In October 2013, SynTao, a leading Chinese Corporate Social Responsibility (CSR) consulting firm based in Beijing, published A Journey to Discover Value for the sixth consecutive year in a row as part of a continuing in-depth look at CSR reporting practices in China. As SynTao’s flagship annual publication, this report offers comprehensive and cutting-edge research on CSR trends in China by providing insightful analysis based on specialized research methodologies.

  The number of CSR reports released in China has grown significantly since SynTao first began tracking market reporting standards in 2007. Over 1700 reports were written in 2012, a notable 70% increase over the previous year. In 2011, SynTao began a call for companies to “disclose key quantitative information and enhance the materiality of disclosure”, and developed its own indicator framework for individual sectors in order to encourage organizations to release their most material environmental, social and governance (ESG) performance data. In addition to several studies concerning the overall CSR reporting landscape in China, the latest edition of the report discusses and tracks the relative level of disclosure of material CSR information across 16 key sectors, comprised of 441 public companies involved in textiles, electronics, IT, real estate, construction, finance, pharmaceuticals, chemicals, transportation, food and beverage, automobiles, oil and gas, metallurgy, telecommunications, coal mining, and utilities.

  Why material and quantitative disclosure matters
  Based on SynTao’s ongoing study of reporting trends in China, the underlying value of CSR reports for investors can be lost in the overwhelming volume of qualitative descriptions, basic philanthropic activities, and “window-dressing” policies, all of which lack the most important and relevant environmental, social and governance (ESG) performance metrics in business. To this end, SynTao created an in-house, sector-based quantitative indicator framework that identifies the most relevant nonfinancial metrics within a given sector, helping to further assess a company’s level of disclosure quality on top of its management of CSR issues. The list of indicators used are tailored by industry, selected from a range of ESG factors such as energy consumption, water use, and employee turnover rates that most suit a company’s corporate profile. A disclosure rate (%) is then introduced to describe the specific number of indicators disclosed by a company, rated against the total number of indicators that the firm ought to include in its public disclosures.

  China’s A-share Issuers: Low average levels of CSR disclosure

  The number of CSR reports published by public companies across the 16 Chinese sectors tracked by SynTao reached 441 in 2013, a slight 4% increase from 2012. The aggregate disclosure rate in 2013 was 18% and remains low, despite a small 3% rise from the previous year. In general, there is considerable room for public companies in China to improve their most basic levels of disclosure, along with identifying the material information relevant to stakeholders, such as detailed quantitative and easily comparable ESG data. The difficulty in distinguishing between adequate and poor ESG performance is mainly due to the low level of overall disclosure in China.

  Disclosure levels were broken down into high (disclosure rate between 60-100%), medium (disclosure rate between 30-60%), low (disclosure rate between 10-30%), and poor (disclosure rate between 0- 10%). More than half (57%) of all the listed companies analyzed have low levels of disclosure. But, while the number companies with a poor rating is still relatively high, there has been significant progress towards increasing minimum reporting standards since 2011.

  Industry Overview: Disclosure levels in high-impact sectors

  The average disclosure rate for the sectors tracked by SynTao was provides an industry-by-industry look at overall reporting standards in China. While the oil and gas, utilities, and coal mining sectors are traditionally energy-intensive and inundated with significant pollution challenges, their relatively high level of disclosure is largely thanks to continued regulator and NGOs activism, which has increased public demand for improved environmental and social disclosure standards. With large portions of the oil and gas and telecommunications sectors currently listed on mainland, Hong Kong, and overseas markets, companies within these areas may be able to take advantage of the corporate governance and regulatory standards such exchanges offer when compiling annual CSR reports.

  Highest Levels of Disclosure for 2013

  Based on SynTao’s analysis, the top ten firms have published five CSR reports on average by 2013, with top companies like Baoshan Iron & Steel Company issuing environmental reports since early 2004.

  Reporting standards have also increased across mainland markets since 2012, with equal representation from both exchanges in 2013.

  SynTao evaluates companies using eighteen different material indicators on average. Among the top performers in China, environmental metrics were the largest (68%) area for disclosure, followed by, product, labor, social and ecnomy respectively. On average, 95% of the required financials statistics were disclosed, while only 24% of social indicators were reported.

　Companies lacking ESG transparency

　The overall number of companies whose disclosures scored zero dropped significantly in 2013, with an overall decline of 46% since 2011. The businesses that continue to under-report are primarily concentrated in the real estate, electronics and IT sectors. In a case demonstrating the underlying relationship between poor CSR reporting and actual management of commonly known industry risks, both Pangang Group Ltd. (000629) and its subsidiary Chongqing Titanium Industry Co. (000515) were heavily scrutinized by the public during August 2013, after both firms experienced several serious environmental incidents (Additional link: Pangang Group’s Environmental Scandal Ought to Raise Investors’ Concern)

　While CSR has become a vital component of regular business affairs, it is important to stress that the overall level of disclosure is not always directly correlated with actual ESG performance. Studies conducted in both China and Australia have highlighted a growing trend, whereby companies maintain high levels of environmental disclosure, but continue to perform poorly. Firms in environmentally-intensive sectors are increasingly under pressure from stakeholders to boost transparency, but as of yet have neither attempted nor have been able to devote an equal amount of resources to reducing the impact of their stated challenges. Despite the need for increased performance, however, firms may continue to choose to remain silent in the absence of similar demands from regulators, customers, and NGOs.

　ESG disclosure as a risk management tool
　While the direct effect of ESG factors on stock price can be difficult to consistently measure across markets and industry groups, they continue to have a significant impact on corporate image and investor perception. Perceived flaws on the open-market are equally as important to manage as the actual ones. In many cases, a negative effect on investors may be realized when a series of incidents reveal deeper and more fundamental ESG challenges. However, companies looking to use ESG reporting as a risk management tool can, to some extent, isolate themselves from the impact of negative events by implementing the externally verified reporting models now demanded by an ever growing range of private investors and public stakeholders. Findings from Deloitte also suggest that regular and credible disclosures can protect an organization from sudden drops in share price when an issue occurs, as they demonstrate to the market that the business chose to consider and hedge such risks ahead of time.

Written by Shen Xin, edited by Taylor Brown

This article was originally published in China ESG Monitor (October 2013) -- a monthly newsletter highlighting ESG trends and research relevant to sustainable investment in China.

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