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Reports | Wednesday September 12, 2018

Climate and Health

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Climate change affects each and every human around the globe, with profound and potentially lasting implications for global health. This paper uses data and case studies to highlight the impacts of climate change on health and help companies across sectors understand the resulting consequences for business.

The report demonstrates why and how business can act, and it explores how to establish a deeper understanding of the nexus of health and climate throughout the company; articulate the risks and opportunities for companies across sectors; secure buy-in from senior leadership; and identify, assess, prevent, mitigate, and remedy the adverse impacts of climate change on health.

This report is part of a series of six climate nexus reports that cover human rights, inclusive economy, women’s empowerment, supply chain, just transition, and health. This series is aimed at business to drive resilience inside the company, across supply chains, and within vulnerable communities.

Climate Nexus Report Series

Blog | Tuesday September 11, 2018

Three Tips for Partnerships to Advance Workplace Health

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Now more than ever, collaboration is the key ingredient to long-term solutions for systemic challenges. UN SDG 17 specifically calls for effective public-private and civil society partnerships to address systemic sustainability issues like increasing workers’ access to knowledge about their health or supporting women with information about menstrual hygiene and voluntary family planning.

That’s one reason why BSR partnered through HERproject with the USAID-funded Evidence Project, Meridian Group International, and Bayer Pharmaceuticals to create printable health education materials for the workplace. A baseline assessment in HERhealth factories conducted by the Evidence Project indicated that female factory workers generally reported low levels of reproductive health-related knowledge, including on menstrual hygiene, the fertility window, and reproductive health services.

To address this, factory nurses, welfare officers, and peer educators need handouts, posters, and other materials they can use to supplement their efforts to educate workers on key health issues. Such materials can be hard to come by for many factories, and when they are available, most educational materials are printed on glossy paper with many colors and photos, which makes them costly to print and unsustainable to use at volume in the long term. 

With input from HERproject, Meridian and Bayer adapted a set of Health Education Materials and an Implementation Guide for factories. These materials cover important health issues facing women and men workers, including voluntary family planning, healthy timing and spacing of pregnancy, menstrual hygiene, engaged fathers and health, and handwashing.

The materials are available electronically in color and black and white (to save on printing costs) to be easily printed at the factory site. They come in three formats:

• Mini-Posters, to be posted in public areas,
• Handouts with more information for workers to take home, and
• Supplemental materials to reinforce learning.

There is also a User’s Guide for Partner Organizations, including brands/retailers, NGOs, and other interested parties, which explains how the materials can be used in workplace programs throughout global supply chains. We have recently started using them in our HERhealth factories in Bangladesh and will be measuring their effectiveness.

While the time required to establish an impactful partnership is often considerable, we’ve seen that the investment is often justified by the results.

While the time required to establish an impactful partnership is often considerable, we’ve seen that the investment is often justified by the results. Here are a few things we’ve learned from this collaboration that you may find helpful in your efforts to partner for impact:

1. Identify what each partner can uniquely contribute: When multiple partners are involved in a collaboration, each has a unique role to play. For example, here HERproject brings in industry insights, The Evidence Project and Meridian have vast technical expertise, and HERproject and implementing partners Change Associates and Mamata have in-depth knowledge of factory management and workers. In this particular endeavor, EngenderHealth Bangladesh played an instrumental role in engaging with the Bangladesh Ministry of Health and its technical committee to get their formal approval of the materials. The interconnected relationships between partners were very important to navigate; the collaborative approach enabled the partners to get formal buy-in from the Ministry of Health and major Bangladesh industry groups like the ILO/IFC Better Work program and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), including approval to include their logos on these materials.
2. Context, context, context: Materials for workers won’t be effective if they are not developed and tested locally. Drafts were shared with factory workers, nurses, and management in Dhaka and Chittagong for their input, and this simple, low-tech solution was based on actual need. The materials are currently available in English and Bangla, and they will soon be made locally relevant and available in other languages for use in new locations.
3. Deepen the partnership to scale: A long time horizon and resource plan will enable the expansion of the scope and allow the collaboration to reach scale. With the success of this initiative to date in Bangladesh, we are now planning to replicate and contextualize this work for other countries where HERproject operates, such as Ethiopia and Kenya.

