Earth Research | Why is ESG a required course for the future development of listed companies?

ESG refers to a set of standards used to measure an organization's environmental and social impact, commonly used in investment environments but also applicable to customers, suppliers, employees, and the public.

The ESG system includes three aspects: environmental, social, and corporate governance. It is the foundation of socially responsible investment and an important component of the green finance system.

The meaning of ESG is an investment philosophy and evaluation standard that focuses on the comprehensive performance of enterprises rather than their financial performance.

ESG standards mainly include: Environmental, Social, and Governance Three dimensions.

Environmental Dimension Focuses on the management and impact of enterprises on environmental issues such as climate change, natural resources, energy use, and emissions.

Social Dimension Focuses on the management and impact of enterprises on social issues such as employee rights, labor relations, human rights, community relations, and consumer rights.

Corporate Governance Dimension Focuses on corporate governance issues such as governance structure, board independence, compensation and incentive mechanisms, and shareholder rights protection.

Specifically:

1. Environmental:

Focuses on the impact of enterprises on the ecological environment during operations and production, such as pollutant emissions, waste disposal methods, energy consumption and efficiency, biodiversity loss, and depletion of natural resources.

Enterprises need to formulate and implement energy-saving and emission-reduction measures, green procurement policies, and green technologies to reduce their negative impact on the environment.

2. Social:

Emphasizes that enterprises should fulfill their social responsibilities, mainly considering the various impacts of enterprises on society, such as employee management, welfare and compensation, employee safety, relationships with upstream and downstream suppliers and service providers, and product safety.

Enterprises need to pay attention to gender and gender balance policies, human rights policies, community health and safety, targeted poverty alleviation, and public welfare and charity to demonstrate their social responsibility and contribution.

3. Governance:

Emphasizes that enterprises should improve their governance level, mainly considering the establishment of enterprise systems, such as corporate organizational structure, the interests of shareholders and management, the existence of corruption and financial fraud, information disclosure transparency, and business ethics.

Enterprises need to establish a sound corporate governance system to ensure the transparency and fairness of the decision-making process and protect the rights and interests of investors and other stakeholders.

The importance of ESG lies in its ability to help investors assess the sustainable development performance of enterprises, including environmental and social risk management, governance structure, and transparency. By considering ESG factors, investors can gain a more comprehensive understanding of the value and risks of enterprises and make more informed investment decisions.

At the same time, ESG can also encourage enterprises to pay more attention to sustainable development, improving their competitiveness and long-term value.

In Investment Strategies ESG can be applied to the construction and management of investment portfolios.

Investors can screen and evaluate enterprises based on ESG standards and select enterprises that meet sustainable development requirements for investment.

ESG can also be used for Risk Management to help investors identify and assess environment- and society-related risks and take appropriate measures to manage them.

In addition, ESG can also be used as a basis for investment decision-making Decision-Making Basis to help investors better understand the long-term value and potential risks of enterprises.

In terms of ESG disclosure, enterprises can publicly disclose ESG information to demonstrate their sustainable development performance and management practices.

ESG disclosure can include regularly published sustainability reports, disclosure and reporting of ESG indicators, and participation in ESG ratings and indices.

By disclosing ESG information, enterprises can enhance transparency, increase stakeholder trust and recognition, and attract more investors and partners.

In short, ESG is a set of standards used to measure the environmental and social impact of organizations, and it is of great significance for investors to assess the sustainable development performance and risk management of enterprises.

ESG can be applied to the construction and management of investment strategies, helping investors make more informed investment decisions. At the same time, ESG disclosure can enhance the transparency and credibility of enterprises, attracting more investors and partners.

1.  ESG Evaluation Objectives:

ESG evaluation aims to discover enterprises that focus on the environment and have a sense of social responsibility. Compared with traditional investment decisions that aim to pursue financial performance, ESG advocates a business model that can bring sustainable returns in the long term, mainly examining three non-financial indicators: environmental factors, social responsibility, and corporate governance.

2. The Role of ESG Evaluation:

- For Investors

Based on ESG evaluation, investors can observe the ESG performance of enterprises, evaluate their investment behavior, and the contribution of enterprises (investment targets) to promoting sustainable economic development and fulfilling social responsibilities.

- For Enterprises

Improving ESG management levels can enhance the ability of enterprises to cope with crises.

