Shanghai bourse pushes transition to green economy

The Chinese regime leaves nothing to chance, time or market. As China makes a transition from its hyper-industrialized model to a slower, sustainable and low carbon industry, the role of the stock market is being carved out to aid in this shift.

This week, the China Association of Public Companies asked all listed companies to publish corporate social responsibility reports. Although the number of companies filing sustainability reports have gone up substantially over the years, these were largely a gesture of tokenism, mostly by state-owned companies.

Symbolism, however, will no longer work. With Chinese companies competing overseas, for markets and acquisitions, transparency in disclosure is an urgent need. In the last few years, Chinese companies listed in global exchanges have earned a dubious reputation for their non-transparent mode of operation and disclosure.

The target now is not just to build the brand and reputation of local companies, but also to coax them to shift to more sustainable practices. Bigger corporations, especially those involved in polluting sectors like power, coal, steel and chemicals, are being pushed to clean up their production and business practices through a combination of strategies. Stringent regulation has been put in place, but more important, companies are being persuaded to embed the clean-energy model into its investment and revenue structure.

Green at core

The Chinese government is making use of an economic, particularly financial institutional, approach to drive corporate sustainability. Also, under the influence of their more sophisticated multinational counterparts operating in China, local companies have begun to take note of the tangible impact of sustainability on their bottom lines.

Regulations like the ‘Green credit policy, launched by the Ministry of Environmental Protection, People’s Bank of China, and China Banking Regulatory Commission some time ago, are slowly taking effect. This policy requires commercial banks to evaluate their corporate clients’ environmental risks before providing credit, thereby increasing cost for heavy polluting companies as they no longer qualify for certain bank loans.

A small number of listed companies have started to explore ways to integrate environmental social and governance issues, or ESG, factors into their investments, while using the ‘green and clean-energy market’ to sniff out opportunities and a new generation of demand.

Global standards

All these efforts, however, need to be presented in a transparent manner to boost investor confidence in the market. Unfortunately, the quality of sustainability reports released from China sometimes lack in credibility. At times, there are significant gaps in terms of material, comparable and credible information on company performance. This is why the Shanghai Stock Exchange (SSE) is now formulating very stringent international standards for companies to adhere to.

In a nutshell, the SSE wants companies in their annual sustainability reports to include: economic issues which have both direct and indirect impact; environmental issues relating to energy, water, waste, emissions, legal compliance; and social issues related to recruitment, workers’ rights, health and safety, training and education, bribery, and community investment.

Carbon market

China is taking a number of market-oriented methods to encourage major polluters to meet emission reduction targets.

Last week, Shanghai launched a pilot carbon emission rights trading scheme, a first of its kind in the country. About 200 major local polluters, including industrial companies whose annual carbon dioxide emissions reach 20,000 ton and non-industrial enterprises whose annual emissions total 10,000 ton, will take part in the trading.

Each of the carbon market participants will get a free quota for a certain base carbon emission. Companies failing to meet emission cut targets will need to buy quota from those whose emission cuts exceed the targets.

China has set itself an extremely ambitious energy target. It plans to invest RMB 2.37 trillion in major energy-saving projects until 2015 which will save the country an equivalent of 300 million tons of coal during the five-year period, according to a recent document.

The new model will force energy-gobbling industries to change their production methods and upgrade their range of products. The Shanghai Stock Exchange’s decision to crack down and demand transparency will go a long way in changing the functioning of some of China’s biggest companies.

The writer is a freelance journalist based in China.