Here at BSR, we know that partnership will be key to our ability to realize the UN SDGs. If you’re interested in learning how to work with us on the SDGs, including specifically to use partnerships (SDG 17) to support gender equality and empower all women and girls (SDG 5), please don’t hesitate to contact us.

The Evidence Project seeks to expand access to high quality voluntary family planning/reproductive health services worldwide through implementation science, including the strategic generation, translation, and use of new and existing evidence. The project is led by the Population Council in partnership with the Population Reference Bureau.

BSR's HERproject™ is a collaborative initiative that strives to empower low-income women working in global supply chains. Bringing together global brands, their suppliers, and local NGOs, HERproject™ drives impact for women and business via workplace-based interventions on health, financial inclusion, and gender equality. Since its inception in 2007, HERproject™ has worked in more than 800 workplaces across 14 countries and has increased the well-being, confidence, and economic potential of more than 800,000 women.

Blog | Monday September 10, 2018

Why Climate Resilience and Supply Chains Go Hand in Hand

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According to the U.S. National Oceanic and Atmospheric Administration (NOAA), 2017 was the third-warmest year on record, the U.S. experienced three of the top five costliest hurricanes in U.S. history that same year, and the 20 warmest years on record have all occurred since 1995. Businesses already experience the negative impacts of climate change, from infrastructure damage to disruptions to logistics, input supplies, and customers. Since 2011, the World Economic Forum’s annual Global Risks Report has ranked climate risks a high priority for business in terms of both likelihood and impact.

It is critical for business to understand the full spectrum of climate risk: not merely how physical impacts affect infrastructure, but also the extent to which their workers and assets are exposed and how communities experience and adapt to these impacts. It is clear from our research that businesses do not yet fully recognize and understand how climate change affects the people in their value chains.

What businesses often overlook is that building climate resilience simultaneously advances other goals, including respecting human rights, increasing inclusivity, empowering women, improving the health of workers and communities, and managing supply chains.

What businesses often overlook is that building climate resilience simultaneously advances other goals, including respecting human rights, increasing inclusivity, empowering women, improving the health of workers and communities, and managing supply chains. To help businesses explore the interaction between climate and these areas, and to direct companies to opportunities for synergy and interventions that will build climate resilience, BSR is launching a series of reports on the “nexus” between climate resilience and other key sustainability issues: supply chain, health, inclusive economy, women’s empowerment, just transition, and human rights.

These reports aim to provide companies with an initial understanding of the importance of these intersections and, more importantly, the business case for action to drive resilience inside their companies, across supply chains, and within vulnerable communities.

The first report in this series, Climate and Supply Chain: The Business Case for Action, explores the business case for integrating climate risks into supply chain management.  

At its core, supply chain management has four primary objectives, any of which could be negatively affected by climate impacts:

• Reduce the overall cost of production,
• Enhance the speed and responsiveness of delivery,
• Enhance the quality of goods and services produced, and
• Manage the uncertainty of major disruptions.

The characteristics of modern supply chains—their global geographical reach, specialized inputs that are increasingly produced in specific locations, and reduced inventories from just-in-time production—render them more vulnerable to disruption by climate risks.

For example, during Thailand’s severe flooding in 2011, more than 14,500 companies reliant on Thai suppliers suffered business disruptions worldwide and total insured losses were estimated between US$15 billion and US$20 billion. Western Digital, with one third of the global hard drive market, lost 45 percent of its shipments, HP lost US$2 billion, and NEC cut 10,000 jobs due to a global shortage of hard disk drives.

The recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) provide a clear categorization of climate risks, which are unifying the vocabulary to describe them. The task force uses two categories of risk, both of which companies should assess throughout their supply chains:

• Physical climate risks from acute weather events and chronic climate patterns are disrupting the availability of raw material and energy supply, supplier operations, and local communities along the supply chain.
• The transition to the low-carbon economy also presents policy and legal risks that result from several trends, including the pricing of greenhouse gas (GHGs) emissions, disruptions from new technologies like blockchain, market risks from growing customer demand for low-carbon and climate-resilient goods and services, and reputational risks to a company’s brand equity and future business.

