This article was first published in the May 2011 International edition of Accounting and Business magazine.
Fast-forward five years, and China could be a lot greener than it is now. In March, legislators officially endorsed the 12th Five-Year Plan – a broad policy document that maps out economic management for 2011–15 – with its ambitious targets for energy saving, emissions reduction and clean technology development. For companies operating in China, the plan represents a mixed blessing. New opportunities will emerge, but capitalising on them requires significant operational reform.
‘Green isn’t totally new in China – it has been mentioned in previous five-year plans – but the big difference this time is that the government seems to be thinking seriously about quality of growth [rather] than speed,’ says Wu Changhua, Greater China director of The Climate Group, a non-governmental organisation. ‘Restructuring has been put at the top of the agenda with a view to advancing low carbon and clean energy.’
The standout environmental policy in the 12th Five-Year Plan is the goal of reducing the amount of carbon dioxide produced per unit of gross domestic product (GDP) by 40% to 45% from 2005 levels. Energy intensity – the amount required to produce each unit of GDP – is slated for a 16% reduction by 2015. A 19.1% cut was achieved between 2005 and 2010, although only after a number of local governments temporarily cut off electricity supplies to companies. Elsewhere, it is clear that measures will be put in place to protect forests, minimise certain kinds of industrial pollution, promote industrial efficiency, curb motor vehicle emissions and encourage recycling.
China’s environmental agenda is also firmly wedded to technology. Non-fossil fuels currently meet about 8% of energy needs and the government wants this to reach 11.4% by 2015. New energy is therefore identified as an industry that will receive considerable support. Others include energy saving and environmental protection, biotechnology, advanced machinery, information technology, new materials and new energy cars. Together these industries are responsible for less than 5% of China’s GDP; by 2015 the aim is 8% and by 2020 15%.
Shift in focus
‘Some of these industries represent a real shift in focus. [This is] in terms of the priorities within the economy to look at what is truly sustainable for China to stay on its current trajectory,’ says Annabell Chartres, associate director of PwC’s sustainability and climate change practice in Beijing. ‘Other industries – specifically new energy, new materials and new cars – are focused on diversification and China being the global leader.’ The latter objective is very much in keeping with the wider economic goal of fostering domestic innovation and the creation of high-value intellectual property.
The measures in the 12th Five-Year Plan will have a greater impact on some companies than others. The ‘top 1,000 enterprises program’ of the previous plan, which targeted the state-owned enterprises (SOEs) responsible for consuming the most energy, will be widened to encompass 10,000 companies. It will operate in tandem with Beijing’s industry consolidation agenda under which small and inefficient cement, steel, aluminium and glass plants are forced to close.
Heavy industry SOEs, already under pressure to account for their energy consumption, have taken the lead in terms of upgrading equipment, monitoring resource use and carrying out sustainability reporting. ‘The high emitters tend to be the first movers,’ says Leah Jin, head of KPMG’s climate change and sustainability services team in China. ‘Most of my clients in China are very much aware of the requirements and what they need to do. Almost all of them have some type of project in terms of energy efficiency and emissions reduction.’
In 1999, Shell China became the first company to issue a sustainability report in the country, but the real breakthrough came seven years later when State Grid, China’s largest power distributor, was praised by the government for its report. Last year more than 630 reports were published in the country, mainly using the Global Reporting Initiative (GRI) guideline.
According to SynTao, a consultancy that promotes corporate social responsibility (CSR) and socially responsible investment (SRI) in China, centrally controlled SOEs accounted for 325 of the 523 sustainability reports issued in 2009. Of the 523, only 10% went through any kind of third-party oversight, more than two-thirds did not disclose emissions data and there was generally little communication with stakeholders. And although 90% of reports introduced some kind of energy-saving programme, this is not necessarily an indication of quality.
‘A lot of companies that talk about reducing emissions or energy efficiency are being opportunistic; there are insufficient strategic thought processes in place that analyse whether it fits into the overall business strategy,’ says Jin. ‘What we are trying to tell clients is that this isn’t a CSR project that you feature on your website. You need to take it to a higher level.’
Listening to stakeholders
There are two primary considerations when writing sustainability reporting into wider business plans. The first is what kind of reporting a company should do – something determined ultimately by stakeholder requirements. These stakeholders may be shareholders, customers, local communities or regulators – each with an interest in sustainability and its own means of exerting pressure. As a result, a multinational in China may approach reporting in a very different way to an SOE.
