Latest Articles by Guo Peiyuan

The future of environmental management

Peiyuan Guo — Fri, 08 Dec 2006 15:29:00 +0000

China's companies are cleaning up their act, writes Guo Peiyuan, but many in business still harbour misconceptions. Rather than hindering growth, environmental standards can save money and open up new markets.

China’s attitude to corporate environmental management has developed in three stages. From the foundation of the People's Republic in 1949 to the start of the reform era in the late 1970s, the government regarded environmental pollution as a consequence of capitalism – something that socialism would simply not suffer from. The role of enterprises was to manufacture goods in accordance with government planning. There was no need for them to consider environmental issues, nor was there any conception of what corporate environmental management might be.

During the second phase, from the reform era up to the mid-1990s, the government realized the importance of dealing with industrial pollution and put many environmental laws and regulations in place – but their implementation was not strictly enforced. Businesses were unwilling to take the initiative, while the exploitation of loopholes was rife. Also, some local governments opted to tolerate pollution for the sake of maintaining income, and so failed to enforce environmental law. Business paid lip-service to environmental management, but it was not actually implemented.

During the third stage, from the mid-1990s to the present day, industrial pollution has reached a level where it cannot be left untreated and the government has taken a firmer attitude, using stoppages, closures, company mergers and changes in production to force enterprises to make real improvements in their environmental management. Finally, businesses are starting to face up to environmental management issues.

It seems that Chinese companies have only changed their environmental performance when they are forced by external pressures. In the past, this pressure came mostly from government, but the situation now is more complex. For instance, pressure may come from overseas purchasers and investors. If a company's products or technologies do not meet specified environmental standards, buyers may refuse to purchase and investors can pull out. Chinese companies may have no option but to spend on improving their methods and keep the other party happy. Pressure may also come from civil society, including the media and NGOs. When people become better-off, they are no longer willing to tolerate dust storms or polluted waterways and will protest to the companies responsible. In some areas, locals have blockaded factories. Meanwhile, NGOs and the media have taken on a supervisory role, repeatedly exposing offending factories. These voices of society may not have binding force, but their influence cannot be underestimated.

In China, a company's response to environmental concerns differs according to its size. Large firms are relatively responsive as their corporate image directly affects profits. This is mainly true for state-owned companies and the China-based subsidiaries and joint-ventures of multinationals. State-owned companies are closely associated with government, and at least have to take a stance in support of the government's sustainable development strategy. Companies owned by multinationals need to consider the parent company's global image, and so take environmental concerns into account at every stage for fear that a mistake could set off a chain reaction in the global media and markets.

But corporate image is of less value to small and medium enterprises (SMEs), and the majority of them do not pay adequate attention to external pressure about environmental concerns. Many of these are Hong Kong and Taiwan-invested SMEs and local firms in heavily-polluting low-tech industries such as fur, clothing, paper-making and metallurgy, which present a serious threat to China's environment. Over the past decade, areas where these firms are concentrated – such as the Pearl River delta – have already suffered serious damage. These companies are unwilling to change, believing that environmental management will bring nothing but increased costs. This leads them to attempt to evade government regulations or purchasers' requirements. It has also lead to some bizarre situations – water treatment plants are installed and never used except during government inspections, or companies wait till nightfall to discharge their waste.

This is not to say that every business owner is at fault. Apart from a few corrupt bosses, I’m sure most would like to run a safe, environmentally-friendly operation. The mistakes they make are due to a lack of knowledge about environmental management and what they can do beyond buying new equipment.

I once heard an electroplate manufacturer complain that to meet environmental standards, he had needed to build a new factory, equipped it with modern, imported machinery using overseas technology, and installed a water treatment plant. The cost of his products rose greatly and sales went down as a result. He was extremely discontented and put the blame squarely on environmental standards. But in fact he was harbouring two key misunderstandings about corporate environmental management.

Firstly, he mistakenly believed that becoming an environmentally-friendly company required nothing more than the purchase of new equipment. Corporate environmental management is not just an issue of equipment and technology – the most crucial factor is the management itself. The equipment can be bought, but the management needs to be learnt. Generally speaking, good environmental management combined with decent technology can cut operating costs by saving energy, materials and human capital.

Secondly, he failed to target a new group of customers to match his new circumstances. In producing environmentally-friendly products, his customers should not have been restricted to China. He should have looked to global markets to find customers willing to spend the extra. Perhaps on the other side of the world, companies were complaining that they could not find an environmentally-friendly electroplate supplier. Bringing together the needs of both buyer and seller could have covered the additional costs of production, and his products would have remained competitive.