BSR recommends that companies address climate risks in their supply chains by focusing where they have the greatest impact and greatest influence and taking several steps:

1. Consider a broad range of climate risks and prioritize parts of the supply chain that are most at risk.
2. Implement supply chain actions, including with internal procurement teams, with suppliers, and through broader collaboration, and develop measurable targets for these efforts.
3. Evaluate the impact of supply chain actions and adjust programs and goals over time.

By integrating climate risks and building the climate resilience of the communities on which supply chains depend, companies increase the likelihood of fulfilling their supply chain objectives. To learn more about how your company can build climate resilience into its supply chain, download the report or contact us.

BSR’s climate and supply chain nexus report is the first in our series. Stay tuned for more on the connections between climate resilience and health, inclusive economy, women’s empowerment, human rights, and a just transition to the low-carbon economy in the months to come.

Reports | Monday September 10, 2018

Climate and Supply Chain

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Climate change affects each and every human around the globe, with profound implications for social justice and human rights. Health-related stresses, competition for natural resources, and the impacts on livelihoods, hunger, and migration warrant immediate global action.

This paper explores the nexus of climate change and the supply chain. The purpose of this report is to:

1. Identify the potential impacts that climate change will have on company supply chains, particularly vis-à-vis the focus of supply chain management on cost, speed, quality, and uncertainty.
2. Outline how companies can enhance the resilience of their supply chains and operations, including supplier facilities; local communities; and the procurement of raw materials, components, and other goods and services.

This report is part of a series of six climate nexus reports that cover human rights, inclusive economy, women’s empowerment, supply chain, just transition, and health.

Climate Nexus Report Series

Reports | Monday September 10, 2018

Climate Nexus Reports

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⇔Businesses already experience the negative impacts of climate change, from infrastructure damage to disruptions to logistics. Since 2011, the World Economic Forum’s annual Global Risks Report has ranked climate risks a high priority for business in terms of both likelihood and impact.

It is critical for business to understand the full spectrum of climate risk: not merely how physical impacts affect infrastructure, but also the extent to which their workers and assets are exposed and how communities experience and adapt to these impacts.

What businesses often overlook is that building climate resilience simultaneously advances other goals, including respecting human rights, increasing inclusivity, empowering women, improving the health of workers and communities, and managing supply chains. 

To help businesses explore the interaction between climate and these areas, and to direct companies to opportunities for synergy and interventions that will build climate resilience, BSR is launching a series of reports on the “nexus” between climate resilience and other key sustainability issues: supply chain, health, inclusive economy, women, human rights, and just transition.

All papers in this series are aimed at business to help sustainability practitioners drive resilience inside their companies, across their supply chains, and within the communities where they operate.

Climate Nexus Report Series

Blog | Thursday September 6, 2018

Preparing for a Future without Certification: Why We Need More Engagement and Traceability

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It is time for us to acknowledge the challenges with sustainability certification. From a Changing Markets report on the false promise of certification, to a recent University of Queensland study showing slight discernible difference between Roundtable on Sustainable Palm Oil (RSPO)-certified plantations and non-RSPO estates, to the evidence of fair trade’s limited impact in lifting farmers out of poverty, and a Human Rights Watch report questioning the true impact of the Responsible Jewellery Council’s supply chain human rights efforts, various research and journalistic efforts are calling into question the effectiveness of these schemes. With the proof points against some of the most widely-applied certifications stacking up, it’s worth stepping back and thinking through what companies would do in the absence of certification.

In related news, sustainability accounting methods are also being called into question: John Elkington, arguably one of the founders of sustainability, has called for us to rethink the “triple bottom line,” a concept that he created 25 years ago. And this Conservation Biology study points to the significant limitations of ecosystem services monetization in being able to support conservation.

