Zhang Hailiang, a committee member of CPA Australia for the East China and Central China regions, has been frequently engaging with businesses recently. As a professional accountant, he provides Chinese companies with reference advice on ESG practices.
He is a committee member of CPA Australia for the East China and Central China regions, and the Head and Managing Director of Vistra Greater China. CPA Australia is one of the largest professional accounting bodies globally.
The enthusiasm of domestic companies for ESG has exceeded Zhang Hailiang's expectations. Before this, there has not been such a large-scale ESG craze.
According to statistics from the Economic Observer Network, from March to August of this year, different departments have almost monthly issued or internally distributed new policies and guidelines related to ESG, including the Ministry of Finance, the Ministry of Ecology and Environment, and other departments are also preparing the next set of policy documents.
By 2027, national ministries, including the Ministry of Finance, will successively introduce basic guidelines for sustainable disclosure and climate-related disclosure guidelines for domestic companies. By 2030, a unified national sustainable disclosure guideline system will be basically established.
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Top-level policy guidance has put the ESG practices of domestic companies on the string. The Economic Observer Network has learned that more than one state-owned enterprise has established a special ESG team in 2024. However, Zhang Hailiang reminds that while it is important to accelerate the construction of the ESG system as soon as possible, it is also necessary to pay attention to multiple challenges. According to the research results of CPA Australia, the main challenges faced by Chinese companies include cost pressure, especially for cost-sensitive companies, the challenge is even greater, and the investment of such companies in ESG may not yield obvious benefits in the short term.
1: What are the main challenges companies usually face in the process of implementing ESG strategies?
Zhang Hailiang: Looking at the research results of CPA Australia in recent years, the main challenges mainly include cost pressure, especially for cost-sensitive companies, the challenge is even greater, and the investment of such companies in ESG may not yield obvious benefits in the short term.
In the process of ESG practice, it is difficult for related companies to measure and track ESG performance. ESG performance evaluation requires a large amount of data support, but many companies have certain difficulties in internal data collection, analysis, and reporting, including the large amount of ESG information collection work, scattered data, a large number of personnel involved, high coordination and communication costs between various departments and subsidiaries, leading to the difficulty of ESG data statistics and accounting. Therefore, improving the ESG data governance capabilities of companies and ensuring the accuracy of quantitative data is a key issue for companies to promote ESG development.
Another challenge is the lack of unified ESG information disclosure and rating standards. The global regulatory and compliance field is becoming more and more complex, and it is difficult to govern emerging fields including ESG information disclosure and rating standards through a unified global standard. These differences in ESG disclosure requirements and rating systems between regions lead to higher compliance costs and complexity for multinational companies in complying with local regulations.In the process of implementing ESG, the challenges of internal corporate transformation include changes to the company's previous business models, operational systems, and management methods. Driving change requires immense determination and courage, which inevitably demands a certain degree of transformation for the enterprise. Challenges will inevitably arise during this process.
There is also a shortage of ESG talent. According to a joint research result released by CPA Australia and the School of Accounting at Shanghai University of Finance and Economics in 2023, mainland Chinese enterprises' awareness of the importance of environmental, social, and corporate governance (ESG) factors is continuously increasing. ESG factors are gradually becoming an important part of corporate operations, thereby driving the rise in demand for related talents. However, due to the lack of a systematic training system for ESG talents in the Chinese market, there is currently a significant gap in the field.
2: In the current market environment, can ESG investment really bring excess returns, and how can enterprises measure the effectiveness of ESG investment?
Zhang Hailiang: It is more reasonable to say that ESG investment has the potential to bring excess returns in the long term, but it is inaccurate to directly link ESG investment with excess returns, as the effectiveness of ESG investment may vary due to market environment, industry characteristics, and other factors.
In recent years, the concept of ESG investment has gained widespread market recognition and rapid growth. Investors at home and abroad generally believe that practicing ESG can improve returns and reduce overall risks. According to public data, by the end of 2023, the number of domestic ESG funds reached 828, a 4.1-fold increase compared to 2019, with a scale of 539.568 billion yuan. Despite being affected by the overall market downturn, the performance of ESG funds still shows relative stability, especially ESG benchmark indexes generally outperforming the parent indexes.
