On June 5th, 2023, World Environment Day, the 10th China Enterprise Green Contract Forum, jointly organized by the Forestry and Grassland Bureau of Alxa League and the Alxa League Ecological Industry Development Planning Center as guiding units, the Alxa SEE Ecological Association, and the Beijing Entrepreneur Environmental Protection Foundation, was held online. Guests from various sectors, including government, industry experts, representatives of enterprises and social organizations, focused on climate change and corporate green action, and jointly explored how to work together to create future oriented green competitiveness under the new situation. Shi Han, Director of the ESG Center at the China Business School of the University of Hong Kong, attended the forum and delivered a keynote speech. Shi Han pointed out that in times of economic downturn, companies should pay more attention to investing in ESG, "because ESG itself is an important framework tool that can help companies identify risks, foresee risks, and improve their ability to respond to risks. At the same time, ESG can greatly enhance a company's brand value and reputation, and is increasingly becoming a tool and means for companies to seize long-term development opportunities
The following is a written record:
Hello everyone, I am Shi Han from the ESG Center of the China Business School at the University of Hong Kong. Today, I am delighted to be invited by the organizers of the 10th China Green Enterprise Forum to share the latest development trends of ESG in 2023, as well as the opportunities and challenges faced by Chinese enterprises.
I will start with the rapid rise of ESG at the global level. From this chart, we can see that since 1950, the global population, economic development, including our infrastructure, energy consumption, and pollution emissions, have all shown rapid exponential growth. This is a very important turning point.
From this background, our human world has entered a new geological opportunity, which we have named the "Anthropocene" and welcome everyone to the Anthropocene. But this welcome is actually accompanied by a great deal of caution and concern, because we have already left the so-called "Holocene" that lasted for 11000 years, which was the most stable period of Earth's temperature in the past 100000 years, and also an important period for the birth of our human civilization.
From this graph, it can be seen that from the nine dimensions of the Earth's boundary, we have three important dimensions. One is the loss of biodiversity, the second is climate change, and the third is the nitrogen element cycle in the chemical element cycle. All of them have deviated far from the safe boundary of our Earth's operation, equivalent to entering a sea area without a navigation chart for navigation.
Against the backdrop of unprecedented environmental crises and social issues, there is an increasing demand for businesses to change their role in social development and environmental protection. In the past, this social responsibility of enterprises was initially expressed as providing donations for valuable public welfare undertakings, which we commonly refer to as charitable donations. On this further basis, we propose corporate social responsibility. In fact, the core concept of social responsibility is to require companies to better comply with regulations, maintain community standards, and be good corporate citizens. Under this premise, we have gradually put the concept of environmental, social, and governance ESG on the agenda in the past 20 years, which has become an important standard and framework for regulating the role of companies in social development and environmental protection. It requires companies to comprehensively internalize the environmental and social costs generated by economic activities, and promote the transformation of their role from problem generators to problem solution providers. This is actually from an academic perspective, in addition to our general commercial license, there is also a social license for enterprise operation.
Corporate social responsibility has at least 70 years of exploration experience. The book on the left, "The Social Responsibility of Businessmen," was written by an American economics professor in 1953. It is the biggest economic contribution of corporate social responsibility, actually an important article published by Milton Friedman in The New York Times in 1970- that the greatest social responsibility of a company is to maximize its interests and create the greatest benefits for shareholders.
For a considerable period of time, most companies in the West and globally have followed the principle that bringing the greatest benefits to shareholders and investors is our most important social responsibility as a company. All of this guidance does not enable companies to play an important role in environmental protection and social development, in addition to their important role in economic development. Therefore, in this context, the concept of ESG was proposed, which was advocated by former United Nations Secretary General Annan in 2004 under the framework of the Global Compact, to incorporate ESG principles into the focus of financial institutions' investment behavior. This is the earliest birth of the ESG concept we have seen.
The concept of ESG has been put forward for less than 20 years since 2004. From the perspective of corporate social responsibility, it has actually been practiced for more than 70 years. The first important book has a history of 70 years, so in this sense, CSR corporate social responsibility must be a more widely accepted concept. ESG is a new concept, but we see a very important trend, that is, the following red line also represents everyone's attention to this concept of ESG. During the COVID-19 epidemic, CSR corporate social responsibility quickly surpassed the concept of CSR with a longer history.
Overall, if we look at this picture, the sustainable development of a company, which is the green sustainable development on our right, depends on the framework of corporate governance, which has three legs to walk on - economy, environment, and society. When the three legs are relatively balanced and comprehensive, this is a fundamental principle for our company to achieve sustainable development. So we used to only focus on the economy, with the economy dominating in the bottom left corner. However, we didn't pay enough attention to corporate social responsibility and environmental responsibility, so the three legs were not balanced. As we can see, the economic responsibility of enterprises measured by financial reports has always been a concern, but in addition, the ESG responsibility and reporting represented by the governance environment and society have only received greater attention in recent years.
Let's take a look at the latest trends in the development of ESG. As mentioned earlier, the ESG concept with a very short history has rapidly exceeded the CSR concept practiced for a long time in the past few years of the COVID-19 epidemic. What is the latest development?