If a company can change its attitude towards the environment, it will see wider markets and increased competitiveness, not increased costs – something too few Chinese businesspeople have realised. But the government must also bear some of the responsibility. In the process of dealing with industrial pollution, the government has treated it as a public good. As a result, people feel the government is ordering business to sacrifice its own interests in order to protect the public interest. The government uses crude measures, such as inspections, punishments, stoppages and closures, which may scare a company, but cannot persuade it to change. Companies will always look for ways to get around the government. It becomes a never-ending game of cat and mouse.

To turn the situation around we should change our old ideas about dealing with pollution – particularly end-of-pipe treatment – and make competitiveness a starting point. Environmental management should be part of the essence of corporate management itself. Many Chinese companies use a low level of technology, and management techniques are often coarse – there is great room for improvement. But with the correct guidance, these firms could be given a new lease of life, becoming both environmentally friendly and more competitive.

China already has some innovative prospects. For instance, a Sino-German environmental consulting project in Zhejiang now helps local firms adopt the environmental management tools used in German companies. Profits have improved, and so have the environment and the company’s organisational management. It is an example worth learning from.

Guo Peiyuan is a researcher and PhD candidate at Qinghua University, focusing on finance, sustainable development and corporate social responsibility. He is the co-founder of Syntao.

Also about sustainable business on chinadialogue: Green grows the opportunity

Homepage photo by Astrid B

Socially responsible investment emerges in China

Peiyuan Guo — Mon, 19 May 2008 02:58:00 +0000

As Chinese banks and investors become involved in projects across the developing world, green issues are high on the agenda. The country’s officials, bankers and business people are starting to embrace new concepts, writes Guo Peiyuan.

Along with the rapid development of Corporate Social Responsibility (CSR), Socially Responsible Investment (SRI) is emerging in China’s financial market. Some bankers and fund managers have become active on SRI issues. Regulators, stock exchange authorities and other stakeholders have also become involved. This article aims to provide an overview of SRI development in China in 2007.

Several interesting developments are relevant to SRI in China’s banking sector. First, more banks released CSR reports in 2007. China Construction Bank published a CSR report in May 2007, followed by Shanghai Pudong Development Bank (in June 2007) and China Merchant Bank (in September 2007). These reports cover various topics ranging from corporate governance to employee relations and philanthropic activities. Though these reports do not focus on how environmental, social and governance (ESG) issues impact the banking business, CSR reports are still a good starting point for Chinese banks to practice non-financial disclosure.

Secondly, some banks begin to consider environmental factors in their business. On December 19, 2006, the People’s Bank of China (PBOC, China’s central bank) announced its collaboration with the State Environmental Protection Administration (SEPA) – now the Ministry of Environmental Protection (MEP) – to integrate information on corporate pollution records into the database for corporate credit. PBOC then urged all commercial banks in China to conduct a strict environmental screening process when lending money to companies. This became widely known in China as the “green lending campaign” or “environmental storm in the banking sector”. Banks in China are forced to follow this policy. Industrial and Commercial Bank of China (ICBC), one of the biggest banks in China, declared that it had set up a system to classify sectors into three categories, and clients into five categories according to environmental criteria. (The three sector categories are: Positive Sector, Normal Sector and Limited Sector. The five client categories are: Encouraged Client, Preconditioned Client, Neutral Client, Limited Client and Rejected Client. ) But it is still not easy for many banks to figure out an effective mechanism for green leading. The International Finance Corporation (IFC) grasped this opportunity and established cooperation with SEPA in early 2008. In January 2008, SEPA introduced the Equator Principles in China.

Besides screening borrowers to prevent pollution, energy efficiency and emission control became two other hot issues in the banking sector because they are on the top of the Chinese government’s agenda. An official from the China Banking Regulatory Commission (CBRC) announced that CBRC was drafting a piece of guidance which aimed to link a company’s energy efficiency and emission performance to its credit standing. China’s Industrial Bank, a local bank in Fujian province, achieved great success in this regard. Supported by IFC, this bank designed an energy efficiency program that offers tailor-made financing tools to support industrial, commercial and residential entities in implementing energy efficiency improvement projects and the use of cleaner fuels and renewable energy. The bank financed nine projects in six months and won the Financial Times Sustainable Banking Award in 2007.