Measuring the effectiveness of ESG investment is a multidimensional process. In addition to considering performance and the impact on financial returns, factors such as ESG rating improvement, risk and compliance management, policy and regulatory compliance, stakeholder feedback, and attracting investment should also be considered.
3: When enterprises make ESG investments, how should they assess and manage risks related to the environment, society, and governance?
Zhang Hailiang: Effectively assessing and managing risks related to the environment, society, and governance should be based on historical data forecasts and estimates, conducting scenario analysis, drawing on industry best practices, using ESG risk assessment tools, and introducing expert advice.
Enterprises are advised to start preparing for ESG 1-2 years in advance. The ESG practice framework and process verified by customers include: screening impact factors, conducting substantive assessments, evaluating the current baseline, setting goals and vision, establishing an ESG strategic roadmap, implementing an ESG action plan, and reporting progress externally. However, enterprises should be deeply aware that ESG investment and practice are a long-term continuous process. Regularly reviewing and updating the ESG strategy can ensure that the company remains consistent with stakeholders and business expectations.
4: What is the current global trend in ESG investment, and what possible development directions might there be in the next few years?Zhang Hailiang: Currently, the global ESG investment trend shows the following tendencies: Asset scale growth: According to Bloomberg's "Global ESG Outlook 2024 Report," ESG investment is expected to reach $40 trillion by 2030; Policy promotion: Developed countries are leading the formulation of global ESG policies, promoting the transformation of enterprises towards a sustainable economic model; Investor recognition: Investors are increasingly valuing corporate ESG performance, prompting the diversification of ESG investment products such as green bonds and sustainable funds; Regional differences: There are differences in the scale and growth rate of ESG investments in different regions. Public data shows that in recent years, the scale of ESG investment management in Australia, New Zealand, Japan, and China has continued to grow, while the US market has declined; Technological application: Enterprises are increasingly using data analysis, artificial intelligence, and blockchain technology in ESG investments to more accurately assess and integrate ESG factors.
In the next few years, the possible development directions of ESG investments include the following points.
First, product diversification and strategy innovation. Future ESG investment products will be more diversified, covering different asset classes and investment strategies. It is expected that more thematic investments, index funds, bond products, etc., that combine ESG factors will emerge to meet the needs of different investors.
Second, increased requirements for information disclosure. As ESG information disclosure policies continue to improve, listed companies and other investment targets will need to disclose their ESG-related information more comprehensively, increasing market transparency.
Third, the deepening of long-term value investment philosophy. This will bring investment opportunities for enterprises that are truly committed to sustainable development and have long-term growth potential.
Fourth, the demand for skills and expertise. As the complexity of ESG investments increases, the demand for professional talent and service organizations will rise.
5: How can enterprises balance short-term financial returns with long-term sustainable development goals in promoting ESG practices?
Zhang Hailiang: Although more and more evidence shows that ESG practices are positively correlated with corporate financial performance, enterprises must recognize that ESG is not a short-term profit strategy but requires long-term investment and commitment when adopting sustainable business strategies.
For listed companies, multinational giants, and industry leaders, they not only have the strength to promote ESG practices but also face ESG information disclosure requirements from regulators and considerations for attracting investors. These enterprises show a strong motivation to deploy and implement ESG strategies for multiple considerations, such as shaping a positive brand image, enhancing market competitiveness, and leading the industry's sustainable development trend through ESG practices.
In contrast, small and medium-sized enterprises (SMEs) are often in a stage of rapid growth, with relatively limited resources and a higher sensitivity to the cost and short-term returns of ESG strategies. Given that ESG investments may not immediately bring direct economic benefits, it is recommended that such enterprises adopt a strategy of doing what they can and gradually advancing. They can prioritize ESG projects that are closely related to their own business and can be implemented at a controllable cost. By taking small but refined measures, they can gradually accumulate experience, establish systems, and continuously increase their investment in ESG as the enterprise grows, achieving a positive interaction with business development. This can effectively manage resources and gradually enhance the enterprise's sustainable development capabilities.6: When formulating ESG policies, what factors do companies typically consider, and how do these policies impact the company's overall strategy?