Firstly, the regulatory development of ESG supervision at the global level has been very rapid, with representative examples including the recently adopted Corporate Sustainability Reporting Directive by the European Union. This is a regulatory requirement for listed companies in many other countries, including the United States, Hong Kong, and the Hong Kong Stock Exchange, to further propose climate related and TCFD related information disclosure.
From the perspective of global development experience, the promotion of ESG solely through self-discipline and voluntary actions of enterprises is not efficient. So, regulations are becoming increasingly important. As mentioned earlier, the EU's Sustainable Development Reporting Directive, as well as the 2021 German Enterprise Supply Chain Due Diligence Act, and the continuous introduction of laws such as the Due Diligence for this supply chain, have made regulations the most important cornerstone in driving our ESG.
From the perspective of financial institutions' attention to climate change, there is also a growing focus on the carbon emissions corresponding to their downstream investment activities. As you can see, this is the calculation of the loan balance and corresponding carbon emissions of the six major state-owned banks in our country by MSCI using its model. As can be seen, for example, in our Postal Savings Bank, based on the self disclosure of enterprises, we emphasize scope one and scope two, and the carbon emissions at the organizational level of enterprise self operation. This may be a scale of 214000 tons, but MSCI's attention to the carbon emissions of scope three corresponding to the downstream loan balance of Postal Savings Bank can be seen to be between 50 million tons and 100 million tons. Here, 210000 tons belong to scope one and scope two, and its focus is on our downstream investment activities, exceeding 50 million tons but less than 100 million tons.
Also, let's take a look at Industrial and Commercial Bank of China. In fact, it has disclosed data several times, with a level of 2.02 million tons in 2022. If you want to look at Mingsheng's accounting for Industrial and Commercial Bank of China, what is the focus of its attention? Its downstream investment emissions exceed 200 million tons, which is equivalent to the 2 million tons we announced, which is one tenth of the 200 million tons it is concerned about. Now, from the perspective of financial institutions, especially their role in low-carbon transformation.
Thirdly, various countries have begun to strengthen the supervision of ESG funds. In the early stages, many fund managers and others may easily label their investment activities as ESG, but in reality, there are many risks of greenwashing, and actual events may occur. So with the regulation of ESG funds in various countries, you will find that many previously claimed to be ESG grade investment funds have removed their ESG labels to prevent potential risks such as litigation.
The next important trend of change is our current criticism of ESG. There are many evaluation frameworks and standards for corporate ESG in the world, and we are talking about the "alphabet soup". There is an ESG alphabet soup in English, and there are too many frameworks and standards. Look at this chart, the right side is the framework, and the left side is the standard. There are many frameworks and standards, which leads to significant differences in the ESG rating results of different mainstream rating agencies for the same company. This is similar to the financial ratings of different mainstream investment institutions for the same company, forming a clear distinction. This is also an important criticism from some people regarding the current ESG rating, including ESG as a management intermediary investment evaluation.
In this regard, we can see that the International Sustainable Development Standards Committee, or the International Sustainable Development Standards Committee, established after Glasgow COP 26, has begun to operate and has begun to release the ISSB global unified standards for corporate sustainable development. ISSB has signed a memorandum of understanding with the Ministry of Finance and should soon establish an office in Beijing. So China's role in ISSB or its participation in international sustainable development standards should accelerate.
ESG investment reached a peak around 2021 to early 2022, but after that, due to other reasons, there was a slight decline. However, the general consensus is that ESG investment will continue to maintain this level of intensity.
Just now, I briefly introduced the background of the rise of ESG in a very short period of time and its latest development trend. Finally, I will briefly talk about the opportunities and challenges that ESG can bring to Chinese enterprises.
The first is the rise of the company's' purpose '. Recently, more and more companies have begun to explore their vision and mission. This is the latest perspective. The purpose, vision, and mission of a company are still different, and what he is most concerned about is the meaning and goals of the company's existence. Meaning and value are the most fundamental aspects, which are the impact that the existence or non existence of a company will have on society. This is the most fundamental question why businesses exist.
The first is the rise of the company's' purpose '. Recently, more and more companies have begun to explore their vision and mission. This is the latest perspective. The purpose, vision, and mission of a company are still different, and what he is most concerned about is the meaning and goals of the company's existence. Meaning and value are the most fundamental aspects, which are the impact that the existence or non existence of a company will have on society. This is the most fundamental question why businesses exist.
In our Greater China region, you will see that including the MTR Corporation, they have proposed that the company's goal is to keep the city moving sustainably, sustainably moving. Another company, especially Vitasoy, is actually a plant-based food company. Its most important characteristic in developing beverages and food is that it is beneficial to human health and the earth. This is an important selling point and prominent feature of plant-based food.