Though SRI funds do not yet exist in China’s financial market, an SRI-like fund has been created. According to its prospectus, this fund, the Bank of China Sustainable Growth Equity Fund, manages its investment portfolio from two dimensions: profitability and sustainability. Established in 2006, the fund was not very attractive while the whole market was booming as its investment style was rather conservative. When the market slumped, however, the fund showed its strength, i.e. its capacity to resist risk. According to Morning Star, the leading rating agent, the fund was ranked top in the first quarter of 2007. From October 16, 2007 to January 4, 2008, the Shanghai Stock Index dropped by 12.7% while the Sustainable Growth Equity Fund still managed to grow by 7.6%. It provides a good case to educate investors who care about long term values to enhance their risk resistant capacity by using the SRI strategy.

The Sustainable Growth Equity Fund is not alone. A statement by Li Keping, the vice secretary general of the National Council for Social Security Fund, indicated that this large-scale pension fund might consider SRI as its future investment style. Li said in September 2007 that the Social Security Fund will promote a long-term value investment style and consider corporate governance and socially responsible investment.

Compared to conservatively managed SRI mutual funds, SRI venture capital is more proactive. The China Environment Fund is a leading player in SRI venture capital. In the last few years, it invested in several projects, including two solar power companies, China Sunergy and LDK. Both companies successfully listed in the NASDAQ and New York stock exchange, respectively. The venture capital fund enjoyed great returns from these investments.

Shenzhen Stock Exchange (SSE), one of the two stock exchanges in mainland China, has shown its interest in CSR and SRI since 2006, when it first launched a CSR Guideline for Listed Companies. In this guideline, SSE encouraged its listed companies to be more socially responsible, and in particular to disclose non-financial information through CSR reports. This guideline motivated many listed companies to publish CSR reports in China, even though some were of low quality. In addition, in summer of 2007, SSE organised a CSR training for listed companies to advance the progress of corporate social responsibility.

In December 2007, SSE announced that it was cooperating with the TEDA Group in developing the TEDA Environment Index. This index consists of 40 listed companies. The companies on the index were selected from ten environment-relevant sectors according to their environmental and governance performance. Launched on January 2, 2008, TEDA Environment Index was said to be the first environmental index or even SRI index in Chinese history. It is a milestone for SRI development in China. The index set up a benchmark for SRI style investment, which might be able to indicate the long term values and risk resistant capacity which result from ESG concerns.

In China, government plays an important role in promoting SRI. Government agencies do not fully understand the concept of SRI, and do not use this term. But they understand that financial institutions matter a lot to policy implementation. Therefore, SRI has become a policy instrument in some areas. Obviously, pollution control and energy efficiency are among them. When SEPA realised the value of SRI, it turned to the banking regulators and asked for their support in order to strengthen its influence on business sectors. That was the origin of the “green lending campaign.”

Energy efficiency and emission-based credit screening is a similar story. When the central government set up an ambitious goal regarding energy efficiency and emission control, it urged all government agencies to make efforts in their own areas to help fulfill this goal. Consequently, CBRC decided to integrate these issues into the credit checking process.

As SRI is new to many government officials, bankers and business people, the Chinese government conducted several seminars and workshops in 2007. In late October, SEPA organised a training workshop on the green lending policy. In late November, China Industrial Bank, IFC, and the National Development and Reform Commission jointly held a conference entitled Green Financing. In early December, PBOC and IFC organised a seminar on CSR and the banking sector.

Besides government, some other domestic stakeholders contribute to the development of SRI in China. These stakeholders include academic faculties, NGOs and the media. For instance, a professor from the environmental department of Tsinghua University, organised a few small seminars on green banking at the university in 2007. The Institute of Public and Environmental Affairs launched water and air pollution maps in 2007, which potentially enhances corporate environmental disclosure. The Institute’s work might also have impacts for future SRI developments. As for the media sector, some environmental concerns, in particular water, air and mining issues, are a frequent topic for some business papers. Caijing, a semimonthly finance magazine, became a leading forum for such discussions. In 2007, Caijing magazine published many analytical articles on corporate CSR reporting, water pollution, etc.

Similar to the government, these stakeholders are still learning by doing. For some NGOs in China, SRI is somewhat outside the scope of their knowledge, and they need to learn more to understand the concept and apply it to their campaigns. Some NGOs have begun to pay attention to that the concept. For example, Green Watershed, a local NGO in Yunnan province, participated in SEPA’s green lending workshop in October 2007.

