Li Wen, Chief Research Officer of Menglang: Do China's ESG evaluation standards

Text | Sasha Zhao

Edit | Guo Nan

In 2015, advocate the governance concept of green development; in 2020, launch a "double carbon" target timetable; in 2021, research to promote common prosperity... In recent years, the Chinese government has been making positive efforts to build a global sustainable development. However, the power of government is far from sufficient, and the heavy responsibility of global sustainable development must rely on the extensive participation of real enterprises and social groups. Taking corporate social responsibility (CSR) as an important starting point and increasingly focusing on environmental, social and corporate governance (ESG) management practices have become an important way and method for most countries to promote corporate responsibility.

So, what exactly is CORPORATE SOCIAL RESPONSIBILITY? Is there a unified discourse system in the world? In what context of social development is the social responsibility of Chinese enterprises gradually clarified? How is China's ESG investment and related research different from the European and American markets? How does the FIN-ESG Rating measure the social value of a business?

To this end, Reading One spoke to Ms. Wen Li, an expert in the field of sustainable development. Wen Li is the Chief Research Officer of Menglang Sustainable Digital Technology (Shenzhen) Co., Ltd. and participated in the research and development of the Yili Evaluation Model. As a senior expert in the industry, Li Wen started from practice and elaborated her understanding and insights on these issues for us.

The following is a transcript of the interview:

Q1: In the issue of sustainability, we often hear about the concepts of ESG and CSR, is there any connection between them? How did they develop in China?

A: ESG itself is not a completely new concept, nor is it a new thing. ESG is closely related to two concepts: one is the introduction of Corporate social responsibility (CSR) in China at the beginning of this century. Fifteen or sixteen years ago, when I started doing CSR research, the topic of ESG was already three of the many key topics in CSR. The other is the United Nations Sustainable Development Goals (SDGs), which include 17 elements – end poverty, end hunger, health and well-being, quality education, gender equality, clean water, clean energy, decent work, industrial innovation, social equality, sustainable communities, sustainable supply and demand, climate action, marine environment, terrestrial ecology, institutional justice and global partnerships. With the increasingly negative externalities of enterprises in the industrial era, sustainable development has become a common global challenge. Humanity is constantly encountering new problems and constantly exploring new solutions. In this process, the United Nations advocates the participation of the business community in the governance of global sustainable development, and corporate social responsibility has gradually focused from the original relatively vague and broad concept to the three core issues of environment, society and corporate governance.

In the 1990s, CSR became popular internationally, and some corporate responsibility standards for supply chain inspections began to emerge. At that time, a number of Chinese enterprises took the lead in going abroad and extensively participated in international cooperation and international mergers and acquisitions. After China's accession to the WTO in 2001, the social responsibility of Chinese enterprises has also been valued and gradually clarified with the extension of the international cooperation industry chain.

In January 2008, the State-owned Assets Supervision and Administration Commission of the State Council issued the Guiding Opinions on the Fulfillment of Social Responsibilities by Central Enterprises in the form of Document No. 1, which clearly requires central enterprises to actively fulfill their social responsibilities. The document requires all 100 central enterprises to compile and issue social responsibility reports within three years. Since then, some industry associations in China, such as textile industry associations, electronic industry associations, foreign contractor associations, etc., have begun to formulate guidelines that can lead enterprises in the industry to fulfill their social responsibilities, and encourage enterprises to compile and issue social responsibility reports, which were later called sustainable development reports. Since the reform and opening up, successive national leaders have also attached great importance to corporate social responsibility and encouraged and advocated enterprises to perform their duties. If we want to have a broader voice and international recognition on the international stage, then we need to strengthen mutual recognition and interoperability in the process of international cooperation.

Although corporate social responsibility in Western countries started earlier, in fact, China's progress in this regard is also obvious. Take the solution of the "double standard" problem of labor protection and market as an example: some multinational companies have adopted a "double standard" approach in terms of environmental pollution and labor rights after entering China, which has triggered the accountability of domestic consumers and public opinion. In 2011, Apple's supply chain management problems in China also made China's non-governmental environmental organizations directly fight the lawsuit to the United States, Jobs bowed his head, and finally realized Apple's implementation of supply chain green management standards in China that are unified with the international market.

