CSR, or Corporate Social Responsibility, is likely to be a familiar term for many of us. But ESG, which stands for Environment, Social and Governance, is probably not yet as well known.
The ESG criteria are a set of standards for a company’s operations that socially-conscious investors use to screen potential investment. Their adoption is a growing trend in the capital markets of the Greater China region.
Through government policy, more and more countries have made ESR disclosure mandatory for listed companies. Many expect China to take the same pathway soon, which it is believed will boost the development of Chinese civil society, either directly or indirectly.
Global Reporting Initiative (GRI), an Amsterdam-based international nonprofit organization, provides the world’s most widely-used ESG reporting framework, the GRI Standards, that makes it easier for report-issuers to communicate their impact with their shareholders, stakeholders and investors effectively.
Verna Lin, the Head of GRI’s Regional Hub for the Greater China Region, spoke to CDB on the sidelines of the 2020 CRO Global Summit in Shanghai, on January 9, to share her views on ESG disclosure in the Greater China region.
Verna Lin, the Head of GRI’s Regional Hub for the Greater China Region, gives a keynote speech entitled ‘Global Trends of ESG Disclosure’ at the 2020 CRO Global Summit. (Photo: CRO Global Summit)
What’s the difference between CSR and ESG reporting?
Verna: We are seeing a trend towards adopting ESG disclosure, but in fact CSR and ESG are talking about the same thing. Which term to use depends on which capital market you operate in and the perspective you are taking. The term ESG was coined from an investors’ perspective and talks about a company’s impact on the environment, society and governance, while CSR (corporate social responsibility) initially had a broader focus from a perspective of social responsibility. In the Mainland and Taiwan the term CSR was adopted because of the capital market structure. When China adopted CSR decades ago, the term ESG did not yet exist. The fact that Hong Kong uses ESG disclosure for sustainability reporting guidance reflects its nature as a financial centre and international investment hub. We see that ESG disclosure is becoming a popular way to describe sustainability reporting. As everything is converging, the more important question remains how a company can truthfully communicate its impact on the world.
Currently, in the Greater China region, is there a basic requirement on what corporations should disclose in their ESG reports?
Verna: Each country has its own ESG guidelines. For example, the Hong Kong Stock Exchange (HKEX) has updated and published its ESG Guide on the 18th of December 2019, with the amendments to take effect on the 1st of July 2020. A company publishing an ESG report according to the GRI Standards would also meet the requirements set by the HKEX, as GRI Standards represent global best practice for reporting on a range of economic, environmental and social impacts. For companies which are at the initial stages of building their capability in sustainability reporting, reporting according to the KPIs or guidelines set by the HKEX would fulfil their regulatory requirements.
Could you share with us the role GRI plays in the Greater China Region?
Verna: My responsibilities include three layers. The first one is to continue our policy advocacy by working with the authorities, the regulators and the policy makers in this region, for example the Shanghai Stock Exchange, Hong Kong Stock Exchange and Taiwan Stock Exchange. Secondly, we work with global NGOs like UN entities, industry associations and all the different professional bodies to advocate for sustainability reporting. The third layer is the so-called stakeholder engagement, in other words interacting directly with report issuers. For instance, we do engage with corporates that have adopted the GRI Standards. We understand their needs and walk with them in their sustainability journey. We are also looking to expand the GRI Community in order to communicate directly with them. By joining the GRI Community, members not only demonstrate their support of GRI and our mission, but also have the opportunity to interact with their peers or leaders from the same industry around the globe, and contribute towards global sustainability goals.
How does GRI work in the different markets within the Greater China Region?
Verna: The three capital markets in the Greater China regions are very different from each other. In the Mainland, the CSRC (China Securities Regulatory Commission) has not yet officially made ESG reporting mandatory. The market is expecting the implementation but we have to wait for the official announcement. The support from the private sector and consultants has been tremendous and valuable in both the development and the quality of sustainability reporting.
Mainland China is a huge market and like other international capital markets, they will develop domestic guidelines for listed companies. GRI will continue working closely with policy makers in China to facilitate communication. Among the companies which have begun disclosing ESG efforts, 70% adopt or refer to the GRI Standards. GRI also works with local framework provider CASS (Chinese Academy of Social Science), and has published several linkage documents that are downloadable in both English and Chinese versions.
