Institutional Investor: CSR makes slow progress in Asia

Institutional Investor, May 2011

Asian companies are showing steadily more interest in corporate and social responsibility (CSR) in their business practices. While Asia is nothing like the US or Europe in terms of ethical and environmental policies becoming an investment class in their own right, much is changing nevertheless.

“In terms of the actions of the companies themselves, we have seen a lot of development,” says Richard Welford, chairman of CSR Asia, which provides information, training, research and consultancy services on sustainable business practices in Asia. “Compared with two or three years ago, we are now seeing many more companies involved.”

One of the drivers of this increased awareness is the behaviour of stock exchanges. For example, in August Singapore Exchange issued a policy statement on sustainability reporting, including a guide for listed companies and a series of principles. Among other things, the statement stressed that a company’s board is responsible for matters of sustainability; that environmental, social and governance factors are important for the long term performance of a company; and that companies should use appropriate reporting standards, such as the Global Reporting Initiative’s Sustainability Reporting Guidelines, linked to the UN Compact principles. “At this stage, sustainability reporting is voluntary,” it said at the time, as it sought feedback from the public. “SGX is of the view that as more companies become inspired to adopt sustainability reporting, it will be natural to take the next step on guidelines and standards leading to rules.” Singapore has not yet made these guidelines mandatory, but it is widely expected to be only a matter of time.

Malaysia is way ahead of it: Bursa Malaysia, the national stock exchange, made sustainability reporting mandatory for listed companies in 2006, and publishes a detailed framework to help them do so. And Hong Kong’s stock exchange has been developing its Guide to ESG Reporting, which is expected to make sustainability reporting there compulsory in due course.

Hong Kong provides a useful case study of the way sustainability has long appeared in corporate reporting. Its blue chip companies are considered some of the most open in the region, if not the world: MTR Corporation published its first sustainability report (also thought to be the first of its kind in Hong Kong) in 2001. But what’s most encouraging is a shift away from the obvious standard-bearers of governance and CSR towards others, and in particular Chinese companies. “For a long period of time it was the usual suspects like HSBC, CLP and Swire: what you could call the old British Empire companies,” says Welford. “Now we are getting to some big Chinese companies, such as Bank of China, Sun Hung Kai and Hang Lung, who are starting to think about sustainability as well.”

Thailand has been a particularly active market for CSR and governance development recently. PTT, for example, has set up a dedicated CSR policy and framework. Its national gas transmission business was developed with a CSR management system manual, winning a national quality award in the process, and it has adopted security, safety, health and environmental management standards. And Thai Airways is involved in reforestation programs, as well as conducting seminars on CSR earlier this year.

And in mainland China, the shift towards CSR and governance has probably been more acute than anywhere. State-owned companies face mandatory governance reporting requirements anyway, but in addition to that, many people feel that the terrible Sichuan earthquake in 2008 was something of a catalyst for CSR thinking in China.

A look at the annual reports that came out for China’s blue-chips in 2008 shows a major shift in the importance of CSR and philanthropy: all of China’s biggest companies made considerable donations (China Mobile, for example, eventually committing RMB282.6 million through a combination of company donations and staff collections, Sinopec RMB300 million, and China Telecom RMB330 million). Bank of China established tent banks to keep emergency financial services moving; other banks provided relief loans or grace periods on repayments; Petrochina distributed and transported a million of tons of refined products to the region in two months as part of an emergency response plan; China Life gave free accident insurance to rescue workers and used its charity foundation to fund earthquake orphans’ living expenses until they reach 18; and oil company CNOOC sent 14 helicopters in relief support.

The earthquake notwithstanding, in the same year ICBC moved its CSR report into line with the 2006 Sustainability Guidelines of the Global Reporting Initiative, with an independent third party appointed for verification, and imposed limitations on loans to industries with high pollution and energy consumption (by the end of that year 99% of outstanding loans were to borrowers meeting China’s environmental policy). Sinopec devoted 26.8% of its capex for the year to the development and production of cleaner energy, and passed an Employees Code of Conduct, as well as supporting public welfare and charity programs in Tibet; Petrochina implemented a new accountability system on safety and environmental protection; CNOOC, which was already running a poverty alleviation program in Tibet and making education donations, published details of new pollution prevention measures; China Life ramped up its involvement in the New Village Cooperative Medical Schemes, which affects 30 million rural residents; China Mobile increased its involvement in a program supporting children orphaned by AIDS, and another training 3,600 primary and middle school principles (it also became the first mainland Chinese company to be listed on the Dow Jones Sustainability Index);  China Telecom built primary schools and a hospital in Sichuan; and Ping An, long involved in the Hope school-building program, engaged 600 of its staff in voluntary teaching programs, and became a party to the Self-Disciplinary Convention on Environment Protection for Listed Companies.

