Professor Zhu Rui of Cheung Kong Graduate School of Business: Business ethics design is the key to preventing ESG risks

In 2004, the United Nations Global Compact program first explicitly put forward the concept of ESG, namely Environmental, Social, and Governance. After nearly two decades of development, more and more investors and consumers have begun to pay attention to the performance of enterprises in ESG, and ESG has gradually become an important indicator to measure the sustainable development ability and social value of a company.

However, while the concept of ESG has been widely recognized and applied around the world, there have also been some skeptical voices. Previously, Elon Musk, CEO of Tesla, criticized ESG ratings on social platforms because Tesla did not receive high scores in multiple ESG ratings, believing that the entire evaluation system is a game. In the past year, a number of international giants who have long advocated the concept of sustainable development have been caught in the "greenwashing" question.

According to the "2023 Responsible China ESG Innovation Trend Research Report" recently released by Southern Metropolis Daily, since the beginning of this year, a number of corporate ESG risk events have become hot events of national concern, such as the "poisonous land" storm in Lujiazui, Shanghai, Cathay Pacific flight attendants discriminating against non-English speaking passengers, Japan's nuclear sewage discharge incident, Alibaba Cloud's major network failure, etc. (See previous report for details>>>)

Is the current global ESG evaluation system reasonable?What stage is China's ESG development in?How to prevent the risk of "green drift"?In response to these problems, a reporter from Nandu recently interviewed Zhu Rui, professor of marketing and director of ESG and social innovation center at Cheung Kong Graduate School of Business.

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Nandu: What is the level of China's ESG development in the world?

Zhu Rui: The origin and development of the concept of ESG is relatively leading in the West. Today, we see that the formulation of ESG standards and evaluation systems, and the setting of dimensions, the main leading institutions are mainly the European Union, and then the United States, and on the whole, the West is indeed in a relatively leading position.

I think China's understanding of ESG and business for good is still in its infancy, but it is developing very fast. Because of global trends and the guidance of China's policies, such as our carbon peak and carbon neutrality goals, as well as the requirements of the 20th National Congress of the Communist Party of China for green development, China's attention to ESG has increased rapidly in the past two or three years. Two or three years ago, when I was in class, I asked everyone what ESG is? Very few people in a class know about it, but if I ask it today, I think a third or half of them will know about it.

Nandu: What are the differences between the understanding and practice of ESG between Chinese and Western companies?

Zhu Rui: Due to the gap in development time and cultural background, the attention to different topics of ESG between China and Western countries will show phased differences. In terms of substantive issues, Western companies may pay attention to LGBTQ people and show tolerance for vulnerable groups or individualized groups, but such issues rarely appear in the ESG issues of Chinese companies at this stage, and Chinese companies may pay more attention to basic employee protection and environmental protection requirements. However, in our system, we will also see some content with Chinese characteristics, such as issues related to corporate culture and party building, which are ESG issues with Chinese characteristics.

Nandu: Many people think that the ESG of Chinese companies is a mere formality, or even for the sake of "window dressing", what do you think of this phenomenon?

Zhu Rui: Whatever the motivation was in the first place, I think it's a good thing to start doing. First, it shows that the company is aware of the importance of ESG, and second, in the practice of ESG, the company can find that this matter is beneficial to itself, and this benefit is not only monetary, but also includes brand image, consumer perception, employee loyalty, etc., if these dimensions are improved, the company will naturally invest more energy in ESG, and do it more scientifically and efficiently.

In addition, we see that many industries, such as e-commerce live broadcast, new energy vehicles, etc., will have bubbles at the beginning, bubbles are inevitable, but after the bubble there will be precipitation, there are more and more norms, through a process of elimination, will let the real precipitation of things emerge.

Nandu: Does insisting on "business for good" mean that enterprises should surrender their own interests, what is the greatest value of business for good, and how can enterprises balance the investment and benefits of sustainable development?

Zhu Rui: In my opinion, business for good is the social value of enterprises to tap their core competencies, and reflect such social value in the strategy, business development and resource allocation of enterprises, so that enterprises can better realize business value by creating social value, truly achieve sustainable development, and become an important force for social progress.