Good ESG performance is an invisible asset. Enterprises can discover the negative environmental impacts caused by their production processes earlier, reducing the possibility of being subject to high fines from regulatory authorities in the future due to environmental violations;

At the same time, it can accelerate the construction of product quality control and supply chain management supervision systems, reducing the possibility of future product quality and safety problems and customer complaints.

In general, ESG is a comprehensive and multi-dimensional evaluation standard aimed at promoting sustainable development for enterprises and achieving a balance across economic, social, and environmental dimensions.

3. The development of ESG in China faces some challenges and opportunities.

First, the development of ESG in China faces many challenges, including a lack of unified ESG information disclosure and rating standards, difficulties in collecting and calculating ESG information, low quality of ESG information disclosure, large discrepancies in ESG rating results, and the need to promote ESG investment strategies.

Second, various regions around the globe are suffering from the difficulties caused by climate change. In the face of global climate goals, although countries have not yet reached a consensus on their responsibilities in addressing climate change, the development of ESG principles has become a global focus.

In recent years, ESG has become a "weather vane" for the sustainable development of Chinese enterprises. In the capital market, ESG has become the "second financial report" for listed companies.

In addition, ESG investment is an investment philosophy that fully considers environmental, social, and corporate governance factors in the investment decision-making process. Related concepts also include:

Since its emergence in 2019, ESG financial products in China have also developed rapidly. By mid-2023, the market size was approximately 160 billion yuan, with a growth rate significantly higher than other financial products.

In summary, the development of ESG in China faces some challenges, such as the lack of unified information disclosure and rating standards, but there are also opportunities, such as ESG becoming a global focus, ESG becoming a "weather vane" for the sustainable development of Chinese enterprises, and the rapid development of ESG investment concepts.

At the same time, the development of ESG (Environmental, Social, and Governance) in China shows a positive and upward trend, specifically reflected in the following aspects:

a. Dual-engine drive of policy promotion and market demand:

The Chinese government attaches great importance to sustainable development and has introduced a series of policies and regulations to promote enterprises to improve the transparency and quality of ESG information disclosure.

For example, documents such as the "Guiding Opinions on Central Enterprises' High-Standard Fulfillment of Social Responsibilities in the New Era" issued in June this year provide a clear direction and standards for enterprises' ESG practices.

With the growing interest of global investors in ESG investment, more and more Chinese enterprises are beginning to attach importance to ESG ratings to enhance their global market competitiveness and brand value.

b. Improvement in corporate ESG performance:

According to the "2024 ESG Action Report," the average ESG index of the "Top 100 Chinese ESG Listed Companies" has jumped to 77.4 points, with 20 companies achieving a five-star excellent level, a significant increase compared to 2023.

Manufacturing companies account for half of the "Top 100" companies, reflecting the high attention paid by Chinese manufacturing to ESG governance capabilities and performance levels under the concept of high-quality development.

c. ESG integration into corporate management:

Nearly 90% of the "Top 100 (2024)" companies have integrated ESG into their supply chain management, extending ESG principles to all links in the upstream and downstream supply chain.

Taking Ping An Insurance as an example, as an ESG pioneer in the financial industry, the company is committed to playing an industry-leading role in sustainable development and continuously providing high-quality services for economic and social development.

d. ESG and carbon footprint management:

With the global focus on climate change, Chinese companies are becoming increasingly proactive in addressing climate change. More than 60% of the "Top 100" companies have set quantitative targets for addressing climate change, and 85% have disclosed their annual greenhouse gas emissions.

The "Implementation Plan for Establishing a Carbon Footprint Management System" jointly issued by the Ministry of Ecology and Environment and 14 other departments provides a clear direction and operational guidance for Chinese enterprises in carbon footprint management.

e. Enhanced international influence of ESG:

With the increasingly obvious trend of Chinese companies' "ESG going global," the ESG influence of Chinese companies has radiated to many countries and regions, bringing positive changes to the local areas.

In summary, the development of ESG in China is characterized by dual-engine drive of policy and market, improved corporate ESG performance, integration of ESG principles into corporate management, strengthened carbon footprint management, and enhanced international influence. In the future, with the continued global attention to ESG issues and the continuous efforts of Chinese enterprises, the development of ESG in China is expected to be further improved.