BSR and our sustainability peers are committed to incremental as well as disruptive change, and we can see value in both approaches to moving the sustainability agenda forward. However, at times certification can be perceived and treated as an end itself rather than the means to a goal, which can result in considerable investment of resources by companies with the singular objective of “ticking the box” to ensure they obtain the certifications requested by their buyers. Yet even after certification, there is still much work that needs to be done to ensure a company has actual policies and practices that are sustainable and even more work to ensure that these extend beyond the company itself into the supply chain.

There is only so much time, effort, and resources that we can legitimately continue to invest in ineffective systems. We need to ask ourselves what we want—is the goal to create functional certifications or is it to change the world? Think about what could be possible if we redirected the effort, resources, and will of suppliers, companies, NGOs, and other stakeholders toward participatory capacity building methods, engagement, and more secure and effective ways of gaining and validating data.

We need to ask ourselves what we want—is the goal to create functional certifications or is it to change the world?

We Know What We Want

We know with a great degree of certainty what we want our global supply chains to look like. We want them to be transparent, traceable, efficient, and equitable, and we want them to help us achieve the UN Sustainable Development Goals. We can debate the exact meaning of each of these words, but broadly speaking, no matter the supply chain, we want its players to see and know what’s going on. We also want supply chains to be resource- and cost-efficient—and as circular as possible—and we want the people along the chain who are contributing value to be gaining value in return, especially those upstream.

We Have the Means to Get Us There

The will, technology, and financing exist to achieve this, so let’s focus on deploying these tools for maximum impact. We have three big ideas:

1. First, we must acknowledge that supply chains are shared resources. Gaining traceability and tackling issues will work better if companies stop thinking about them as their proprietary supply chains and instead start trying to gain maximum benefit out of their interconnectedness. This goes beyond the collaboration happening in various industry fora; it is actually about letting go of ego and putting effort into listening. Specifically, this means understanding the needs and incentives at every step along the supply chain, starting with the producers and workers, to ensure we collectively apply solutions to address their actual problems. 
2. To tackle issues at the site level, we know how to engage for change. There is still a translation and reality gap between corporate-level policies and implementation on the ground. We need participatory capacity building and two-way dialogue for both buyers and suppliers to understand each others’ existing challenges and limitations, identify solutions and tools that are feasible and practical, and uncover the root causes for systemic, industrywide issues that require multistakeholder engagement and commitment to resolve. We hear the calls that this isn’t scalable, but we disagree. If companies pool their efforts and resources, perhaps taking their financing partners with them, and put them toward participatory engagement methods, then suppliers, NGOs, nonprofits, and community organization partners will deliver. 
3. To tackle the need for data and validation, companies should be putting significant effort into using technology to gain traceability and transparency. This doesn’t mean using old tools—for example, sending people to sourcing countries with spreadsheets and calling it a traceability program. There is so much technology available, and it takes intelligence to identify and apply the right mix: That’s why business should use the wealth of expertise internally and externally to work with peers and supply chain partners to agree on objectives and apply some (not all) of the tools like supply chain mapping, mobile connectivity, IOT devices, data analytics, and—yes—blockchain. If you want proof that this kind of stuff is possible, start by looking at these organizations and how corporations are interacting with them: Blockchain Lab for Open Collaboration, Eachmile, Halotrade, Provenance, Sourcemap, Trase.

We Need to Try a New Approach

It has been said that human beings will be the first species to measure their own demise. Instead of doubling down our efforts in certification and accounting for sustainability, we propose prioritizing our efforts on meaningfully changing how we manage and engage with supply chains.

As an example, BSR is convening players to coordinate efforts on social change in the palm oil industry in Indonesia, through workshops that will provide suppliers across the country with the opportunity to have in-depth discussions on their sustainability challenges with industry experts. We will also develop practical site-level tools and guidance on labor issues like women’s empowerment and the prevention of child labor.

We are also working with our members and external partners to navigate how to use new technologies and incentives to provide better outcomes for smallholders and to drive traceability and visibility for the consumer-facing brands and for all the actors along commodity supply chains.

Reach out to us if you’d like to learn more.

