ESG Risks and Coping Strategies in China

Covering environmental, social and governance issues, ESG is a broad concept. It has also become a hot topic globally, and although it is still difficult to reach consensus on the details of its meaning, public perceptions of ESG are changing rapidly. From net zero transition and sustainable finance, human rights and supply chain issues, to corporate purpose and corporate governance issues, it is crucial to understand the landscape of ESG. For businesses of all types, the challenge is how to integrate ESG factors into robust business processes – certainly no small task. 

ESG investing is an attempt to let capital play a positive environmental and social role and to deal with the threat posed by climate change. ESG investment has become increasingly important on a global basis in recent years. An increasing number of investors have become, or are striving to become, positive investors with a mission to influence target companies from an ESG perspective.  

The podcast looks at private equity funds, the localisation of ESG due diligence questionnaires for the Chinese market, and renminbi (“RMB”) funds, and explains that market awareness of ESG is growing at an unprecedented rate in China, largely due to increasing global attention, international conventions and regulations, as well as policy trends at a domestic level. 

The podcast also explains that the majority of Chinese companies typically encounter ESG issues when they – as suppliers – face ESG due diligence initiated by overseas clients, or when they – as target companies seeking investment from new investors or loans from banks or listed companies – need to obtain a good ESG rating from third-party institutions. Adverse events suggest that ESG risk management is critical for a company to achieve longevity.  

Companies need to integrate ESG factors into their risk management system, covering their entire business operation, and gradually make improvements in areas such as energy consumption management, social issues, protection of minority shareholders’ rights, compliance management systems, etc. In terms of the latter, for mining, energy and manufacturing enterprises, the Environmental, Health and Safety (EHS) issue is a major concern in ESG risk management.  

Differences in local regulations and practices in China can result in disagreements, which means that companies may face unique challenges in EHS compliance management and may therefore require assistance from EHS lawyers or specialists.

The podcast also discusses China’s awareness of its responsibility to address the greenhouse gas issue and the steps that have so far been taken to help the second largest economy in the world achieve its undertakings with regard to carbon emissions and carbon neutrality.