This is a presentation by Ms. Sun Xiufang from Forest Trends on environmental and social disclosure policies in China with a focus on Chinese company commitments and stock exchange requirements in land-based sectors.
The presentation was made at the third event of the China-Africa Forest Governance Learning Platform, held in Beijing 24-25 October 2016.
The event explored how China can help sustain Africa’s forests with a focus on the role of private sector actors and Chinese stakeholders in working with African stakeholders to promote pro-poor and sustainable investments and trade in Africa’s forests.
More details: www.iied.org/mists-china-africa-forests
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Environmental and social disclosure policies in China
1. Environmental and social disclosure
policies in China
Assessment of Chinese company commitments and stock exchange
requirements in land-based sectors
Forest policy, trade and finance October 24 2016
2. Background
• “Go Global” strategy stimulated increase in OFDI
• One Belt, One Road; new “development banks”
• Companies implicated in illegal/unsustainable activity, despite
pledges to abide by host country laws, financial incentives from
banks and investors, and government-mandated guidelines
• Growing share of publicly listed companies in investment
output (v. SOEs) – but few studies to date
• Corporate disclosure requirements mandated by the Chinese
Government, stock exchanges, and financial institutions
3. Research context
•Enhance understanding of the roles, activities, and
environmental, social, and governance (ESG) impacts of
publicly-listed companies engaged in land-based sectors,
both in terms of company behavior and financial
performance
•Aim: to identify avenues to ensure that operations, both
domestically and abroad adhere to international best
practice, filling literature gap
4. Questions to address
•Extent of ESG policies in publicly-traded Chinese
companies (company-specific)
•Comparison of company-specific ESG policies in China vs.
global peers
•Whether presence or absence of ESG policies affects
financial performance of Chinese land-based sectors
5. Methods
Chinese stock exchanges: SSE, SZSE, and HKSE
1.Screened global stock exchanges for companies in land-based
sectors according to their Thomson Reuters Business Classification
(TRBC)
2.Identified a set of environmental and social indicators monitored
by Thomson Reuters;
3.Evaluated the indicators’ presence or absence for the companies
in the set for Chinese and global companies;
4.Identified and collected a set of financial performance indicators
most relevant to this analysis;
5.Analyzed company performance and E&S policy presence
6. ESG “indicators”
1. Human rights policy
2. Environmental management team
3. Environmental investments initiatives
4. Sustainable packaging policies
5. CSR sustainability external audit
6. CSR sustainability reporting
7. Land environmental impact reduction policy
8. Biodiversity impact reduction policy
7. Number of land-based companies in
each industry group
Land-based sectors Global China and Hong Kong
Coal 279 60
Containers & Packaging
534 51
Food & Tobacco 2765 238
Metals & Mining 4169 258
Oil & Gas 1691 61
Paper & Forest Products
487 63
Renewable Energy 381 56
Total 10306 787
10. Comparing ESG policies with
financial performance
• Financial performance metrics:
1. Market capitalization
2. 52-week total return
3. Percentage Price Change Relative Index
• ANOVA statistical analysis to identify correlation
between metrics and presence/absence of at least
one ESG policy
01/06/17
12. Results and conclusions
• Inferences on relationships between ESG policies and financial
performance difficult to draw, but companies with policies are
often larger, with high share price appreciation
• Companies that fare worst relative to market indices in both
China and ROW demonstrate lowest adoption of policies
• <1% Chinese companies have ESG policies – slower to adopt
than ROW peers (4%)
• No Chinese company in paper/forest product or coal
sectors report policies – well behind global average.
Limitations: low availability of public data; difficult to parse out
domestic v. international operations
01/06/17
13. • HKSE features the most comprehensive and concrete set
of disclosure guidelines when compared to the SSE and
SZSE
• No means to ensure that companies report on
environmental impacts abroad distinctly from those
domestically
• No specific wording to prompt companies to address
timber legality or other land-based sustainability issues
Disclosure guidelines by stock
exchanges
14. Companies’ disclosure on
resource uses
• 72% of companies provided some general disclosure on
efficient use of resources, symbolic reporting in nature
• Only a handful of companies (6%) fully complied by
providing more comprehensive disclosure of resource use
• Companies tended to provide stronger disclosure on energy
use
• Listed companies in the paper and forest products /
containers and packaging industries were, on average, very
limited in their disclosure
15. Companies’ disclosure on
identity of suppliers
• High among companies listed on the SSE
But, companies are not required to report the
geographies or location of land-based sourcing, nor
on the supplier’s ESG performance
• Virtually non-existent for companies listed on the
SZSE and HKSE
Companies listed on the latter exchanges
exhibited some lag in complying with corporate
disclosure requirements
16. Companies’ disclosure on risk
management
· • HKSE formally requires to disclose policies to
manage E&S risk in supply chains
• Companies that do so provide no insights into
specific risks
Leaves a window for companies in the land-
based sectors to under-report negative
externalities
understanding of the roles, activities, and social and environmental impacts of publicly-listed companies engaged in forestry, agriculture, mining, renewable energy and oil/gas headquartered in China (hereafter “Chinese land-based sectors”). The overarching aim of the project is to identify avenues to ensure that such companies’ operations, both domestically and abroad, adhere to internationally-recognized environmental and social standards. The extent to which the presence or absence of environmental and social safeguards (whether adopted by the companies themselves or imposed by investors or stock exchanges) have or have not changed financial performance, remains poorly understood, despite increasing corporate disclosure requirements mandated by the Chinese Government, stock exchanges, and financial institutions. Given the unique characteristics of operating in the land-based sectors – exploiting or altering natural resources and potentially displacing people – the question of whether environmental or social performance affects financial performance appears to be salient.
