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Is China greenwashing its ESG disclosures?

buddha statue

Published on Feb 15, 2018

The 19th National Congress of the Communist Party of China was recently held in Beijing, propelling China into the new era, also labeled as ‘Xi Jinping Thought on Socialism with Chinese Characteristics for a New Era’.

In it, among other things, was a reaffirmation by Chinese President Xi Jinping to stay committed to battling climate change, doubling up on green development with his idea of a ‘new model of modernization’. As the Chinese economy no longer enjoys the double-digit growth rate of the 2000’s, the Communist Party of China is looking to shift the economic focus from one of ‘rapid growth’ to one of ‘high-quality development’.

According to a Xinhua News Commentary, this can help the country “focus on implementing new development concepts of innovation, coordination, greening, opening up and inclusiveness.” The actual execution of the ‘greening’ can, surprisingly, be seen in many different ways. Ranging from a large number of bicycles and electric 2-wheelers in China to the (now dumped) experiment for a new mode of urban public transport, called the Transit Elevated Bus (TEB, also known as the Straddling Bus).

An even grander scheme is the Chinese government’s plan to create the world’s first ‘Forest City’, with high-rise structures acting as vertical forests of a sort. Confused? I shall say no more, the below picture should quench your imagination’s thirst.

Artist impression of Liuzhou Forest City in China (STEFANO BOERI ARCHITETTI)

However, the Communist Party of China runs the Peoples’s Republic of China with a top-down developmental approach. What that means is that any change in the Chinese economy is always heralded by the government itself. In this case, the increased focus on ESG disclosure is being pioneered by China’s debt-ridden SOEs (State-Owned-Enterprises).

This top-down, governmentally-driven approach to development, on one hand, does lead to the rapid construction of regulatory policy and framework but on the other almost always results in poor execution and supervision. What this means for ESG in China is that, while the SOEs MAY become third-world East-Asian pioneers in balancing financial disclosure with ESG disclosure, supervision, and fruition; But, and that is humongous ‘but’ indeed, there may be no change in the status quo for Chinese private firms.

Let’s be realistic here, take any government ever, supervision has always been their Achilles’ heel. Government officials have, for the most part, always been very thoughtful in creating laws and legal frameworks. This is especially true for China with its meritocratic unicameral political system. But, execution of the said laws is where things go downward spiral, due to lack of supervision and high monitoring costs. As I mentioned above, the billions of dollars of debt that China’s SOEs have accumulated over the years has put enormous pressure on them to perform, i.e., earn a profit, therefore ESG takes a back seat, and it would be futile to talk about the scrutiny of private firms’ disclosure when the government’s own industries are slackers in this aspect.

This problem is even more aggravated in areas like Xinjiang, Inner Mongolia, and Tibet. These three areas are not provinces, but rather ‘Autonomous Regions’ which have their own local governments, thus adding an extra layer of bureaucracy.

China has a total of 5 autonomous regions, namely, Inner Mongolia, Ningxia, Xinjiang, Guangxi, and Tibet, which are home to China’s ethnic minorities. More than 92% of China’s population is comprised of the dominant Han Chinese, but, in the above-mentioned 5 areas, one or more ethnic minorities are of a sizeable population. Since ancient times, these minorities have had mixed to cold relations with the kingdoms of mainland China, and this has transformed into an inherent distrust of the Han-dominated Chinese Communist Party.

The party’s policy of trying to change the demographics of these regions by encouraging Han Chinese to relocate there, a policy that frighteningly seems to be working, has only aggravated the problems. Additionally, these regions are quite underdeveloped compared to the eastern provinces of China, owing to the lack of resources. Also, the difficult terrain and low population density make infrastructure building a highly costly affair.

Now, what does this have to do with ESG? The lack of development means that in these autonomous regions, in particular, the party and its SOEs are not as interested in protecting the environment. Their first priority is to ‘tame’ these regions, which they wish to achieve by means of rapid growth and development. But this rapid development is like a double-edged sword; these ethnic minorities have traditionally been following animistic shaman faiths (apart from Tibet, which is Buddhist), and have a deep bond with their surrounding environment. Any harm done to their environment will only further alienate these people from the Han-dominated China. So it is here, that we see an interesting case of intersecting of environmental and social issues against the backdrop of economic development.