“We must never confuse philanthropy with CSR, but I think there was a sense that some companies were not perceived as giving enough” after the earthquake, says Welford. “People were saying: you’re a multibillion dollar company, giving one million RMB is not enough. The earthquake also led people to realise that it’s not all about money: sometimes it’s about equipment, or water, or providing skills.”

Welford adds that, in China, “the leadership from government has been quite interesting. Senior politicians have been talking about the role of the private sector in contributing to a harmonious society. And their notions of the harmonious society contain strong sustainability dimensions.”

But if 2008 was a spur for new behaviour in CSR, some feel that it was also a cause of lost ground in the related field of corporate governance.  “The 2008 global financial crisis was a wasted opportunity,” said Amar Gill, CLSA’s Head of Thematic Research, when he presented CLSA’s latest annual Corporate Governance Watch survey in September 2010, produced with the Asian Corporate Governance Association. “Rather than using it to push reform forward, most governments have taken a complacent view, happy that the crisis this time did not start in Asia. Not enough has been invested to make best practices work and the negative trends we see may lead to a build-up of governance risk for the coming years.” The survey, a benchmark in Asian corporate governance and now covering 580 companies in 11 countries, concluded that corporate governance was improving in Asia, but was well short of international best practice, with regulators making it too easy for companies to simply tick boxes rather than effect genuine change.

One of the reasons governance and CSR have not gone as far as they could do is that there is not the same push from institutional investors in Asia for governance as exists elsewhere in the world. Asia is not yet home to a vibrant SRI fund industry of the kind that exists in Europe, the US and Australia. “They are appearing,” Welford says. “There has been quite a track record in Japan, particularly for environmental funds, and to some extent Korea. But they have not shot up as one might have predicted five years ago.”

That said, Welford does believe that “mainstream as well as socially responsible investors are getting more interested in disclosure from companies. They are recognizing there are risks associated with making sustainability mistakes.” He cites the example of Foxconn, the Chinese company that became internationally controversial when 14 of its workers committed suicide in the space of 2010 alone; a report by several Chinese universities subsequently described its factories as labour camps. Foxconn did then change some practices and increase wages, but its share price has plunged – partly because of reputation damage, and partly presumably because of the impact of the wage increases on the bottom line. “I think investors are aware of these sorts of stories now, and are looking for more information.” Others have argued that the revolt in Thailand illustrated how social inequality is, to be pragmatic about it, plain bad for business.

CSR Asia was one of the backers of the Asian Sustainability Ratings initiative, alongside Responsible Research, a Singapore company that provides CSR-related research to global institutional investors. The initiative has its roots in a business barometer of the top 10 companies in four countries several years ago; it has been progressively expanded and will this year rate 750 all over Asia. Tellingly, the ratings appear to be more popular with European pension funds seeking to understand Asia than Asian institutional investors themselves. But it does demonstrate the increasing level of information and research growing around these areas of business.

On top of regulation and research, another prompt for improvement in CSR practices has been peer pressure. “More companies are looking at peers and realizing that they are laggards,” says Welford, “and that’s not good. It would be too strong to say they are being embarrassed into doing things, but they are certainly recognizing that big brand name companies do this. In particular, Asian companies with global aspirations are beginning to realize CSR is a big part of their brand and reputation.”

Across Asia, there are numerous examples of CSR practices gaining greater traction. The Ministry of Company Affairs in India, when it announced a new Companies Bill, required some companies to allocate 2% of net profits for the previous three years to CSR. It’s not without criticism – it lacks specificity on what CSR spending actually is – but it shows an increasing willingness to legislate for CSR. Interestingly the Indian bill, which is not yet law, will be self-regulated, relying on shareholders and other stakeholders to make companies do the right thing. India already imposes mandatory CSR spending on the mining industry.

In Malaysia, the 2011 budget includes several green policies, including tax breaks, soft loans and a general encouragement to invest in green innovation, provide information on energy usage and carbon footprint, providing green products without a premium for the greenness, and adopting green living in everyday life.

Alongside this comes a general change in multinationals behavior in Asia. Coca-Cola, for example, is now engaged in a project with the World Wildlife Fund to improve water quality on the Yangtze. This will involve working with rural farmers to turn animal waste into biogas instead of allowing it to enter the river; as well as community education projects on environmental issues for rural farmers. Coca-Cola is an example of a multinational taking the approach of issues-based reporting: taking a global issue and writing detailed studies of that issue, in Coca-Cola’s case water. Unilever was an early mover in this area, writing reports on poverty alleviation.

And one can even make a case for arguably Asia’s most obscure state, the mountain kingdom of Bhutan. It has introduced a new index of development called Gross National Happiness, combining psychological well-being, health, education and environmental diversity into one single measure. Perhaps we’ve all got something to learn from the Bhutanese.