1. Comparison of company-specific ESG policies in China v. global peers: a first step in understanding the financial dynamics between Chinese companies in land-based sectors and the possible links between financial performance and environmental and social measures
2. Assessment of ESG requirements of stock exchanges and banks with a focus on compliance: this tracked compliance of companies against mandatory and voluntary guidelines on the Hong Kong Stock Exchange, Shanghai Stock Exchange, and Shenzhen Stock Exchange, along with a comparative review of disclosure policies for major stock exchanges around the world.
Chinese stock exchanges: SSE, SZSE, and HKSE
As a proxy for presence of “environmental and social policies,” Indufor identified the following
indicators relevant to land-based sectors, which were found in the Eikon database:
• Human Rights Policy: Does the company have a policy to ensure the respect of human rights
in general?
• Environment Management Team: Does the company have an environmental management
team?
• Environmental Investments Initiatives: Does the company report on making proactive
environmental investments or expenditures to reduce future risks or increase future
opportunities?
• Sustainable Packaging Policy: Does the company have a policy to improve its use of
sustainable packaging?
• CSR Sustainability External Audit: Does the company have an external auditor of its
CSR/Health and Safety/sustainability report?
• CSR Sustainability Reporting: Does the company publish a separate CSR/ Health and Safety
/sustainability report or publish a section in its annual report on CSR/ Health and Safety
/sustainability?
• CSR Sustainability Committee: Does the company have a CSR committee or team?
• Land Environmental Impact Reduction Policy: Does the company report on initiatives to
reduce the environmental impact on land owned, leased or managed for production activities
or extractive use?
• Biodiversity Impact Reduction Policy: Does the company report on its impact or on activities
to reduce its impact on biodiversity?
Figures 1 and 2 compare the results of the Chinese companies and the RoW set. Several findings are derived from these figures. Firstly, the Chinese companies with at least one E&S policy are below the RoW set in all sectors except Renewable Energy. Secondly, the Chinese Paper and Forest Products sector lags well behind the RoW.
Of nearly 800 companies identified in the initial analysis, less than one percent report indicators of company-specific environmental and social policies. Despite recent concerns with environmental and social impacts and maintaining China’s image and good standing in the global marketplace, and a renewed “push” by Chinese government and financial institutions to promote green OFDI, Chinese companies have been slower to adopt policies than their global counterparts. Of nearly 11,000 land-based companies identified globally, nearly four percent identify such policies. While neither set presents robust integration of these policies, it is clear that several countries, particularly in Europe, tend to perform better on this indicator. Notably, none of the companies in paper/forest products or coal sectors reported safeguard policies. Given their RoW counterparts, China’s paper and forest products sector in particular is well behind the global average.
When analysed by the type of E&S policy in place
the Chinese companies lag behind their RoW counterparts in all policy types. Notably, the policies
on external CSR audit and Human Rights fall far behind the RoW set. Chinese companies appear
to focus more on internal CSR committees and reporting and environmental concerns.
Analysing the results of the quartiles in the China, we observe that companies in the upper quartile of market capitalization account for 85% of all companies with at least one E&S policy. In other words, the larger companies in the set demonstrate more E&S policy adoption than the smaller companies. This finding is consistent with the notion that larger companies are under more regulatory and public scrutiny to institute policies. Moreover, they are likely to be the companies with the financial and human resources required to develop and institute E&S policies. In the case
of the 52-week return category, we see the companies with performance in the lower 3 quartiles account for all the companies with E&S policies. Whereas in the Percent Price Change Relative to Index the existence of the policy is concentrated in the middle two quartiles. While it appears that companies with at least one E&S policy perform relatively poorly compared to peers for the 52-week total return and Percent Price Change Relative to the Index, this could be explained by the tendency for smaller companies to exhibit exponential share price appreciation in the early stages of the
company’s development before they mature into companies that institute more robust internal policies such as E&S policies. Nonetheless, only one company in the lower quartile holds an E&S policy, which could suggest that the presence of the policy is associated with companies that perform closer to the median of all companies in the Chinese land-based sectors.
ROW companies exhibited similar characteristics
However, its mandatory “Comply/Explain” disclosure reuiqrements are still written loosely enough such that companies can be selective in reporting.
With some exceptions, sourcing of raw materials still tends to be opaque.
On the SSE – the only exchange where companies have been forthcoming on disclosing the identities of their suppliers – companies are not required to report the geographies or location of land-based sourcing, nor on the ESG performance of the supplier.