Why businesses in China need to prepare for changes in regulation, buyer behaviour and the digital landscape

Environmental, social and corporate governance (ESG) is quickly becoming the global standard for investors seeking responsible investment opportunities. This framework requires companies to provide data on carbon emissions, employee health and safety, diversity and business ethics, among others. As Joachim Poylo, president of Aden Group explains, the ‘ESG effect’ will force companies to put digitalisation and traceability at the centre of their operations, requiring a reassessment of each layer of business – from facilities to executive decision-making.

Larry Fink, chair and chief executive officer (CEO) of the investment management giant BlackRock, announced in his 2021 letter to client CEOs that almost all of BlackRock’s United States dollars (USD) 7 trillion assets under management would be directed by ESG metrics. Shortly afterwards, BlackRock joined more than 40 other top global asset managers, including Vanguard and APG, as new signatories of the Net Zero Asset Managers initiative – which now represents euro (EUR) 27.2 trillion in assets under management, more than a third of the global total.[1]

The ESG trend is also making waves across Asia. Stock exchanges such as the Korean KRX and Hong Kong’s HKEX have already announced new rules that companies of valuations over a certain level must disclose ESG ratings to remain listed.

This trend is starting to take hold in China as well. Between 2009 and 2018, the number of Chinese companies on the Shanghai-Shenzhen CSI 300 index that voluntarily disclosed some level of ESG data almost doubled from 43 per cent to 82 per cent. Some regulatory action is beginning to appear as well. In May 2021, the China Securities Regulatory Commission (CSRC) published suggested updates to disclosure requirements for China-listed companies, with proposals including environmental and social responsibility, as well as enhancements to current corporate governance metrics, to improve and standardise transparency.[2]

Despite this, the adoption and awareness of ESG reporting in China continue to lag behind Europe – China ranks 47^th out of 50 countries according to median ESG scores.[3] Nevertheless, some signs suggest that the country will begin to tighten its belt soon enough. China has consistently reaffirmed its commitment to the Paris Accord, referring to it as “irreversible” in a joint statement with France.[4] The announcement of the national peak carbon emissions by 2030 and net-zero emissions by 2060 goals signal that regulations are sure to follow soon. In a written address to the recent United Nations Climate Change Conference (COP26) in Glasgow, President Xi Jinping reiterated the nation’s commitment to these goals. any analysts based in Asia are expecting Chinese regulators to roll out more standardised ESG listing requirements for the main boards in Shanghai and Shenzhen before 2025.

Regardless of the current policies—or lack thereof—for Asian exchanges, there is still a high expectation that businesses operating in China and the wider region need to get serious about ESG. Much of the downward pressure comes not from governments or shareholder activism, but rather from the internal practices of larger multinationals imposing stricter requirements on their vendors to qualify for procurement.

As the gaze of ESG turns towards supply chain practices, many companies that traditionally fell outside of its vision (for example, private, small and medium-sized firms) are now coming under scrutiny. Supply chains have an amplifying effect on every organisations’ carbon footprint; in fact, they account for up to 90 per cent. This effect is putting increased pressure on large firms that source from regions with less stringent ESG regulation. Even medium-sized companies can have thousands of suppliers, each with its own complexities and often employees located around the globe. The impact is proving to be so large that financial firms are launching ESG-linked supply chain financing in the Asia Pacific to encourage suppliers to accelerate their efforts to reduce their carbon footprints.[5]

The fact is that changes in buyer behaviour create just as much of a risk for business in Asia as regulations do. In fact, according to a survey by Baker McKenzie, it is the third biggest risk for businesses in the Asia-Pacific region.[6]

The role of data

Ever since ESG arrived on the scene, it has become apparent that no business can demonstrate compliance, trustworthiness, or even fully understand their own strong and weak points, without transparent data. Data is key to running effective auditing, analytics and strategising. One problem is that this data is too often in silos between departments, across borders or not even recorded in the first place. Another complication is that often companies may be in the dark about the‘right type’ of data that regulators, auditors, clients and shareholders are looking for. With a handful of rating agencies such as the Global Reporting Initiative and the Sustainability Accounting Standards Board competing with each other, it is difficult to know what data needs to be tracked and measured. Digitisation provides a solution to this problem.

Properly digitalised companies are using Internet of Things (IoT)-enabled sensors, web apps and software to record all ESG data points relating to business operations – everything from energy and waste management to indoor environmental quality, employee well-being and vendor sustainability control. Furthermore, the centralisation of this data into a ‘single source of truth’ is just as important as its collection. Ensuring data transparency across the organisational structure, as well as for third parties during audits and reporting, is essential for informing business decisions and establishing credibility and trustworthiness.

ESG-data digitisation is much easier for organisations that have properly digitalised the built environment in which they operate – which usually begins even prior to the construction of their facilities. However, the vast majority will need to retrofit their facilities and rethink the tracking and measuring of their workflows. This is no small feat, but faced with changing ESG regulations and buyer behaviours, it will be worth the investment.

After all, ESG metrics are ultimately about judging an organisation’s resilience and risk in an economy that increasingly prioritises equitable prosperity.

Joachim Poylo is president of Aden Group. Born and educated in France, he founded Aden in Asia in 1997. Since then, he has overseen Aden’s growth and evolution from its headquarters in Shanghai.

Aden Group is headquartered in Shanghai and operates in 25 countries worldwide. Rooted in facility management and solutions for the built environment, Aden’s full portfolio includes ventures in digital twin services (Akila), clean energy (Tera Energies), handling and automation (ASAP Rental), equity and venture capital (Avance), and more.

[1] Susanna Rust, APG, BlackRock and 41 others boost Net Zero Asset Managers initiative, IPE, 29^th March 2021, viewed 9^th December 2021, <https://www.ipe.com/news/apg-blackrock-and-41-others-boost-net-zero-asset-managers-initiative/10051914.article/>

[2] Vivian Gan and Aaron Costello, ESG Challenges and Opportunities in Chinese Equities, Cambridge Associates, September 2021, viewed 10^th December 2021, <https://www.cambridgeassociates.com/insight/esg-challenges-and-opportunities-in-chinese-equities/>

[3] Hannah Zhang, There’s a Big Opportunity for ESG in China, Institutional Investor, 27^th September 2021, <https://www.institutionalinvestor.com/article/b1ts1n1676vbsk/There-s-a-Big-Opportunity-for-ESG-in-China>

[4] China, France reaffirm support of Paris Climate Agreement, call it ‘irreversible’, Reuters, 6^th November 2019, viewed 10^th December 2021, <https://www.reuters.com/article/us-china-france-paris-agreement/china-france-reaffirm-support-of-paris-climate-agreement-call-it-irreversible-idUSKBN1XG0QJ>

[5] Citi Launches Sustainability-Linked Supply Chain Financing in Asia Pacific, Citi, 1^st November, viewed 10^th December 2021, <https://www.citigroup.com/citi/news/2021/211101a.htm>

[6] From Strategy to Action: Advancing ESG in the Asia-Pacific, Baker McKenzie, 2021, viewed 10^th December 2021, <https://www.bakermckenzie.com/-/media/files/insight/publications/2021/07/apbr_from-strategy-to-action–advancing-esg-in-asia-pacific_19-july.pdf?la=en>