As environmental, social and governance (ESG) investing moves increasingly into the mainstream of business strategy at a global level, and following a general trend across its listed businesses, China’s technology sector is quietly making progress in a number of important ESG domains.
The governance challenges facing the actors in this all-important sector of the Chinese economy are well documented, as are the responses from government, particularly in terms of increased regulation – for example, the requirement by the China Securities Regulatory Commission for listed entities to disclose ESG risks associated with their operations in 2020 and the 2021 guidelines requiring them to make these disclosures in annual and semi-annual reports.
However, there has been less focus on the efforts of major Chinese mainland tech companies in the other non-governance ESG domains – environmental and social – as part of an overall approach to competitive advantage and differentiation as they mature.
While Chinese tech companies are not alone in having adopted ESG best practices and have learnt lessons from businesses based in developed markets, particularly around the design of their ESG strategies, they have also moved to forge clear identities and focus on material sustainability-related issues.
Critics may suggest that Chinese tech companies have come late to the ESG party and that only by virtue of increased and more rigorous state regulation has there been an improvement. Indeed, Asia, in general, is often widely dismissed by commentators who say it lags behind the Global North when it comes to ESG in corporates and that governance remains a critical weakness in many sectors.
However, those involved in the detailed tracking and analysis of corporate governance over time have observed that Asia has made significant and, in some cases, rapid progress. While notable differences remain both within countries and sectors, particularly when compared with the West, there have been notable upticks in sector level performance in 2021, according to the Asian Corporate Governance Association. None more so than in materials and capital goods, where performance has been driven by diversified boards, better capital structures and a focus on efficiency and emissions.
However, this was closely followed by the technology sector, which has made considerable gains. In China, the state’s overall carbon neutrality target set out in its 14th Five-Year Plan can be seen as an important driver, as it not only has implications for the transport and utilities sectors, but also for that of technology.
Re-calibration, ESG integration
An analysis of Chinese mainland tech company ESG reports since 2017 finds a general trend of significant evolution, greater transparency and improved performance as the companies’ ESG journeys evolve. The companies have also demonstrated a greater understanding of ESG materiality in their business and wider sectors, including the need to work in partnership with external stakeholders. As well, the impact of the Covid-19 pandemic in raising the understanding of, and the responsibility to address, overall sustainability goals cannot be underestimated.
There is a clear trajectory and maturity of sustainability reporting within the Chinese tech space. For example, JD.com, a leading e-commerce platform, first started reporting on its sustainability performance in 2020. Its early reporting highlighted its corporate social responsibility (CSR) efforts; but, by 2021, it was positioning itself as a key actor in the ‘new real economy’, anchoring its ESG efforts within a strategic business and enterprise context. Reporting also highlighted a strategic pivot towards responsible consumption and consumer behaviour, echoing China’s prioritized policy agenda and aligning with wider national development goals.
Furthermore, Chinese tech companies, rather than reacting to increased market scrutiny, are pursuing ESG initiatives as a means of driving internal efficiency, reducing risk and supporting talent acquisition and retention.
The pioneering fintech Ant Group started publishing its ESG report in 2017, despite being a private company. It was the first company, of those analyzed, to adopt ESG criteria while others were still focused on CSR. Its ESG evolution is well documented, and it has become increasingly ambitious and understanding of its own performance in a regulatory landscape that is becoming more sophisticated and global. (For example, it has aligned its ESG strategy and reporting against the UN Sustainable Development Goals).
Ant’s latest 2021 sustainability report places significant emphasis on financial inclusion as part of a wider social responsibility pivot. The business has provided a clearer articulation of why ESG matters in the report and identified a series of strategic pillars to guide its ESG trajectory and objectives to 2030, which involve digital inclusion, green and low-carbon development, technological innovation and an open ecosystem.
The group also inked its first green loan in 2022. This more ambitious strategy and its clear goals have been noted by a number of external rating agencies, including MSCI, which have rated the business on par with its western peers – Visa, Mastercard - on its access to finance metrics.
Unsurprisingly, there is significant focus across the Chinese tech universe on the importance of addressing climate change, specifically reporting progress against Scope 1 (direct) and Scope 2 (indirect) greenhouse gas (GHG) emissions.
Four out of seven companies analysed have disclosed their carbon neutrality roadmap in the last year or two, with clear goals and a pathway for achieving carbon neutrality for Scopes 1, 2 and 3 GHG emissions respectively. Of note, Ant has achieved carbon neutrality in its operations (Scope 1 and 2 GHG emissions) in 2021 – a commitment that will remain in place until it achieves net-zero emissions (Scope 1, 2 and 3 by 2030.
