ESG management

Compliance and opportunities for European enterprises in China 

In recent years, enterprises are increasing efforts to stand out from their competitors through environmental, social and governance (ESG) management. People generally think that ESG management can help enterprises reduce operational risks through sustainable development and therefore attract more investors, and thus should be more of an issue for senior management. But in fact, as this article from Bureau Veritas explains, employees are also vital stakeholders of their enterprise, and they too should actively participate in daily ESG management as essential advocates and enablers.  

In addition to strategic development and corporate governance, the working environment, compensation and welfare, and occupational health and safety should also be a focus for ESG management. As these are issues of major concern for employees, they cooperate to present their actual needs in relation to ESG to the management team through their chosen communication channel. This may be particularly so for European companies in China that have such communication channels set up in their global operations. 

Meanwhile, the new generation of job seekers have become the backbone of the employment market. They are also increasingly taking a company’s ESG performance into account when job-hunting. Many expect enterprises to act to address climate change and take a stand on social issues of importance to them. This in turn is encouraging enterprises to improve their ESG management to better attract talented younger employees. For enterprises—including European companies in China—when formulating ESG strategies, they should consider how to promote and encourage younger employees to understand and participate in the construction of the corporate ESG culture, whether on a local basis or globally, so as to truly lead the management of enterprise ESG. 

Though ESG investment and practices have only recently become popular in the Chinese marketplace, they have been in place in Europe for the past two decades. The management status and market expectations of the two parties are very different. As many multinationals have their headquarters in Europe and manage their global supply chains from there, European enterprises operating in China tend to have a stronger ESG culture than their Chinese competitors. Large European enterprises generally have already established a relatively sound ESG management system, which will have contributed to the development of the global ESG market.  

In terms of regulation, the European Union (EU) has also issued a series of directives (the Sustainable Finance Disclosures Regulation/the Corporate Sustainability Reporting Directive/the Shareholder Rights Directive II), hoping to control the disclosure of ESG reports and the ESG-related service market with more unified standards. Likewise, the EU financial market is also more active on ESG: businesses are expected to disclose their ESG claims in a more transparent way and to reduce ‘greenwashing’ by adhering to more strict regulatory standards.  

While many Chinese enterprises are still in the initial stage of ESG management, the main drivers behind ESG disclosures are clients and investors. At present, there are no mandatory disclosure requirements on ESG performance in Mainland China. Therefore, the Chinese market’s current focus for ESG development is mainly on building awareness and introducing a unified disclosure system and guidance framework. Only after standardising ESG information disclosure can the ESG reports issued by enterprises be more credible and better guide related investment in the market. 

For both Chinese and FIEslisted on Mainland China stock exchanges, except for those listing on the Hong Kong Stock Exchange, there are no unified mandatory ESG disclosure requirements. For the following enterprises, it is necessary to disclose a social responsibility performance report when disclosing their annual report: 

  1. Enterprises listed as Shenzhen 100 sample stocks on the Shenzhen Stock Exchange 
  2. Enterprises listed as Shanghai Governance Sector sample stocks on the Shanghai Stock Exchange 
  3. Enterprises listed on the KeChuang 50 Index on the Shanghai Stock Exchange.  
  4. Enterprises listed on both Chinese and overseas exchanges 
  5. Financial companies  

In addition, the Shanghai and Shenzhen stock exchanges also require disclosure of environmental pollution and safety accidents in key industries, including steel, coal, electricity, construction, chemicals, and food and wine manufacturing. Other types of listed enterprises can voluntarily prepare annual social responsibility reports for disclosure on exchanges’ websites. 

Therefore, for European enterprises in China, the current primary consideration is the EU’s requirements for ESG disclosure, as these are relatively stringent and standardised. However, with the global trend towards ESG development and the improvement of the ESG management system in China, clearer and binding ESG regulations and guidelines are likely be introduced in China’s and third-country markets in the near future.  

European enterprises stand to benefit from this, as many have commenced ESG management earlier than their Chinese peers and are experienced in combining ESG considerations with daily management. They also are more likely to have personnel specialising in ESG already in place and capital investment completed. This will have given them extensive disclosure experience that will allow them to quickly comply with ESG-related regulations and policies. 

Bureau Veritas is well-known globally in testing, inspection, certification and technical consulting services. Created in 1828 and headquartered in Paris, France, it now has around 1,500 offices and labs, and more than 75,000 staff members, in 140 countries. Bureau Veritas delivers professional services and innovative solutions to its 400,000 clients in multiple key industries, to ensure their products, facilities and production flows meet the required codes and standards of quality, health, safety, environmental protection and social responsibility. Restarting its China operation in 1993, Bureau Veritas has over 130 offices and labs, and more than 17,000 professional staff members in 55 cities across the country.