‘If a company is under pressure about its supply chain, then it would probably start by looking at GRI reporting,’ says Roger Adams, head of technical services at ACCA. ‘If a company is being asked by investor groups to provide more economic, social and corporate governance (ECG) information, then it would look towards the new integrated reporting concept that is designed to flag up issues that have an impact on longer term financial business.’
The second consideration is tying sustainability initiatives to saving or making money. A large Chinese company may see energy efficiency or emissions reduction as a means by which to define its brand in the eyes of consumers or consolidate market share by pursuing technological development. In addition, a firm with global ambitions may see this as an opportunity to benchmark itself against international peers.
As a whole, smaller companies – typically privately owned and often in the manufacturing sector – have yet to make much progress on sustainability reporting but a combination of industrial consolidation and tougher regulation may force their hands.
The Climate Group’s Wu stresses that the government’s command-and-control mechanisms, such as cutting off electricity supplies to meet energy savings targets, are costly and ultimately unworkable. She expects these to be joined by a series of integrated, market-based instruments: carbon trading, a resource consumption tax and price hikes for utilities such as water and electricity.
Information is power
A company that tracks energy use and eliminates waste can cut costs. Similarly, by calculating its carbon footprint, it is able to take a strategic view on reducing emissions and minimise the business impact of future policy clampdowns. Manufacturers may also find a payoff in terms of winning or retaining foreign orders. ‘Walmart has a huge impact on the economy through supplier agreements; it can play a powerful role in terms of ensuring energy efficiency,’ says Chartres. ‘How that actually happens is a different story and the next couple of years will be very interesting.’
An information bottleneck isn’t helping. Although companies may be aware of the need for sustainability, they may not appreciate opportunities. For example, many smaller players don’t know about the wide range of tax holidays and other incentives introduced to encourage energy efficiency in the manufacturing sector. ‘It’s an education issue and it will take time but in many respects all the pieces of the puzzle are there,’ Chartres says. ‘The expectation is that these problems will be resolved eventually.’
‘Eventually’ is not enough for some. Industrialisation and urbanisation continue to drive growth in China and both are heavily reliant on energy. McKinsey projects that there will be 221 cities with more than one million inhabitants by 2025 – requiring 40 billion square metres of new floor space, 5 billion square metres of new road and an additional 700GW to 900GW of coal-fired power. Based on current progress, the government estimates that carbon emissions might not peak until 2050.
While China’s policy and financial commitment to developing environmental solutions is clear, there is plenty of criticism about the practical implications. A wind farm building spree is under way but most facilities aren’t connected to the electricity grid. The government wants to punish polluters but penalties are small and regulations poorly enforced.
But there is some evidence that attitudes are changing. ‘At a recent meeting with a large SOE one of the senior officials told me that 10 years ago investors were mostly interested in how much money the company was making,’ says KPMG’s Jin. ‘Now the question they ask is: “What are you doing about sustainability?”’
setting the standards in reporting
Electricity company CLP and MTR, a property developer and metro system operator, were joint overall winners at the 2009 ACCA Hong Kong Awards for Sustainability Reporting. Both have interests in mainland China but they are primarily Hong Kong companies, although mainland company China Mobile was acknowledged for its reporting in the communications sector.
‘CLP is widely recognised as a beacon in terms of the way in which it integrates sustainability reporting into its annual reporting,’ says Roger Adams, head of technical services at ACCA. ‘The company looks at the type of power sources likely to be used 15 to 20 years hence and displays an awareness of global attitudes towards emissions and how emissions limits will move in the various areas in which it operates.’
He credits MTR for the detail of its reporting and successfully embedding its sustainability strategy into overall corporate strategy.
Annabell Chartres, associate director of PwC’s sustainability and climate change practice in Beijing, is quick to praise CLP, but also cites China Mobile’s ‘very weighty CSR reports’, as well as the efforts made by Suntech Power in bringing energy efficiency into the solar-cell production process.
SynTao, a consultancy that promotes corporate social responsibility (CSR) and socially responsible investment (SRI) in China, provides its own assessments of the quality of sustainability reporting among the country’s largest corporations. In a report published in 2009, China Ocean Shipping (COSCO) came out on top, followed by Lenovo Group, Baosteel Group, Sinopec, PetroChina and State Grid.
‘COSCO has established a model for companies from China, and the rest of the world, to disclose information for key sustainability indicators,’ SynTao says. The company’s approach includes linking sustainability strategies to performance indexes and providing detailed quantitative information on the consumption of raw materials, water, energy and electricity as well as on waste gases, water and solids produced.
Tim Burroughs, journalist