Zhou Pengyuan: There is still a long way to go to establish an ESG "consensus"|Looking forward to 2024

The achievement of an operational, measurable, and comparable "consensus" is a global challenge in the field of ESG

Zhou Pengyuan, Partner of A.T. Kearney Greater China

Interview collation|"Chinese Entrepreneur" reporter Li Xin

Editor|Zhao Jiankai

Header image source: Respondents

Compared with other theories, the ESG concept covers a wider scope, is richer and more complex, has a larger system, and emphasizes more on the close relationship with the company's business. ESG is not simply the pursuit of social value or business value, but emphasizes the unity of business value and social value.

But on the other hand, it should also be admitted that while the scope of ESG has expanded, it has also brought "choice difficulties" to many companies.

According to A.T. Kearney's "ESG Issues Survey on Asia-Pacific Companies", although the "dual carbon" issue is undoubtedly the most concerned issue, more than half of the topics are also very diverse, covering many different areas such as E, S, and G.

Therefore, I believe that when companies deal with the above challenges, they should first start with the "materiality assessment of ESG issues", select the issues that are most important to the company, customers and stakeholders in a wide range of issues, and start from these issues to formulate ESG strategies and effectively integrate them with business strategies.

One of the debates that has been in the theoretical community about ESG is whether the value of ESG to enterprises is "risk resistance" or "value creation". In fact, from the perspective of ESG practices, only a combination of these two points is the key to true sustainable value creation.

Taking environmental issues as an example, why financial institutions have paid great attention to environmental information disclosure in recent years is certainly influenced by a series of public opinion and climate conferences, but more importantly, the "risk exposure" brought about by climate change.

More than 200 of the world's largest companies estimate that their exposure to climate risk is around $970 billion. In the past five years, the annual global losses caused by climate-related disasters have been between 150 billion ~ 200 billion US dollars, and the insurance industry has made compensation as high as 80 billion ~ 100 billion US dollars. However, on the other hand, financial institutions are also taking green finance as a new driving force for future business, taking green loans as an example, as of the third quarter of 2023, the balance of green loans is 28.58 trillion yuan, a year-on-year increase of 36.8%, ranking first in the world.

In 2023, "versatility" is hard to find

In 2023, my most obvious feeling is that although the international economic situation has posed great challenges to business operations, the attention of Chinese enterprises to ESG has "increased instead of falling".

A straightforward statistic is that before 2021, about one-quarter of China's listed companies chose to disclose ESG reports. In 2022, that number rose to nearly 30%. However, as of November 2023, about one-third of listed companies have disclosed ESG reports. Therefore, the proportion of listed companies that will disclose ESG reports in 2023 will probably exceed 35%.

The core behind the digital change is that the whole society pays more attention to ESG, especially the consensus on low-carbon and sustainable development, which is getting stronger and stronger, and gradually landing. Therefore, on the policy formulation side, ESG has also shifted from "advocacy and appeal" in the past to more institutional and mandatory requirements, the most obvious of which is the E (environment) in ESG. Correspondingly, both major exchanges and major institutional investors will put forward increasing requirements for the degree and scope of information disclosure in the ESG field.

However, in 2023, despite the importance and proportion of disclosed companies, Chinese companies are strengthening their ESG practices year by year. However, at the level of "behavior patterns", it is difficult to find strong "universality". In fact, I think one of the challenges in the global ESG field is the achievement of an operational, measurable, and comparable "consensus".

This includes the lack of a unified ESG disclosure system (such as GRI, TCFD, ISSB, etc.) at the standard level, as well as the huge differences between nearly 100 ESG rating agencies in terms of assessment concepts, evaluation methodologies and tools, assessment scope and data caliber, and data quality management. It also includes the difficulty of reaching a consensus on the positioning of ESG issues within the company, the relationship between ESG strategy and overall strategy and business strategy, and the establishment of ESG-related institutions and departments.

Due to different industries and different types of enterprises, there are still big differences in the practice of ESG by Chinese enterprises.

For example, due to the characteristics of its own industry and business operation, the financial industry is far ahead of all industries when disclosing ESG-related information, accounting for nearly 90%. In addition, due to the large number of business growth opportunities in the new energy industry, which directly come from the field of green development, there is also a strong incentive to disclose and release relevant information, and the proportion of ESG report disclosure of new energy enterprises is also close to 60%.

In terms of enterprise types, the ESG (social responsibility) disclosure rate of central enterprises and state-owned enterprises is also significantly ahead, and as of mid-2023, the ESG report disclosure rate of listed companies of central enterprises exceeds 70%. In mid-2023, after the SASAC released the "Index System for the Preparation of ESG Special Reports of Central Enterprises", it is expected that the proportion and scope of disclosure will be further improved in the future, and the comparability will also be significantly improved. At the same time, this trend will also have a transmission impact on local state-owned enterprises. In addition, the regional dimension is also worth noting, for example, Shenzhen has passed the Green Finance Regulations, which require local financial institutions to make environmental information compulsory.

The proportion of "E" allocated by enterprises will be greatly increased

In 2024, there will undoubtedly be great differences in the allocation of ESG ratios among different industries and companies. But if you look at the overall trend, I think the proportion of "E" will increase dramatically. This is a trend that has continued since China put forward the "3060" dual carbon goal.

In addition, compared with the "S" and "G", the green economy itself has stronger and more direct business growth potential, and under the incentives and constraints of policies, the low-carbon transformation of enterprises can directly lead to cost reduction and ESG score improvement. For the energy industry, this is the key to sustainable business growth in the future. In addition, with the gradual implementation of the "carbon tariff" mechanism and the "anti-greenwashing" action in developed countries, paying attention to data collection and reporting in the field of carbon emissions is a necessary action to maintain the international competitiveness of products.

In the future, all walks of life will definitely continue to pay more attention to ESG practices. In addition to the financial industry and the new energy industry mentioned above, for Internet companies, due to the increase in the attention to personal information protection and privacy security, the attention to S and G will also increase. In addition, small and medium-sized enterprises should gradually take ESG issues as the focus of their companies in the future and gradually participate in them.

However, due to the impact of corporate recovery pressure, companies will also take a more serious but pragmatic approach to ESG in 2024, and the selection of ESG topics and the setting of goals are based on practical and achievable risk mitigation or value creation.

Let's go back to "behavior patterns". In fact, the most worthy reference of leading enterprises is the formation of a multi-level ESG organization and leadership mechanism. Many leading companies have gradually established ESG teams from the ESG committee of the board of directors, the management's ESG dedicated executives and leadership teams, ESG-specific departments (rather than part-time public relations or investor relations), and various business departments, and deeply integrated key ESG issues with performance management, business processes and corporate culture.

There is still a long way to go to establish a "consensus" on ESG, which requires the participation and coordination of various institutions outside the enterprise, including governments, standard-setting agencies, ESG rating agencies, media, think tanks, etc. Only in this way can we continue to improve the setting of the top-level ESG mechanism and the quality and comparability of information disclosure. With the continuous expansion of the connotation of ESG, it will inevitably require the in-depth involvement of different government departments, and how to form an effective coordination mechanism between multiple departments will have a significant impact on China's ESG practice.