Secondly, the global sprint towards net zero by 2050. On this chart, it can be seen that more and more organizations and departments are participating in achieving net zero at the global level, especially by 2050, which is an important transformation for us to achieve carbon neutrality. This transformation is actually proposed in the sixth assessment report of the United Nations IPCC. If the Earth wants to maintain an average temperature rise of 1.5 degrees, we need to achieve carbon peak by 2025 and carbon neutrality by 2050 at the global level. This is the prerequisite for keeping the Earth's temperature rise within 1.5 degrees. So many companies turn this condition into their own actions.
As you can see in this chart, the statistics show the average planned time for EU listed companies in different industries to achieve carbon peak. For some low-carbon industries, on average, the information and communication industry needs to achieve carbon neutrality by 2037. The most difficult point is that the automotive industry is relatively more difficult, with an average of achieving carbon neutrality by 2048. So at the international level, if a company has ambitions for climate change, it needs to achieve carbon neutrality by 2050 and have significant emissions reductions in the next decade.
The most important tool and economic means to promote corporate participation is actually carbon pricing. The emission of carbon dioxide has gradually shifted from having no cost to requiring a relatively high price to be paid. This is essential for solving the climate crisis, addressing climate change, or achieving carbon neutrality. I have the same statement about money: carbon pricing is not a panacea for solving climate change. It does not mean that climate change can be solved with carbon pricing, but without carbon pricing, it is absolutely impossible.
There are two interesting cases in this regard. One is the change in the tax rate for implementing a carbon tax in Singapore. When Singapore first started discussing the implementation of a carbon tax, it hoped that the government would propose to push forward with ten Singapore dollars per ton of carbon dioxide equivalent. At that time, it was opposed by some in the industry, who believed that the carbon tax rate was too high and the introduction of ten Singapore dollars was too high. Later, everyone reached some compromises. From 2022 to 2023, it is five Singapore dollars per ton., But by 2024 and 2025, starting from next year, he will suddenly increase it fivefold, to 25 Singapore dollars per ton of carbon dioxide equivalent, and then to 45 Singapore dollars per ton in 2026. It is obvious that after the implementation of the initial carbon tax of 5 Singapore dollars, the whole society has achieved greater support for increasing the carbon tax rate, and it is moving forward at a very fast pace.
On a global level, this chart shows the carbon prices of various countries at their highest levels, reaching over 100 US dollars. The World Bank has proposed a reasonable carbon price corridor, which has now increased from 40-80 US dollars per ton to 50-100 US dollars per ton. The reasonable carbon price corridor has been raised, and the era of carbon tax pricing is definitely coming soon.
Finally, let's talk about the circular economy. Because in order to achieve our entire carbon neutrality transformation, part of it is the zero carbonization of energy. Sustainable energy transformation is necessary, but in conjunction with energy transformation, the widespread implementation of circular economy throughout society is necessary. So I repeatedly emphasize that developing a circular economy is the responsibility and business opportunity of every enterprise in China, rather than being largely the main work of the resource recycling industry or industrial parks.
What is the problem with linear economy now? When we extract from nature and produce and use it, its value suddenly becomes zero, and we abandon it. This is the situation.
So from the perspective of circular economy, we hope to maintain its value to the greatest extent possible and within the smallest circle of circulation. This is a core of circular economy, and the emphasis of circular economy is on maintaining the value of our resources.
One thing that our country is proud of is the development of shared bicycles. It is a sharing economy, and in itself, the sharing economy belongs to the category of circular economy. However, when we were developing the sharing economy, we did not integrate the concept of circular economy well at the beginning, so our entire design and recycling still had problems. Many cities have seen bicycle "cemeteries".
At that time, there was a Burmese businessman who saw many of these bicycles in Singapore. Shared bicycles were not utilized and were abandoned. He imported them from China or Singapore. On the one hand, he sought donations or offered a very low price to buy a considerable number of these bicycles. After repairs, he distributed them to local primary and secondary school students because they had to walk for a long time on their way to school. In fact, this also achieved some kind of circular economy, but not in our own country.
The most important aspect of promoting a circular economy is the business model. In the business model, there are five important business models proposed by Accenture, which are to promote the use of platforms and extend the service life of products. But the most important point, in my opinion, is that this business model, from products to services, is more about providing services from selling products now to the future. For example, when I went to this Philips company, I used to sell its lighting fixtures, but now it has transformed into a company that provides lighting services. I personally think that there are very few products that cannot be easily converted into services. This is already very common in some countries in the European Union. Relatively speaking, I think there is a bigger prospect to promote in China.
The conclusion is that when discussing ESG nowadays, it is often said that companies should do less ESG during economic downturns and difficult times. This is a situation raised by some companies. But from another perspective, should companies pay more attention to ESG during economic downturns? Because ESG itself is an important framework tool that helps businesses identify risks and anticipate them in advance, enhancing their ability to respond to risks. Secondly, ESG can greatly enhance a company's brand value and reputation. If, during an economic downturn, a company first cuts off ESG activities, it is likely to have a significant negative impact on the company's brand value and reputation. Thirdly, ESG is increasingly becoming a tool and means for companies to seize long-term development opportunities.
I am delighted to have the opportunity to share with you the latest development trend of ESG globally, as well as some opportunities and challenges it brings to our Chinese enterprises. Thank you.