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Embracing China's target of carbon peaking and carbon neutrality, ESG empowers new growth in traditional industries



Since 2008, the State-owned Assets Supervision and Administration Commission of the State Council (SASAC) and the Shanghai and Shenzhen Stock Exchanges successively issued documents encouraging Chinese companies to publish reports on corporate social responsibility (CSR). China then began to promote the establishment of an environmental, social and governance (ESG) system. As the A-share market becomes increasingly accessible to foreign investment, listed companies and investors have given more importance to ESG. The ESG performance of a company is now one of the important considerations for making investment decisions. By assessing the performance of ESG risk and management, investment institutions can analyze a company’s capability for long-term sustainable development.

A strong ESG proposition helps traditional industries create new business model for sustainable development by integrating business development with environmental protection, social sustainability, and good practice in corporate governance. A company’s ESG risk management not only enhances its ability to respond to future risks, but also improves its overall strength and reduces its financing costs by team reinforcement and digital management. In addition, under the dual carbon goals – reaching carbon peak and achieving carbon neutrality, the industrial ecosystem will transform toward a circular economy and drive the vertical integration of the industrial chain. In the new era, low-carbon and green growth will be the key factors in measuring competitiveness.

As traditional companies are generally new to ESG, most of them are still at the early stage of ESG management and encounter many challenges in governance, management and disclosure. In terms of governance, these companies lack a sound ESG governance system and awareness, and have not yet established a risk assessment system to mitigate potential ESG risks. In terms of management, they have not yet established a complete ESG management mechanism and any ESG-related activities were loosely executed. Their data collection system is also relatively out of date, which cannot fully and timely reflect their ESG performance. As for disclosure, due to the lack of a unified indicator system, the information disclosed in the report often have low information value. In addition, the lack of communication with stakeholders and external rating agencies has resulted in companies failing to gain sufficient external recognition.

EY believes that to enhance the overall ESG standards, companies need to make efforts in five aspects: ESG governance system, ESG risk management, ESG management system, ESG information collection and information disclosure. They need to integrate ESG management into their day-to-day operations. In terms of governance, companies are advised to build a multi-level governance structure led by the board of directors, and steadily promote ESG work by clarifying the rights and responsibilities of each level. They also need to integrate the ESG risk management mechanism into the overall risk management system to improve their ability to cope with emerging and future risks.

In terms of management, companies should improve the ESG management system, standardize their day-to-day management, optimize the existing ESG data management system through digital solutions, and improve the quality and timeliness of ESG data. In terms of disclosure, companies should clarify the ESG information disclosure process, and establish a regular communication mechanism with stakeholders and rating agencies to ensure that information disclosure results are in line with the purposes and principles of reporting.

Represented by the iron and steel industry, traditional industries shoulder important social responsibility. Baosteel, the world’s leading modernized steel conglomerate, has put ESG concepts into practice and shouldered the responsibility of sustainable development. The company established an ESG governance structure and formed a three-tier governance system – the board of directors; the strategy, risk and ESG committees; and the ESG working group. It has incorporated ESG concepts into its strategy and risk management, and leveraged on digital technology to improve the efficiency of ESG management and to control ESG risks. In terms of environment, Baosteel has proactively responded to China's dual carbon goals, and formulated its own carbon goals to achieve carbon peak in 2023, to be technologically enabled by 2025 to reduce carbon by 30%, then to reduce carbon by 30% in 2035, and eventually to achieve carbon neutrality in 2050.

In terms of society, the company not only safeguards the rights, interests, health and safety of employees, but also actively promotes green construction of the industrial chain and the common development of the society. These efforts have allowed Baosteel's ESG performance to be highly recognized.

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