As for Hong Kong, it has always been a market-driven jurisdiction. Financial institutions and the investment industry are the frontrunners. Fund managers on behalf of investors and service providers have also advocated for ESG integration, and it has become mainstream in the past few years. Working in one of the biggest international financial centres, the SFC (Securities & Futures Commission of Hong Kong) and the HKMA (Hong Kong Monetary Authority) have put much efforts in strengthening the capital market’s green policies. In Hong Kong the private and public sectors work side by side in achieving sustainability goals. The relocation of GRI’s regional office to Hong Kong will boost GRI’s stakeholder engagement throughout the region, spreading sustainability reporting knowledge and best practices. This includes the involvement of various professional bodies and market participants, who together provide the skills and services that companies require to make their ESG reporting robust.
Since 2011, the Taiwan Stock Exchange (TWSE) has encouraged all publicly listed companies to refer to GRI, in the context of international trends in sustainability reporting by most MNCs and the majority of G250 companies. Going further, on the 19th of September 2014, the TWSE and the Financial Supervisory Commission announced that listed companies in specific industries, such as food processing, chemical, and financial services, and those whose paid-in capital is above NT$10 billion are required to issue a standalone CSR report. Taiwan is the first capital market in Asia that mandates CSR reporting. We now also see other sectors that are not required to do so following suit. We have worked closely with the Taiwan Stock Exchange since 2013 and will continue our partnership in facilitating the market’s best practices in sustainability reporting.
What’s the purpose of setting reporting standards? Is it to monitor business operations?
Verna: No. Once again, reporting is about more than just the report itself. The whole point of reporting is to communicate your impact with your existing and potential stakeholders including but not limited to shareholders, staff, customers and investors. The world wants to know what types of and how much positive or negative environmental, social and economic impact your company is having.
For example, ESG reporting can facilitate communication with your target audiences on the company’s carbon emissions information, and in turn provide inputs for the company’s carbon emission policies. Some reporters start with preparing sustainability reports to fulfil regulatory requirements; there are also model companies which have been providing ESG disclosure for years, who intend to take a leadership role in sustainability reporting. Regardless of which stage a company is in, we encourage the adoption of the GRI Standards.
We start with a materiality assessment as lined out in GRI 101 and GRI 103, assessing what’s material to your business or mission. We delegate and certify 100 training partners globally to provide GRI Standards training workshops in their training centres or on-call service at clients’ workplaces.
How does ESG disclosure benefit China’s civil society?
Verna: The Sustainable Development Goal 17 is about partnerships, meaning that no one can achieve sustainable development goals alone. NGOs act as the bridge between the government, society and corporations. NGOs and the corporate sector benefit each other, because for corporates the disclosure of ESG performance is a way to enhance the company’s reputation. As companies grow, they would want to contribute and give back to the society, and they could do that through their partnership with NGOs. I think it’s a win-win for both sides and for the society.
In some countries, NGOs might have doubts over the ESG reports. In cases when they believe the report is misleading or used for “greenwashing”, will GRI take any actions?
Verna: As the standard setter, we don’t evaluate, rank or rate the ESG reports because we need to maintain our neutrality. Yet we do share concerns about quality and the need for improved assurance. There are service providers in the market who provide similar services and there are third-party assurances. The main actors in the market, including investors, will all be evaluating the truthfulness of companies’ sustainability reports, so there’s no point in providing misleading information.
How receptive are Mainland companies towards ESG disclosure, if compared with Taiwan and Hong Kong?
Verna: The market is expecting the regulators to mandate ESG disclosure in the Mainland. Reporters are also preparing themselves for the implementation of the policy. Companies who are already making efforts in contributing to sustainability goals are very receptive towards ESG disclosure. For example, China Mobile, one of the GRI Community members and long term supporters, has been publishing CSR reports for twenty years. China Mobile is dual-listed in Hong Kong and they publish CSR reports in both English and Chinese to communicate with both domestic and international stakeholders. For those who have just started their sustainability reporting journeys, they will soon realize its importance. I think collectively we are moving forward. In the very near future, everyone will join the game and we will all work together for our common goals. To answer your question, I think everybody is very receptive towards ESG disclosure.
What is your vision for the development of the ESG report in this region over the next 10 years?
Verna: The 17 SDGs set by the United Nations are the overarching framework that humankind needs to achieve together. The Greater China region represents a particular position and opportunity, given the market’s scale and strategic relevance. In the next ten years, we must continue collaborating with governments, policymakers and all relevant parties in this region to push for ESG disclosure and further advance the global sustainability agenda. This is clearly in the interest of the marketplace and companies themselves – as well as benefiting wider society.