Blog | Wednesday September 5, 2018

How Business Can Manage Climate Risk in Southeast Asia

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The World Economic Forum reports that the leading threats to businesses today are extreme weather events, natural disasters, and the failure to mitigate and adapt to climate change. Businesses and society in Southeast Asia in particular—one of the most vulnerable regions in the world to climate change—face unprecedented climate risks. The Asian Development Bank finds it will likely experience larger economic losses than any other area in the world.

Because of the existing and projected impacts from climate change, it is imperative for businesses in Southeast Asia to prepare for today’s climate reality. In two new reports, we  outline why and how businesses across countries and industries can act now to build climate resilience.

As the world’s fourth-largest economy, the region has seen rapid economic growth and urbanization over the last decade. By 2050, the population of Southeast Asia is expected to reach 760 million people. Many of these people live in cities concentrated in low-lying coastal areas, which puts communities and industries at risk. For instance, Indonesia has the world’s second largest coastline, exposing nearly 60 percent of its population and 80 percent of business production to sea-level rise, storm surge, and inundation. And Indonesia is urbanizing rapidly—second only in the world to China—but has an infrastructure gap of US$1.5 trillion compared to other emerging economies. Land subsidence and poor infrastructure are causing the country’s capital of Jakarta to sink faster than any other big city in the world.

Businesses are being affected today. In Thailand, the Asian Disaster Preparedness Center found that small and medium-sized enterprises, or SMEs—which comprise 99.7 percent of all businesses in the country and 78 percent of its labor force—experienced several impacts on their business from recent weather and climate-related events. About 37 percent of businesses surveyed said employees were unable to get to work; 26 percent were unable to deliver products; 22 percent experienced damage to facilities and equipment; 20 percent received damaged raw materials; and 17 percent were unable to receive materials or services from suppliers.

To prepare for climate change, businesses in the region need to build resilience, which is defined as the ability to anticipate, absorb, accommodate, and recover from the impacts of climate change. Building resilience can help a business protect its valuable assets, maintain productivity, and reduce costs. The benefits to building resilience can extend beyond business continuity—resilience links a company to its broader community and operating context. Every business relies on basic resources and infrastructure to function, but it also needs a thriving economic community to support its operations with essential human, natural, and financial assets. Resilience can create multiple business benefits, ranging from a consistent source of raw materials to healthy and safe employees.

The benefits to building resilience extend beyond business continuity and asset protection—resilience links a company to the broader community and operating context.

Resilience also can help businesses unlock growth opportunities in the marketplace. For instance, a company can market its own products and services to help others strengthen adaptive capacity by offering flood mapping tools, monitoring and communication technology, drought-tolerant seeds, protective apparel, or eco-tourism experiences. Resilience can even help a business maintain stakeholder confidence, build customer loyalty, and assure investors that the company is preparing for and able to recover from climate hazards.

However, to get started, a company needs to understand its risk. Assessing climate risks requires a company to identify its exposure to climate hazards—such as heatwaves, more frequent extreme weather events, and drought—throughout operations, the supply chain, and in the community. Moreover, understanding the vulnerabilities, or underlying weaknesses, that can exacerbate risk is essential. Vulnerabilities include, for example, inadequate infrastructure in which a manufacturing facility floods after heavy rainfall, or the distribution of goods and serves is disrupted due to damaged roads and seaports. In short, climate risk can affect business strategy and impact finances, operations, human resources, compliance, and sales and marketing.

Businesses can take five steps to start building climate resilience:

1. Develop a governance structure.
2. Assess climate risk throughout operations, the supply chain, and communities.
3. Build a resilience strategy leveraging the company’s capital assets.
4. Partner with others to scale up resilience.
5. Disclose risks and report on progress.

The private sector in Southeast Asia must pursue efforts to enhance climate resilience with both urgency and ambition. To learn more, see the Framework for Private-Sector Action. For tools and resources to help your organization create resilience, please refer to the accompanying Handbook for Action.

Reports | Tuesday September 4, 2018

Building Climate Resilience in Southeast Asia

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Businesses worldwide are facing climate risks, and companies with operations or supply chains in Southeast Asia are exposed to a range of climate hazards and vulnerabilities that can exacerbate these risks. To prepare for the effects of climate change, businesses in the region need to build resilience.