Global stakeholders keep a close eye on China’s SRI development. Some international organisations are interested in engaging Chinese financial investors in their programs. They made some progress in 2007, in particular the following:

• The UNEP Financial Initiative successfully recruited two new signatories from mainland China: China Industrial Bank and China Merchant Bank. The Initiative also invited a team of Chinese representatives to join its annual roundtable.

• IFC signed a partnership agreement with SEPA, to introduce the Equator Principles to Chinese financial institutions.

• Mizuho Corporate Bank introduced its experiences on the Equator Principles at a conference organised by the China Enterprise Confederation.

• WestPac (China) introduced its experiences on CSR in a conference organised by a business magazine.

* Friends of the Earth/US released a report, Time to Go Green: Environmental Responsibility in the Chinese Banking Sector.

• International Rivers and Pacific Environment received China Exim Bank’s environmental policy for public release.

• The Carbon Disclosure Project successfully convinced China Investment Corporation to join as a signatory.

Some global stakeholders, particularly international NGOs, are highly concerned about the overseas operations of Chinese financial institutions. However, most instruments mentioned above, such as reporting, greening lending and the SRI fund, have so far not paid sufficient attention to this aspect. For instance, few CSR reports by Chinese banks mention their overseas branches and international project financing. This might be because of the following reasons. First, China’s financial market used to be disconnected from the global market. Therefore, most banks and funds do not have a large exposure globally, and relevant financial instruments and policies are designed in a Chinese context. Secondly, SRI and even CSR are new to Chinese companies and it is hard for them to have a global SRI/CSR focus at such an early stage.

This is however changing as more Chinese banks and investors get involved in southern Asia and Africa. Some companies, as well as the Chinese government, have experienced pressures from international society and global stakeholders. They will be more careful about their overseas investments in terms of social and environmental impacts in the near future. This provides good opportunities for global stakeholders to engage Chinese companies.

Generally, SRI grows fast when the national economy develops to a level where environmental factors become scarce and social issues have a direct impact on business decisions. This is now the case in China. Nowadays, after 20 years of growth, China is facing a crossroad where we need to change our old development pattern and pay more attentions to environmental, social and governance issues. Otherwise, business cannot survive in the longer term. This is the fundamental background and underlying driver of SRI development in China.

In a well-developed market, ESG issues should be clearly defined and priced. As a result, all investors will act in a way that can realise mutual benefits regarding public welfare. However, China is still far from this stage, and many ESG issues are not reflected in market prices. In such a situation, government policy and regulation become the most important enablers. For example, to prevent negative environmental impacts, government requires all projects to undergo Environmental Impact Assessment as part of the approval process. As a result, investors or lenders have to be careful about the quality of the project’s EIA documents. Otherwise, they may be sanctioned by the government.

On the other hand, civil society, including NGOs, the public, the media etc, is also driving the development of SRI. Although they are not comparable with their peers in developed countries, NGOs, the public and the media have growing power in Chinese society. Sometimes they are able to change a company’s behavior or stop a project. Two examples may illustrate this. In 2006, two journalists disclosed the lack of compliance with labour regulations at FOXCONN, a factory producing electronic products for some leading brands such as iPOD. This embarrassed FOXCONN and motivated them to improve their labour compliance. In the city of Xiamen, Fujian province, people in 2007 raised their voices and opposed plans by the municipal government to bring a chemical company to the town. Their protests were successful and the plans of the chemical company were finally suspended.

For some large financial institutions with global operations, globalisation might be a potential enabler as well. These institutions have to operate on a global level and will meet demands to use a CSR or SRI approach to communicate with their business partners or outside stakeholders. These institutions will proactively need to learn more about SRI.

China is still in the baby stage of SRI development, but some progress has been made. In the coming one to three years, it seems to me that SRI will continue to grow in China, and more people will become aware of its importance. Strongly increasing the amount of SRI funds and the number of SRI tools will require collective efforts by all stakeholders.

The MEP (SEPA), PBOC and CBRC have to work out a green credit system that can be commonly accepted, so that the greening lending campaign, energy efficiency and emission-based credit screening systems can become more effective. The main gap between these organisations is the collection and interpretation of information.

In a downside market, investors care more about risks than they do in a bull market. One of the strengths of the SRI approach is its risk resilience. Consequently, ESG issues may turn up on the investors’ agenda more frequently. This will stimulate professional ESG research and disclosure of non-financial information.

The interest and pressure of academics, NGOs and the media will support this trend. But NGOs and the media have to gain more knowledge before they can effectively use SRI as an instrument to realise their goals.

Guo Peiyuan is the co-founder of Syntao.

Homepage photo by pecus