In the past decade or so, the awareness of social responsibility of Chinese enterprises has been significantly enhanced. From the government to the private sector, from entity enterprises to financial institutions, from research institutions to non-profit organizations, from opinion leaders to the general public, the whole society is paying more and more attention to corporate social responsibility issues, and the comprehensive social contribution of enterprises is remarkable. It should be said that China's corporate social responsibility practice has entered a new stage of development with China's reform and opening up. In 2015, the Fifth Plenary Session of the 18th Central Committee of the Communist Party of China put forward the five major development concepts of "innovation, coordination, green, openness and sharing", which promoted a clearer development direction for China's corporate social responsibility practice and continuously explored new development paths in the process of transformation and upgrading. The Targeted Poverty Alleviation, Rural Revitalization and "Double Carbon" goals proposed by the Chinese government are not only based on national conditions, but also the positive contributions of a large developing country in the construction of global sustainable development.

Q2: In what context is CSR developed internationally?

A: In recent decades, the issue of negative externalities in enterprise development has received more and more attention from government regulators, consumers, non-governmental organizations, corporate shareholders and employees, communities, and the media. In this context, people have begun to systematically explore the issue of corporate social responsibility, and some theoretical research and breakthroughs have emerged, such as stakeholder theory, social performance theory, corporate social value, corporate culture and entrepreneurship. Internationally, the forerunners of multinational companies have been compiling and publishing their own CSR reports since the end of the last century.

In Western economic theory, it was once believed that the only goal of a company was to pursue a return on shareholder value. This idea has profoundly influenced the rules of business in the Western world since the middle of the last century. Throughout history, it is not difficult to see the harm of this theoretical trend to sustainable development. For example, Enron, once a glorious energy giant in the United States, committed financial fraud in its pursuit of profit maximization and eventually went bankrupt. This result not only led to a large number of employees losing their jobs, but also triggered a crisis of trust in the U.S. CPA profession.

In the 1980s and 1990s, a large number of non-governmental organizations (NGOs) (NGOs) defended workers' rights and advocated green development and environmental protection emerged in Western civil society. These NGOs are increasingly involved in CSR discussions, advocating that companies should not only aim to maximize shareholder value, but should be more responsible for the negative externalities of the company, and take responsibility for people, communities, and the environment. It was also during this period that related doctrines such as stakeholder theory came into being, fiercely challenging the theory of maximizing shareholder value, which had been held by the business community.

Since 2000, after 10 years of efforts, the International Organization for Standardization (ISO) has united various stakeholders in 100 countries around the world to discuss and formulate the world's first standard document on social responsibility, ISO 20006. So far, the global discourse system has unified the definition of the concept of corporate social responsibility, and proposed a framework system to promote the development of corporate social responsibility. Prior to this, a hundred people may have a hundred understandings and definitions of CSR, which also objectively hinders the normative development of corporate social responsibility and the solution of many related issues.

Simply put, making companies responsible to their various stakeholders is called corporate social responsibility. Among them, stakeholders are directly or indirectly affected by corporate decisions and business activities, and their actions may also affect the development of the company, including but not limited to shareholders, employees, customers, regulators, partners, communities, and even the ecological environment.

At the end of the last century, the seventh Secretary-General of the United Nations, Kofi Annan, proposed the Millennium Development Goals (MDGs). In 2015, ban Ki-moon, the eighth secretary-general of the United Nations, proposed the Sustainable Development Goals (SDGs). From the MDGs to the SDGs, the issue of global sustainability has become clearer and more consistent.

However, it is not enough to rely solely on the United Nations and governments to promote CSR development, and a more effective way to do so must be found, that is, to leverage the power of business. The government is more responsible for secondary distribution, a series of social problems can not be solved by the government's macro-control alone, and the remaining huge funding gap must rely on social resources to raise. So the first thing that comes to mind are the multinational corporations that are rich enough to rival the nations. They not only have a wide geographical coverage of their business, but also have a very long industrial chain and occupy a variety of resources. If they can actively participate in the governance of sustainable social development, the process of sustainable development in the world will increase significantly. It is also in this context that various countries have begun to promote the corporate responsibility movement, and will promote the development of CSR as an important starting point, and increasingly focus on CSR to ESG management practices. After 2005, ESG gradually became a tool for financial innovation and entered the business field, of which ESG rating became a booster to quickly leverage capital power and affect the direction of investment and financing.

Q3: When did you start working on sustainability?

A: My Social Value Investment Alliance (Shenzhen) is the first innovative international public welfare organization dedicated to sustainable financial development in China. The IIT was just an entrepreneurial organization of 1, 2, 3 and 4 people until it developed into an efficient and capable naked corps of 20 or 30 people.