Why Read This?

The World Economic Forum reports that the leading threats to businesses today are extreme weather events, natural disasters, and the failure to mitigate and adapt to climate change. Climate volatility can disrupt or damage all aspects of a company’s operations, affecting access to natural resources that are vital for production, infrastructure, and logistics that are essential for a functioning supply chain, and markets for goods and services. Failing to understand and manage climate change properly can impact a business’ strategy, finances, operations, marketing, compliance, and human resources.

It is imperative for the private sector to take a two-pronged approach to climate action:

1. To transition to a low-carbon economy, and
2. To enhance adaptive capacity in the face of inevitable climate hazards.

Blog | Tuesday September 4, 2018

Business Prepares for Its Curtain Call at the Global Climate Action Summit

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Next week, nearly 4,000 people will flock to San Francisco to attend a week of highly anticipated events in support of the Global Climate Action Summit. This one-of-its-kind momentous occasion will bring together businesses, cities, states, labor and faith leaders, investors, and citizens to showcase the new extraordinary climate action commitments that we hope will give world leaders the confidence to continue to support the Paris Agreement and prevent the worst effects of climate change.

As the 10th annual BSR/GlobeScan State of Sustainable Business Survey results will demonstrate when released in full later this month, climate action and the related UN SDG 13 remain top priorities for companies. BSR, a member of the Summit Advisory Committee, has been working closely with the business community to secure new commitments that demonstrate how the private sector can be a leader in climate action that fosters inclusive economic growth. 

San Francisco is the location of our first office, and the BSR team is thrilled to welcome our members and Summit attendees to our hometown. As the Summit is a unique event, we developed a BSR Guide to GCAS to help companies navigate the many exciting affiliate events and sessions that should not be missed. The Summit program continues to be updated with speaker and thematic session details and boasts exceptional plenary speakers, like Former U.S. Vice President Al Gore, Canadian Minister of Environment and Climate Change Catherine McKenna, Chairman and co-Chief Executive Officer of Salesforce Marc Benioff, and world-renowned chimpanzee expert Jane Goodall. There will also be a performance from musician Dave Matthews.

One of the main goals of the Summit is to launch new, bold climate action efforts, and we are excited to share the progress made by companies setting science-based targets, issuing new pledges to a just transition, and making new commitments to climate resilience.

One of the main goals of the Summit is to launch new, bold climate action efforts, and we are excited to share the progress made by companies setting science-based targets, issuing new just transition pledges to provide decent jobs through renewable energy procurement, and making new commitments to climate resilience initiatives. 

Does your company have an exciting announcement to share, but you haven’t secured stage time at the Summit? There will be various off-stage opportunities and credentialed media eager to capture your contribution to the Summit and climate action—let us know if you’ve got something new and noteworthy to share, and we will help make it happen!

We look forward to seeing you San Francisco and participating in this landmark event to demonstrate to world leaders that the business community is proactively addressing climate challenges and committed to a global solution. By working together, we will maintain a healthy natural world and a thriving economy that works for everyone.

Blog | Thursday August 30, 2018

Accelerating Awareness and Action on Corporate Governance in China

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China’s individual and institutional wealth have grown over recent decades, and so has its asset management industry. Total assets under management (AuM), including both traditional and quasi asset managers, grew from a mere US$4 trillion in 2012 to over US$18 trillion in 2017. In June, MSCI made the monumental decision to add over 230 Chinese “A-shares” stocks to its Emerging Markets Index. In parallel, the Chinese government has clamped down on the country’s “shadow banking industry,” has relaxed its rules around foreign investment, and has begun encouraging investors to integrate environmental, social, and governance (ESG) considerations into decision-making.

The evolution of governance means new opportunity in China for domestic and foreign investors alike; a keen understanding of how to navigate them will be increasingly essential.

The evolution of governance means new opportunity in China for domestic and foreign investors alike; a keen understanding of how to navigate them will be increasingly essential. In this context, we sat down with Jamie Allen, Founding Secretary General of the Asian Corporate Governance Association (ACGA), following the recent and timely publication of its report, Awakening Governance: The Evolution of Corporate Governance in China.

