Entrepreneurs, as a social class, now have much greater influence in China’s business affairs due to the rapid development of the country’s economy. Additionally, the development of We-Media products like micro blogging has expanded entrepreneurs’ interest in discussing contentious social and environmental issues over top of more traditional business matters. By so doing, entrepreneurs can leverage their influence within society to promote sustainable social development. A key example of this occurred in August 2013, when a micro blog post from Ren Zhiqiang, a famous real-estate entrepreneur in China, revealed that a Chongqing-based company listed on Shanghai Stock Exchange was involved in an unprecedented environmental protection scandal.
On 11 August, Ren Zhiqiang posted on his micro blog that Chongqing Titanium Industry Co. (000515) was pouring untreated sewage directly into the Yangtze River, with a pollutant concentration nearly 100 times more than the legal limit. With over 15 million followers, Ren’s post immediately aroused attention from Chongqing Titanium’s parent company, Pangang Group Steel Vanadium & Titanium Co., Ltd (000629). Pangang stated that it would suspend share-sales, in compliance with the Shenzhen Stock Exchange regulations, should any previously undisclosed information concerning its subsidiary eventually appear in the media in order to give the company time to release a statement concerning the accusations.
This is in fact not the first time Pangang Group has become the subject of public scrutiny due to environmental problems. According to the SynTao Local News Monitoring System and IPE’s Pollution Map, the company has violated environmental regulations multiple times, with over 20 separate fines issued by the Ministry of Environmental Protection (MEP) since 2006.
On the surface, Pangang Group has successfully managed the media storm caused by the incident, having issued a Clarification Announcement detailing the pollution facts and pledging to resolve the matter before share-sales would be resumed.
The two major reasons that companies are willing to violate environmental regulations are that environmental supervision remains poor and the costs of breaking the law are low. Thus, it is paramount for government to better balance economic development with environmental protection needs while pursuing of deeper economic reform. China can no longer sustain the export-oriented and state-led investment model that supported the country’s high speed GDP growth. The large amounts of pollution, massive energy consumption, and intensive resource exploitation that has been produced while continuing to operate as “the world’s factory” will not only further jeopardize the environment, but also fail to achieve economic recovery and meet the government’s “beautiful China” blueprint.
Fortunately, regulatory bodies are now utilizing multiple measures, including legislative and administrative regulations along with a mixture of economic incentives, to encourage change. Faced with the increasing regulatory pressure, combined with the public’s environmental concerns, corporations are gradually integrating environmental issues into their assessment of operational risks. Following this trend, investors should increasingly consider environmental factors and their influence on a company’s financial performance when making investment decisions.
• Environmental information disclosure mechanisms will force companies confront environmental problems and exert pressure on highly-polluting companies
Currently, the MEP’s environmental information disclosure policy requires the 15,000 companies under its supervision to disclose relevant environmental information through the Ministry’s public information platform. Additionally, the Shanghai and Shenzhen Stock Exchanges now encourage public companies to release CSR or environmental reports. According to SynTao’s research, 661 public companies released their CSR reports in 2012. For companies that care about their corporate image, the environmental information disclosure mechanism has encouraged many of them to attach greater importance to their environmental performance. When improper business conduct is reported, a company may face challenges with procuring inventory, securing loans, going public, merging with or acquiring other companies, and expanding, and may also be subject to increased scrutiny from media and NGO groups.
• Green credit and green bonds set environmental requirements for corporate financing
The green credit and green bonds policy implemented by the MEP in 2008 make environmental concerns a key factor in impeding further capitalization and financing of highly polluting and energy-inefficient industries. An example of this can be seen in the IPO process. The titanium-dioxide powder industry is considered to be a heavy polluter, and the IPO application of Lomon Corporation, one of the largest companies within its sectors, was rejected by the China Securities Regulatory Commission recently. Analysts have subsequently pointed out that environmental concerns, along with the polluting and exploitative nature of this industry, may hinder a company’s IPO potential. In other words, environmental policy has become a key success factor for companies during the IPO process.
Implications for investors
Institutional investors have begun to consider environmental, social and governance (ESG) factors as three significant non-financial indicators that can affect the performance of investment portfolios. Institutional investors have incorporated ESG considerations into investment analysis, due diligence, and investment decision-making. In addition, the United Nations Principles for Responsible Investment (UN PRI) asks every signatory to incorporate ESG concerns into their investment strategies. Currently, 1213 investment agencies have signed the initiative, with total assets under-management of USD 34 trillion.
Although many companies and investors believe that an increase in environmental controls will raise short-term costs, a recently research conducted by the Harvard Business School has indicated that companies can bring about greater financial performance as their environmental, social and governance performance improves. To simultaneously improve both kinds of performance, it requires companies to produce major innovations in products, processes, and business models. As a result, companies that attach greater importance to ESG performance tend to have sound management, strong innovation capacity, and a good reputation, helping to bring investors long-term sustainable investment returns.
SynTao 2012 ESG Report finds out that apart from environmental risk, other ESG challenges of Chinese public companies include: occupational health and safety, product safety, labor conditions, business ethics, corruption and cheating.
This article was originally published in China ESG Monitor (August 2013) -- a monthly newsletter highlighting ESG trends and research relevant to sustainable investment in China.
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