Chinese tech companies are heavily focused on the concept of ‘green computing’ as a means of reducing their own carbon-dioxide (CO2 emissions in their facilities. This includes investment in high performance computing infrastructure and better use of computing resources – including more energy-efficient CPUs and servers, reducing resource consumption, and the responsible disposal of electronic waste. Data centres – often criticized for their significant energy intensity and emissions due to the cooling necessary to function efficiently – have been increasingly subject to better controls.
As well, leading tech firms are increasingly adhering to more rigorous ESG-related standards and placing stringent demands on their suppliers worldwide. For example, Apple has called on its global supply chain to address their GHG emissions and actively evaluates its key manufacturing partners on their climate impact and reduction targets, in support of its decarbonization goals.
Some tech players have also actively chosen to take a leading role within the industry itself and broader business community within China to achieve a shared goal of addressing climate change. In 2022, the e-commerce group Alibaba vowed to eliminate 1.5 gigatonnes of CO2 emissions across its entire business ecosystem by 2035, announcing Scope 3 GHG (value chain) targets and promising to leverage digital platforms to influence and advocate for a low-carbon approach across the group.
Separately, the green energy initiative led by Ant in its Ant Forest programme is open to brands that wish to incentivize their customers to go green. Ant Forest is an enormously successful tree planting initiative, launched in 2016, that supports ecological conservation and ecosystem restoration. The campaign has engaged 650 million Chinese users since then in “gamified, participatory pro-environmental communication”.
The concept is simple – consumers collect “green energy points” on Alipay, the world’s top mobile payment platform, when they opt for low-carbon lifestyle choices like renting shared bikes and using mass transit instead of driving to the office. By collecting a certain number of points, the user can ask Ant Forest to plant a real tree in his or her name.
Chinese tech participants have also increasingly seen the importance of using their collective voices to call for positive change in other areas of sustainability, among them, the need to address biodiversity and nature loss. Tencent and JD.com, for example, have joined more than 1,000 companies worldwide to support the Nature Is Everyone’s Business call to action urging international governments to adopt policies to reverse nature loss in this decade.
Room for improvement
Despite significant progress, challenges remain within the Chinese tech sector on key aspects of ESG. Greater transparency within such companies is still required, particularly around the need for more effective communication around how ESG creates value and supports their business strategies, and for greater integration of ESG aspects within the business itself.
Greater focus is also needed around stakeholder engagement and outreach. Key player carbon reduction plans, in general, show little evidence of the detail needed to achieve carbon neutrality and lack rigour in terms of the year-on-year reductions to be achieved, the notable exceptions being Baidu, Ant, Alibaba and Tencent.
While the Hong Kong stock exchange has been advocating strengthened corporate governance for many years, there are encouraging signs that Chinese mainland tech companies are making progress in the governance domain. Independent non-executive directors (INEDs) have become a feature of leading tech company boards, including those of Baidu, Tencent, JD.com, Alibaba,NetEase and Ant, which recently announced its plan to bring in its fifth INED, increasing the number of its board members to nine.
However, board diversity remains an issue among Chinese mainland companies in general. Gender diversity is weak and female directors remain a minority. Women in China – unlike in Europe and North America where board diversity has been driven by regulatory, political and market pressures – still have low representation on corporate boards (only 11.8% of companies have 30% or more women on boards, according to MSCI). The proportion is only slightly better in the tech space, where two out of seven firms have no women on boards.
Beyond this, a greater future focus on diversity of background is expected to develop targeting expertise in specific areas required to lead today’s businesses – such as climate change and data security – and to respond to other material issues on company risk registers. In this regard, the Chinese mainland can look for inspiration to the Hong Kong stock exchange where ESG factors are becoming increasingly core for listed businesses.
Despite the challenges and recent regulatory pressures, significant long-term growth opportunities are expected in this all-important sector in China, as is continued investment in the technology to support environmental objectives critical to enabling the government to achieve its carbon neutrality targets.
The innovative tech sector has the opportunity to assume a leading role in the ESG space, and it can potentially become a beacon for ESG in the Chinese mainland. There is a considerable way to go, but the sector is aware of the challenges and opportunities, and is well placed to lead the way towards a new era of greener, more socially responsible businesses.
Mark Watson is the senior managing director and head of ESG advisory for Asia-Pacific at Teneo.