while recent announcements generated uncertainty and put its governance into question. 

In 2015, when the SBTi was first created, there were no science-aligned climate target methodologies, or externally validated near-term or long-term climate targets aligned with the Paris Agreement. In 2024, SBTi is the common reference initiative in the space and currently the only framework for third party-validated, climate science-aligned targets for businesses: its growth is therefore an important sign of the momentum behind climate targets. SBTi-validated targets have grown 100 percent annually over the past three years, to over 5000 approved targets worldwide to date.

Recently, a small group of companies (around 10) withdrew from SBTi, mostly due to methodological misalignment. 

SBTi got into the spotlight for the recent statement from its Board of Trustees on changing rules regarding the use of environmental attribute certificates (EACs) within Scope 3. The initiative has since put forward a clearer process and timeline to establish any changes to its guidance. But this issue puts the initiatives’ governance mechanisms into question, and trust will need to be rebuilt. 

A small group of corporate commitments were for the first time removed from the SBTi website, as part of an effort for corporate accountability.

In 2024, for the first time SBTi removed 284 expired corporate commitments that were set in 2021 as part of the Business Ambition for 1.5°C campaign, in which companies did not submit for validation in time. There are several reasons why companies were not able to submit their target in time, from internal staff changes delaying the process, to confusion about SBTi evolving methodologies, to changes in companies structures making the initial commitment irrelevant. The three most common reasons revolve around the SBTi Net-Zero Guidance being published after the time of commitment, concerns about the feasibility of targets, and challenges with Scope 3. While many reasons are valid, removing expired commitments is crucial for holding companies accountable.

What’s more, most of the removed commitments are related to long-term targets, with the same companies having already validated near-term SBT. This points to the fact that long-term targets require the ability to navigate complexity and uncertainty, fundamental shifts well beyond incremental change, and pulling systemic levers that are critical for transformation. 

1.5°C targets, and how to achieve them, are clearly embedded in regulations.

Setting and delivering 1.5°C targets continues to be a top priority for companies worldwide. While cases exist of companies pulling back their climate targets, the overall trend is in the opposite direction, pushed by regulations as well as customers. The regulatory landscape points toward a doubling down in climate action and ambition, driven by EU’s Corporate Sustainability Reporting Directive (CSRD) and the Corporate Sustainability Due Diligence Directive (CSDDD). 

• Under CSRD, climate is de facto a material issue unless a company can prove otherwise. The CSRD’s European Sustainability Reporting Standards (ESRS) requires disclosure of Scope 1, 2, and 3 GHG emissions in line with GHG Protocol; absolute emissions reduction targets; and reporting and disclosure of a transition plan to a 1.5°C future. Companies with SBTs are well placed for the CSRD target requirement, as this WWF analysis shows.
• CSDDD requires companies to develop a climate transition plan, including a 1.5°C aligned time-bound target “for 2030 and in 5-years steps up to 2050.” 

Companies should stay focused on setting and implementing 1.5°C targets, build 1.5°C climate transition plans, and collaborate to unlock the net-zero transformation.

BSR encourages its members not to lose focus on the end goal outlined in the Paris Agreement, so staying focused on setting and implementing 1.5°C targets. This should include both near-term and long-term (2050) goals, as well as a plan to reach them. Today, SBTs are the only externally certifiable science-based climate target companies can use. External validation and transparency on methodology are key for accountability, so we encourage BSR members to continue on their SBT journey. 

High-quality carbon credits are critical for quickly scaling the desperately needed investments in the nature-based solutions necessary for addressing the twin climate and nature crisis. BSR encourages an approach to credits that is differentiated from Scope 3, and stands ready to support its members navigate the volatile space with integrity.

Finally, transformative business action is critical to address the climate crisis: developing 1.5°C-aligned climate transition plans is the way to do so. BSR stands ready to work alongside our members to understand climate transition plan requirements, build climate transition strategies, and collaborate to unlock systemic barriers to net zero. If you still aren’t sure how to move forward with your climate targets, or would like to learn more about BSR’s work on Climate Transition plans, please don’t hesitate to reach out to the Climate team.

Reports | Thursday May 23, 2024

Effective Engagement with Technology Companies

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Civil society has long sought to influence the policies and practices of technology companies in order to address adverse impacts on people and society and advocate for user rights. Technology companies, on the other hand, should engage with affected stakeholders as part of their responsibilities under the UN Guiding Principles on Business and Human Rights (UNGPs, PDF). Stakeholder engagement is also increasingly required as part of compliance with emerging regulation, such as the EU Digital Services Act (DSA).

Achieving meaningful stakeholder engagement in the technology industry benefits both civil society and companies. However, both civil society and technology companies face challenges in engaging effectively.

BSR’s new guide, funded by the Omidyar Network, is a practical resource for anyone seeking to engage with global technology companies on digital rights issues related to the development, deployment, and use of their products and services. The guide includes the following sections:

• Key terms, including the definition of “effective engagement” 
• How technology companies conduct stakeholder engagement
• Common characteristics of effective civil society-company engagement, as well as the barriers to achieving it
• Practical tips and best practices