If we define business for good from this perspective, we can see that doing business for good does not mean that enterprises should surrender their own interests. There may be investment in the short term, but in the long term, it must be for the better development of the enterprise and a more reasonable and sustainable profit margin.

As for how to balance investment and return, I think this is a process of doing what you can. If it is a start-up enterprise, it should first achieve legal compliance, and then pay more attention to the development of employees within the scope of its ability, reduce environmental pollution as much as possible, and do not do evil. But if it is a larger-scale enterprise, then everyone's expectations and what the enterprise should do will have to be higher than a grade, or even multiple grades.

Nandu: How to prevent and regulate the "green drifting" behavior of enterprises?

Zhu Rui: "Green drift" is not only in China, but also in the world. Because people are profit-seeking, it is actually a bit anti-human to ask companies to do an ESG thing, so it is not an easy thing to do. But I don't really do it, I think time and the market are the ultimate criteria. So in the long run, I think it's going to be the companies that continue to do real business for good that will come out on top.

At present, there have been very formal and strict legal proceedings in Europe and the United States to challenge and punish companies with "green drifting" behavior, and cases like this often make the front page of the American media. This shows that when a market has a very good regulatory mechanism, there will naturally be a third party who will accuse the company of violating its will, and through administrative or economic penalties and the successive formulation of laws and regulations, this phenomenon will become more and more standardized, and at the same time guide ESG to the right track with evidence and regulation, but it will take a certain amount of time.

Nandu: What are the main areas, industries or types of ESG risk events in A-shares that you have observed in the past year?

Zhu Rui: Recently, there was a case of an oil company that promised to achieve a certain goal in terms of ESG, but in fact its goal may be vague, and when it actually reports results, there will be an element of exaggeration. Moreover, it will constantly adjust its goals, starting with a more ambitious list of goals, but then gradually narrowing them down. Of course, the most obvious problem is that you actually have a goal, but what you actually do will do the opposite of the original goal.

On the one hand, such companies may do something that is relatively good for the environment and employees, but on the other hand, they advocate fast fashion and have a high frequency of clothing iterations, which is actually a great pollution to the environment.

Nandu: Are ESG risks of enterprises only possible to deal with after they occur, but they are difficult to prevent?

Zhu Rui: That's why we talk about the G in ESG, and there is a part of corporate governance that talks about business ethics, and business ethics is whether there is regular training on business ethics within the enterprise, from executives to employees to customers upstream and downstream, and for the Xi study of laws and regulations, and regular internal audit or supervision? Therefore, the design of this mechanism is the most important dimension for enterprises to prevent ESG risks. Of course, if you have a problem and the company has been fined, the best way is to change it.

Nandu: Previously, Tesla CEO Elon Musk bombarded ESG on Twitter because Standard & Poor's Global Ratings only gave Tesla a score of 37 in its ESG score, while tobacco giant Philip Morris International gave it an 84 score. What do you think about companies paying too much attention to ESG ratings?

Zhu Rui: First of all, the evaluation of ESG and sustainable development is still in a stage of contention and confusion on a global scale. We have studied that the major institutions in the world, from the European Union to North America, have their own standards and assessment methods, and each organization has its own assessment methods.

Therefore, there will be reports that the same company, when it is rated by different institutions, may get different scores and grades. That is to say, ESG is still in the development stage, and everyone is using different rulers to measure it, but the standard of this ruler has not been formulated, and to measure a changing thing, it must be in a chaotic stage. So I would encourage my students to do things that are really good for business and society, not for the sake of ratings.

In addition, we can't simply judge heroes by industry. It is not that tobacco companies cannot be a good company, electric vehicle companies must be a good company, because existence is reasonable, since tobacco companies exist, it means that it actually creates social value. Tobacco companies can do as reasonable and sustainable things as possible within their scope, and similarly, new energy companies may save on energy, but if they do particularly poorly in other dimensions, it is understandable to get a low score, so I think such a simple comparison is unscientific.

Written by: Nandu reporter Ma Ningning and Xi student Wei Shanshan from Shanghai