Big Chinese business must strive to climb higher in global environmental lists, writes Ni Huan, following a less than stellar performance this autumn. There are barriers, but they can be overcome.
Editor’s note: in recent weeks, two reports have hammered home the message that China’s biggest firms are not yet sufficiently open about their environmental performance. The fourth annual China report from the Carbon Disclosure Project (CDP), a UK-based non-profit that asks the world’s biggest firms to share data about their carbon footprint, showed that only 11 of China’s top 100 listed companies are prepared to supply this kind of information. And in a global green ranking from US magazine Newsweek, Chinese business had the worst score out of BRIC nations on environmental transparency and management. Here, Ni Huan looks at the Newsweek data and asks what’s driving the performance gap.
Since 2009, American magazine Newsweek has published an annual ranking of the world’s largest publicly traded companies by environmental performance, regarded by business as an important tool for – or barrier to – building a green corporate image. This year, that list expanded from 100 to 500 companies for the first time, with many of the new players coming from emerging economies. China’s disappointing performance is clear from a glance and requires some probing. What is holding Chinese businesses back? And how can they perform better in this and other green rankings?
In October, Newsweek and its two research partners, environmental research outfits Trucost and Sustainalytics, published two lists: one ranking America’s biggest firms and the other the world’s largest listed corporations. Software giant IBM took the top slot in the United States, but was knocked into second place by German insurer Munich Re in the global list.
Of the 500 firms in the worldwide rankings, 32 were from the Chinese mainland. These included 13 financial companies and four telecommunications firms. The best-performing Chinese companies were all in finance or IT, a pattern consistent with the list as a whole. But of those 32, only the Bank of China made it into the top 100, in a hardly inspiring 92nd place. The rest were mostly concentrated towards the bottom of the list.
Only four Chinese firms, or 12.5%, received an overall green score of 60 out of 100 or above – the number generally considered a “pass” in Chinese culture. (In the list as a whole, 38% of companies achieved scores above 60). All four of the Hong Kong firms ranked had green scores of less than 60, and of three listed Taiwanese OEMs (“original equipment manufacturers”, or parts suppliers), only Taiwan Semiconductor Manufacturing made the grade. Overall, we can say the performance of companies from the Chinese mainland, Hong Kong and Taiwan could be better.
How was the list put together? The analysis relied primarily on information released by the companies themselves. Each firm was given an overall Green Score, made up of weighted scores in three sub-categories: environmental impact (45%); environmental management (45%) and environmental disclosure (10%). Grades out of 100 were given in each category and then combined into an overall score, also out of 100.
The “environmental impact” score came from sector data compiled by Trucost, which assessed the overall environmental impact of a firm’s global operations. It used over 700 metrics across 464 sectors, including nine types of greenhouse gas, water use, solid-waste disposal and emissions that cause acid rain, smog and more. When information was not available directly from the companies themselves, an economic input-output model was used to calculate this score.
The “environmental management” category meanwhile was based on a qualitative analysis carried out by Sustainalytics, which probed each company’s environmental policies, programmes, targets and certification. Three areas are taken into account: the company’s own operations; its contractors and suppliers; and its products and services.
And, finally, the “environmental disclosure” score represented an evaluation of the quality and transparency of a company’s sustainability reporting. As part of this, it took into account whether or not a company participates in or has signed up to initiatives such as the Global Reporting Initiative or the Carbon Disclosure Project, a UK-based effort to persuade the world’s biggest firms to reveal their carbon emissions.
Newsweek’s green rankings provide an evidence-based, cross-industry standard with which to compare the environmental undertakings and performance of the world’s major listed firms: if Chinese business needs to improve, it shows. So what’s behind China’s environmental gap?
Out of the BRIC nations (Brazil, Russia, India and China) Chinese mainland companies performed the best overall and achieved the highest environmental impact scores. But they were the worst performers in environmental management and environmental disclosure. There are several likely reasons for this.
First, comparatively speaking, most Chinese firms do not yet have adequate IT systems for managing environmental data, which limits their ability to disclose that information. Sustainability reporting is relatively new to China compared to developed countries, and internationally recognised reporting standards were only introduced in recent years. Many Chinese firms are now equipping themselves with the necessary professional systems, such as IBM and, SAP but they still need time to build capacity.
Second, the indicators of Newsweek’s green rankings all referred to internationally recognised reporting standards. Although 24 of the 32 Chinese firms on the list use the standards of the Global Reporting Initiative or ISO 26000, overall information disclosure by Chinese firms was not transparent enough to meet these global benchmarks. Chinese business remains conservative about releasing information, particularly when that information is negative, preferring to focus on their achievements in CSR reports. Again, time is needed to make the shift to a more open reporting culture.
And, when the rankers look at the annual and sustainable development reports of Chinese companies, language barriers and lack of direct communication may compound matters, meaning that some firms are given a low or zero score for environmental disclosure. Partnering with local Chinese research firms – as is Trucost’s plan for next year – will help improve lines of communication, and give the rankers a fuller picture of the inner workings of these firms.
There is also a discernible difference in performance between different sectors, possibly reflecting impacts of industry-specific policies. The scores and rankings of China’s 13 financial firms included in the list were better than those of other Chinese companies, including players in capital goods and retail, for example. The best performer, the Bank of China, came 27th out of 90 in its sector. A series of “green credit” policies designed to encourage firms to restrict lending to projects that have a negative environmental impact, implemented by government since 2007, may be influential here, as well as the fact the China Banking Association became the first Chinese industry group to produce a corporate social responsibility report for its sector in 2008.
However, financial services also have their problems. For the last two years, Chinese NGOs have been closely monitoring the environmental performance of the banking industry and found that only four of China’s 14 market-listed banks are fully transparent about loans to polluting and energy-hungry sectors. Indeed, in Newsweek’s disclosure assessment, the Chinese banks only achieved an average score of 12.6. Clearly, sustainability reporting from China’s listed banks is also disappointing.
But the strong business arguments for sharing data are increasingly clear. Global financial instability has made institutional investors even more cautious about risk, and they are making higher demands for the disclosure of sustainability information. Firms that meet Triple Bottom Line requirements – a UN-backed approach to assessing organisational success that covers economic, ecological and social criteria – often attract socially responsible investors due to their management of long-term environmental and social risks. The top 100 firms in Newsweek’s 2009 Green Rankings have, over the last two years, outperformed credit rating agency Standard and Poor’s 500 Index by 4.8%, weighted equally. The top 30 financial performers of Businessweek’s top 100 green companies have made returns of 24.1% over the last two years – 14% more than the S&P 500.
It is not just Chinese firms who appear dumb to this message. Apple, which has come under sustained fire from Chinese environmental NGOs this year for a lack of transparency, was ranked 117th in Newsweek’s global list and 18th of 26 in its sector. Its environmental disclosure score was only 28, the third lowest grade in the industry. Meanwhile, two of Apple’s main Asian manufacturers, Foxconn and Quanta, only achieved disclosure scores of 18.8 and 8.3 respectively. If we are to expect more from Chinese business, we must demand more from our biggest multinationals too.
This is an edited version of an article that first appeared in China Newsweek on October 24, 2011. It is used here with permission.
Ni Huan is a research fellow at the Policy Research Centre for Environment and Economy. She is manager of the evidence-based evaluation of China’s Green Credit Policy, funded by FCO’s Global Prosperity Fund.
This article is published as part of our Green Growth project, a collaboration between chinadialogue and The Energy Foundation.
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