Time for Chinese business to look to the future

In the future, Chinese companies will need to limit and to take responsibility for the environmental harm they do, says chinadialogue editor Isabel Hilton

The risks that climate change and environmental stresses pose to business are increasingly clear. In the last two years, for instance, an urgent debate has begun among investors, NGOs, banks and think tanks over the value of the fossil fuel reserves that are entered as assets on the books of the world’s largest oil firms.

As the International Energy Agency (IEA) has pointed out, if the world’s leaders are serious about their commitment to limit the global average temperature rise to two degrees centigrade, “no more than one-third of proven reserves of fossil fuels can be consumed prior to 2050…unless carbon capture and storage (CCS) technology is widely deployed”. Those oil reserves become, in the words of the Carbon Tracker Initiative (a non-profit organisation working to align capital markets with climate policy), unburnable carbon; coal reserves are coming under similar scrutiny as pressure grows to scale back coal use, to limit the impact on air quality and, of course, to mitigate carbon emissions.

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These are critical risks for the market and for investors. Other pressures come in different forms: resource competition and the need for better resource stewardship; water scarcity that poses a risk both to energy and to business operations, and the contingency of future regulation as governments respond to new constraints with new rules. The availability and the conditions of credit are also being conditioned by climate risks.

So far, the evidence suggests that business is not responding as well as it needs to. A recent report on US business by the not-for-profit organisation CERES, which tracks business sustainability, revealed that of more than 600 major publicly listed US companies – representing three-quarters of the country’s total stock market capitalisation – few had made sufficient progress or given the risks sufficient attention.

Business leaders at many levels have understood that investors, regulators, partners and customers will increasingly judge performance in environmental terms – penalising negative impacts and rewarding positive contributions to environmental sustainability. The global accountancy firm KPMG has calculated that the environmental degradation caused by the world’s 3,000 largest public companies came to a staggering US$2.15 trillion in 2008. To date, relatively few major companies have followed the example of Unilever, which publicly committed to double its sales and halve its footprint between 2010 and 2020, though many US companies report that they expect some form of climate regulation to come and they have begun to factor climate change into their financial planning.

Since China is the world’s second largest economy, the world’s biggest carbon emitter by volume, and the world’s principal manufacturing centre, and since China also faces a sustained environmental crisis, the capacity of China’s businesses to rise to the challenge of sustainability will be decisive for global efforts to avoid dangerous climate change, and for China’s own efforts to become, in the words of president Xi Jinping, an “ecological civilisation”.

Mounting concern in China over the risks that the environmental crisis poses to future prosperity and the health and wellbeing of its citizens is already visible in the robust action that government is taking against environmentally irresponsible companies: as Fong On Kei reports in this issue, in 2012 the city government of Beijing closed down 200 companies that it judged energy inefficient or excessively polluting, with heavy losses for investors.

Even responsible companies do not avoid all risk – a clean and reliable water supply is fundamental, and many locations in China already suffer extreme water stress, for example. Other projects have been forced to halt at a late planning stage because of opposition from a mistrustful and increasingly active public in China, and in overseas operations – in Peru and Myanmar for example – Chinese companies have suffered severe setbacks because they have either misjudged local public opinion or have failed to meet local environmental standards.

To operate successfully in the future, both Chinese companies operating abroad and international companies operating in China will need to demonstrate their capacity to operate within resource constraints, to limit and to take responsibility for the environmental harm they do. Environmental regulation and responsible environmental behaviour are often understood as a burden for business, but as the example of the most innovative and far-sighted companies shows, constraints can also act as a spur to innovation and responsible companies are rewarded by increasingly discerning customers.

Since its launch in 2006, chinadialogue has documented many aspects of China’s environmental crisis and has published the views and insights of Chinese analysts, policymakers and civil society, along with their international counterparts to promote knowledge sharing and collaboration. In the past year, we have focused increasingly on the conduct and impact of businesses at all levels, in China and overseas, both exposing polluters and highlighting innovative models and examples of best practice that point to exciting future possibilities.

China is a fast moving laboratory of the future; the decisions that are made in China – and by China’s business, affect us all. In this special issue of chinadialogue’s bi-monthly journal, we are pleased to highlight some of our recent coverage; we shall continue to report on and analyse this vital sector.