How companies can benefit from ESG reporting in China

published on 21 July 2023 | Reading time approx. 2 minutes

Climate protection without China? Absolutely not! As the world's largest CO2 emitter, the country has set itself ambitious goals: a sharp reduction in CO2 emissions by 2030 and climate neutrality by 2060.

Climate neutrality measures

To achieve these goals, the Chinese government is implementing several measures, including:

Promoting Renewable Energy: China is a leader in electric mobility and in the installation and production of solar panels. In addition, China is the second largest producer of wind turbines and aims to generate 80% of its electricity from renewable sources by 2060.
Improving energy efficiency: by 2060, China plans to increase the country's energy efficiency by 40%.
Reducing coal use: since coal power accounts for a large share of the country's energy demand, the share of coal power in the energy mix is to be reduced to 20% by 2060.

Developing new technologies: China is already a leader in e-mobility and continues to invest in innovative technologies such as hydrogen production and technology-enhanced carbon capture/storage.

Voluntary ESG reporting and corporate responsibility

To achieve the goals set, support and implementation from companies and society is essential. The Chinese government is therefore pushing for greater regulation in mandatory ESG reporting to ensure and monitor that companies are meeting their environmental and social responsibilities. Currently, this applies to companies listed on Chinese stock exchanges or operating in highly polluting industries, including coal and mining, chemicals, or steel and heavy industry. German companies such as BASF, Adidas and BMW are also committed to ESG reporting in China. Although the regulatory framework on ESG requirements is still fragmented and lacks uniform standards, it is crucial that companies prepare themselves.

Nevertheless, for German and European companies that are not listed on the Chinese stock exchanges, the mandatory reporting obligation will also come sooner or later. The government has already announced that it will tighten ESG requirements for unlisted companies and expand mandatory ESG reporting, but so far without a concrete timetable. In order to meet the increased demand from stakeholders such as employees, customers, investors, financial institutions and politicians and to invest in their own reputation, almost 40 % of foreign companies in China currently prepare ESG reports on a voluntary basis. In addition to reputation, ESG reporting can not only increase transparency, but also reduce costs, e.g., through improved waste management, reduced water consumption, etc., which in turn can increase the profitability of the company.

Opportunities and challenges for business

The Chinese government is providing incentive schemes for both domestic and foreign companies to invest in green industries that have tremendous growth potential. At the same time, the regulatory framework is expanding and there are a multitude of ESG-related legal rules. When entering the Chinese market and setting up a production site, special attention should be paid to the applicable environmental protection law, labor laws, anti-corruption and anti-monopoly law. A thorough site analysis is essential, as China has created special cluster zones in special economic zones, free trade zones and industrial parks, which offer excellent infrastructure, skilled labor as well as subsidies and tax breaks.

Even for companies already operating in China, there are tax breaks and financial support for projects that improve energy efficiency, reduce the carbon footprint or invest in renewable energy.

The importance of ESG reporting

Due to EU requirements, German companies in China are already required to collect data and position themselves as ESG compliant in the Chinese market in order to strengthen their reputation. Voluntary reporting offers companies competitive advantages and increases their value. Companies that implement ESG reporting can increase profitability by reducing costs, such as through improved waste management and reduced water consumption. Transparent reporting also helps minimize risks and improve customer loyalty. According to one study, companies with a strong ESG profile have 10% higher profitability compared to their peers. In addition, reporting can contribute to the diversification strategy, as more and more customers, investors, and financial institutions are placing value on sustainable companies, allowing access to new markets.

Structure of voluntary ESG reporting

The structure of ESG reporting should be similar to that used in Europe and include the following information:

Environmental Aspects (Environment): Information on energy and water consumption, CO2 emissions, resource and waste management, measures to reduce environmental impact and damage, and information on the company's sustainability strategy, defined sustainability goals, and measures taken and being taken to achieve these goals should be included.
Social responsibility (Social): This section of the report includes information on employment relationships, occupational safety standards, support for charitable organizations and projects (including donations), measures to safeguard human rights and preventive measures to combat corruption.
Corporate governance: Governance structure including board of directors, supervisor, and any management systems or programs that demonstrate the company's compliance with the law.

Financial support from the Chinese government

To help companies collect data and build ESG, compliance and risk management systems, the Chinese government offers financial support in the form of grants, consulting services and tax incentives. Companies can draw on our international and interdisciplinary expertise to build these systems in line with local requirements or those of the parent company.

Conclusion

The Chinese government is taking extensive measures to achieve its climate targets. ESG reporting, which will become mandatory in the foreseeable future, will play an important role in monitoring and implementing environmental protection measures as well as social responsibility by companies. There are opportunities and incentive systems for Chinese as well as German and European companies to benefit from the development towards a sustainable economy. Timely ESG reporting can strengthen reputation, reduce costs, and open up new market opportunities.

Seize the opportunity early to secure competitive advantage in the Chinese market.