Zhang Hailiang: Companies usually take into account a variety of factors when developing ESG policies. These factors encompass not only the internal and external environment of the company but also the company's social responsibilities, long-term development goals, and the expectations of stakeholders.
To create a more comprehensive and forward-looking ESG policy, it is recommended that companies refer to the "Guidelines for Sustainable Development Reporting of Listed Companies" jointly released by the three major exchanges on April 12th of this year. This guideline provides a framework and standards for ESG information disclosure for listed companies and analyzes several sub-topics of ESG. Therefore, when formulating ESG policies, companies should try to cover as many of these sub-topics as possible, including but not limited to:
The practice of ESG often has a positive impact on the overall strategy of a company, which is manifested in enhancing the company's image and brand value, reducing operational risks, attracting and retaining talent, expanding financing channels, and promoting sustainable development.
7: How can companies ensure the authenticity, transparency, and timeliness of ESG information disclosure?
Zhang Hailiang: The firm commitment, collaboration, and strategic direction of the board of directors are the first and most important steps for a company to embark on its ESG journey. A well-functioning and effective board with diverse experiences, skills, and management styles can protect and create value; establishing a dedicated ESG team responsible for the collection, organization, disclosure, and communication of ESG information to ensure the professionalism and systematic nature of ESG work; raising employee awareness and participation in ESG work to ensure that ESG concepts are integrated into the company's daily operations; companies should establish ESG performance monitoring and evaluation mechanisms, regularly reviewing and summarizing ESG work, identifying issues for timely improvement, and continuously enhancing the quality and level of ESG information disclosure.
8: What does ESG rating mean for companies?
Zhang Hailiang: ESG ratings are based on various environmental, social, and governance indicators, industry-specific factors and standards, as well as company-provided supporting documents and evidence to verify and confirm the company's disclosure capabilities. Improving ESG disclosure and ESG scores is important and necessary to meet public expectations, industry competition, capital attention, and regulatory strengthening. ESG performance can measure the compliance of a company's business practices, hence sustainable funds often favor companies with higher ESG scores. Investment companies, clients, and the rated companies themselves can use ESG ratings as an important reference for investment, assessing business relationships or procurement, understanding company situations, and formulating strategies.
9: What is your view on China's policy progress in the ESG field, and how do these policies affect corporate ESG practices?
Zhang Hailiang: On April 12, 2024, the Shanghai Stock Exchange, Shenzhen Stock Exchange, and Beijing Stock Exchange officially released guidelines for sustainable development reporting of listed companies, which came into effect on May 1, 2024. The guidelines require companies included in the Shanghai Composite Index 180, STAR 50 Index, Shenzhen Component Index 100, ChiNext Index, and companies listed both domestically and internationally to disclose their sustainable development reports for the year 2025 at the latest, and encourage other listed companies to voluntarily disclose.The issuance of the guidelines has filled the gap in the domestic sustainable reporting guidelines for the capital market within our country, marking an important shift from voluntary to mandatory ESG information disclosure for listed companies, and signifying a leapfrog development in ESG information disclosure. Encouraging listed companies outside the mandatory disclosure scope to voluntarily disclose ESG information is expected to gradually extend ESG practices to all listed companies in stages, creating a broader atmosphere for ESG practices.
Q10: In the process of promoting corporate ESG practices, what roles do governments, investors, and consumers play respectively?
Zhang Hailiang: The government is a key promoter of ESG practices, guiding corporate behavior by formulating and enforcing relevant policies and regulations. Investors, especially institutional investors, influence corporate behavior by incorporating ESG factors into investment decisions. They are increasingly inclined to invest in companies with good ESG performance, promoting corporate ESG practices.
Moreover, consumers' awareness of sustainable products and corporate social responsibility is growing. They are more likely to support brands that align with their values. This change in consumer behavior forces companies to pay more attention to the environmental and social impacts of their products and services.