Karlyn Adams: How has corporate governance evolved in China in recent years?  What are the most exciting or meaningful changes you have seen?

Jamie Allen: Until recently, China was moving quite slowly compared to other markets in Asia. However, in 2018, it revised its Code of Corporate Governance for Listed Companies to now include greater emphasis on ESG disclosure, the role of institutional investors as stewards, the accountability of board directors, and board member skills and diversity.                                                                                                           

The Code’s new requirement on formal incorporation of Party committees is also a major development.  Party committees have long been a feature of Chinese companies, but they have operated in the shadows. Greater clarity around their role in corporate decision-making is still needed for foreign investors, but formal recognition of their existence hopefully now paves the way for greater transparency in the future.

Adams: What are the top governance-related issues that foreign investors should be aware of when considering investments in China?

Allen: Until the mid-2000s, China’s early corporate governance reform was largely focused on adopting global standards. Following the financial crisis of 2007-9, it became clear that “Western” approaches weren’t a panacea. China has since focused on complementing global standards with locally-appropriate solutions. Today, governance in China is a unique hybrid of global and local, which has implications for how a company operates.

For example, the roles and powers of the board of directors, supervisory board, and Party committee are unique in China. While internationally, an audit committee typically sits under the board of directors, in China, a supervisory board often oversees internal audit as well, which creates an overlap between the audit committees and supervisory boards. Similarly, nomination committees typically have significant influence over appointments of independent directors in the West, but in China, the Party committee usually has greater influence and nomination committees are more of a rubber stamp. The practical implications of these differences vary by company, so investors should conducr their due diligence at that level.

Foreign investors need also be aware of the potential risks associated with Variable Interest Entities—overseas holding companies that effectively bypass Chinese law on foreign direct investment in telecoms and IT, enabling foreign investors to gain an economic benefit from Chinese companies through contractual arrangements between a Chinese firm and an overseas entity. While the government may not shut these Variable Interest Entities down, investors should be aware of that risk.

Adams: Your new report includes several case studies.  Which examples are most instructive for Chinese companies?

Allen: Sinopec Corp, a state-owned petrochemical company, is one of the better governed SOEs and is interesting for several reasons. The company has reduced the number of independent directors with government backgrounds on its board, and in 2014, it achieved a successful mixed ownership reform by selling off almost 30 percent of the shares in its retail unit, Sinopec Marketing, to a combination of private and state investors. These minority shareholders were given ample representation on the new entity’s board of directors and supervisory board.

ICBC, one of China’s top banks, is also a positive example. It has one of the more diverse boards for a state-owned enterprise and was one of the first to adopt a board evaluation process. In 2017, ICBC developed a “Green Bond Framework” and invited Norway’s Center for International Climate Research (CICERO) to conduct and publish an assessment of it.  Pursuing evaluation by a non-Chinese entity has lent confidence and credibility to both the framework and the firm.

Adams: Is there a relationship between corporate governance and broader sustainability themes? In other words, is there a relationship between governance (good or bad) and likelihood of being committed to or being able to make progress on environmental and social issues?

Allen: Yes. For a company do a good job on “E” and “S” in ESG, they first need good governance (“G”). A strong board of directors can help ensure direction and consistency on sustainability strategy and reporting; it can also help avoid the risk that companies lose focus on “E” and “S” during tight financial times.  This should be part of a board’s fiduciary duty. Governance is about creating better long-term performance, so there is a clear relationship between companies that are well governed and those that take sustainability seriously.

Adams: What are the biggest governance-related challenges and opportunities that you see in China going forward—over the next three-five years, for example?  How would you recommend that companies, investors, or regulators address these?

Allen: So much of the economy still revolves around the state in China. The government needs to give the private sector greater autonomy. In addition, Chinese corporations, especially SOEs, need to interact more with stakeholders—Sinopec does a good job of this, and others learn from its example, especially as they try to raise capital from overseas.

Ultimately, China needs to create a system that is seen as fairer to minority shareholders. There is tremendous value that can be unlocked through better governance, and companies who pursue this path will see results in their long-term performance.