In 2017, the Social Investment Alliance established the Social Value Evaluation Standard Working Committee (hereinafter referred to as the Social Standards Committee). I also first became acquainted with it at that time and was inspired by the positive dedication of the team members. The experts of the Social Standards Committee are volunteering to support the research of sustainable development value assessment models and related issues in the form of a "time bank".

In this way, a group of experts from all walks of life in the north and south of the world have insisted on it for 5 years. We go from strange to familiar, debate together, explore and pursue the scientificity, rigor and market verification of the value evaluation model together, and explore the solution of enterprise value evaluation together. After 2019, the research results have become one of the series of sustainable development blue books released by the Social Science Literature Publishing House under the name of "Sustainable Development Value Assessment Report of A-share Listed Companies - Discovering China's "Yili 99"".

Q4: How is the Menglang born this year different from the Social Investment Alliance?

A: At the end of 2020, Ma Weihua, chairman of the presidium of the Social Investment Alliance (now chairman of Menglang), proposed: "If only a small and micro public welfare organization is relied upon, it is impossible to carry such a great historical responsibility and mission of sustainable development. Therefore, he advocated the use of commercial methods to make greater services, which is the origin of Menglang.

It is not a mercenary organization, it should explore a path that can standardize and scientifically enhance the contribution of corporate social value. It hopes to promote the responsible practice of the Chinese business community with the original intention of public welfare, the business model, financial tools and scientific and technological means, lead with values, and work together with all sectors of society to promote the development of new commercial civilization.

Compared with the European and American markets, China's ESG investment and related research are still in its infancy. From the beginning to the "follow-up" and even to the future "leading", There are still many problems to be solved. One of the prominent problems is the lack of local commercial operation of independent third-party ESG rating agencies and authoritative ESG rating standards. The establishment of Monlang and the development and application of the FIN-ESG Rating model filled this gap in a timely manner.

Q5: Can you elaborate on the Yili evaluation model?

A: The Fin-ESG Rating model and the indicator system measure the comprehensive value of an enterprise with six system indicators, namely Financial, Innovation, Norm, Environmental, Social and Governance. The first three element systems (FIN) focus on the business strength, innovation and internal driving force of enterprises to achieve sustainable development, while the last three element systems (ESG) mainly examine the performance of enterprises in environmental, social and corporate governance dimensions, including their risk identification and prevention and control capabilities in related aspects, and the positive and negative externalities generated by their business activities. Menglang uses the Yili evaluation model to rate the A-share listed company CSI 300, and it is expected that the evaluation scope will be expanded to CSI 500 listed companies within the year, and full A-share coverage will be achieved in the near future.

Overall, the Yili evaluation model has the following four characteristics:

First, the international mainstream ESG rating mainly focuses on assessing the risk exposure faced by enterprises in the environment, society and corporate governance, that is, ESG risk control management, while the Yili evaluation model, which takes the dialectical relationship between "Yili" as the logical starting point, not only pays attention to and examines the external impact of enterprise business activities, but also pays attention to the internal motivation and strength of enterprise self-sustainable development. The model integrates the traditional Chinese Confucian wisdom, takes into account the "righteousness and profit", agrees that the righteousness and profit can be transformed and mutually promoted and jointly improved, emphasizes the logical closed loop of "good people do good deeds and good rewards" in commercial operations, and organically combines ESG risk prevention and control and cost input with the future sustainable development opportunities and new business opportunities of enterprises.

Second, the Yili evaluation model integrates the scientific core of Western ESG ratings in terms of model structure, index system, and scoring method, and takes into account China's national conditions and enterprise conditions according to local conditions. The model systematically sorts out and clarifies more than 1,000 detailed indicators of enterprise value assessment, and then constructs and evaluates them according to six categories and five levels to ensure the scientificity and applicability of the evaluation model.

Third, the Yili assessment model starts from the six dimensions of FIN-ESG, which is in stark contrast to the practice of international rating agencies that only focus on the performance of enterprises on ESG issues, and rarely examine the company's willingness to sustainable development and responsible values and innovative models. It is an evaluation method that can systematically consider the driving force of corporate values, the transformation of development methods, and the ability to achieve comprehensive performance, focusing on measurement and discovering "long-distance running champions", which can be said to be a better ESG evaluation.

Fourth, the Yili evaluation model constructs a universal evaluation index system, and according to the Shenwan industry classification, a series of evaluation sub-models for differentiated evaluation of 28 first-level industries are formed, which greatly improves the industry differentiation degree and the applicability of the assessment of the model.