China’s autonomous regions

But the bureaucracy isn’t the only one to blame; even the companies themselves are pretty lax about keeping their commitments. They seem only to be interested in creating a brand image of being ‘pro-environment’, using words like ‘zero-waste’ and ‘carbon-neutral’ in their marketing campaigns. Ironically, these very campaigns themselves, using print and electronic media, only add to the companies’ footprint, while achieving nothing. For example, to commemorate World Oceans Day 2017, a Chinese e-commerce giant, signed a strategic partnership with the World Wildlife Fund and publicized a newfound commitment to marine ecology. And the very next day featured a promo deal on southern bluefin tuna, a critically endangered species; so much for the ‘newfound commitment’.

Making a company go green, is in itself a perplexing process. Let’s have a look at the textile industry in China. Many brands that say they are producing sustainable products are in reality simply greenwashing their textile production. “Sustainable Apparel’s Critical Blind Spot’ was a follow-up on a report released in April 2012 that named 49 global fashion brands using polluting factories in China. The ‘Institute for Environmental and Public Affairs listed a whopping 6,000 water pollution violations by manufacturers of global brands ranging from sportswear to luxury apparel and accessories. Of these 49 brands, 30 reacted to the report seeking assistance on how to improve their environmental performance.

Now the catch here is, new data has revealed that using sustainably sourced cotton from China actually increases the water footprint of the product. So on one hand if the brand continues its regular processes, it will lead to increased water pollution, while on the other, if the brands decide to go green, they end up increasing their water consumption and consequently, their water wastage. Pollution versus wastage, a tough choice to make.

Interestingly, this trend isn’t only limited to industries directly involved with using physical resources but rather follows its way up to the financial sector. Reports suggest Chinese banks are under negligible pressure to protect the environment. While companies and officials may get blamed for pollution incidents, the financial institutions who lent the money rarely face any charges.

It was way back in 1995 that the People’s Bank of China issued a notice requiring financial institutions to take into account the protection of natural resources and the environment as a whole while making lending decisions; yet more than two decades later, this ‘green credit’ has not made any serious impact. The sector as a whole is still rife with banks, city-level commercial banks, in particular, lending to polluting, energy-hungry, and resource-guzzling industries. These city-level banks are governed by local governments, which prevent local environmental authorities from relaying information about any breaches in environmental law by some companies, or even in entire projects, to the Central government.

In some instances, the very definition of what is ‘green’ is different in China than the rest of the world. Let’s look at the recent boom in green bonds. China, while being among the world’s biggest of polluters by carbon emissions, also accounts for a fifth of the global green issuance. It issued $26 billion USD in green bonds in 2016 alone, up from just $1 billion USD in 2015. However, only 10% of the green bonds sold had independent verification on the use of proceeds. Many companies simply issue ‘green’ bonds, while their activities are black as coal. How does that happen? Because Chinese ‘green’ bond guidelines allow for funding for ‘clean coal’ power stations.

And yet, there is still light at the end of the tunnel. This green bond boom in China clearly reflects an official push for cleaner energy. This is supplemented by the fact that China’s President Xi Jinping, has on several occasions made clear his commitment to protecting the environment and curb corruption. The latter of the two has actually been executed pretty swiftly. In China’s greenwashing scenario, this kind of policy is exactly what is required to change not only the general public’s mindset, but also morph China’s business ethics.

Another angle that often gets overlooked at by people unaware of economics is how rapid development and increase in people’s standard of living inevitably leads to an increased awareness about ESG and other ethical issues. Over the past few years, China has made leaps and bounds in the standard of living, per capita income, purchasing power and EDUCATION. This all has been coupled with the internet boom of the 21st century. Therefore in China, there has emerged a market full of smart, aware and socially active consumers who don’t mind spending a few extra bucks. News of corporate fraud and graft spreads like wildfire over the Chinese internet and can be fatal for the company’s PR.

Also, with the rapid development that China has seen, consumers are no longer interested in saving each penny and buying the cheapest goods, they would rather spend a few extra Yuan in buying something they know takes their country a step forward in achieving sustainable development. This surprisingly is one positive that has emerged from the Chinese populace’s jingoistic loyalty; it has translated into a feeling of concern for the environment, as that too is a part of their country after all.