Business and Human Rights in China: Sustainability Reporting and Chinese Stock Exchanges

It is a commonplace that Chinese officials tend to be leery of the notions of human rights, especially when being lectured on its finer points by foreigners. From the Chinese perspective, the global human rights discourse might represent a disguised attempt to effectuate changes in Chinese political or social organization, and in any case represents an effort to change behaviors in accordance with standards that the Chinese did not help develop.  These suspicions are augmented by sensitivities that continue to be cultivated relating to the period of semi colonialism that ended with the establishment of the current government under Deng Xiaoping.  From the western perspective, the global human rights discourse represents little more than the implementation of global consensus, with respect to which China is both bound and has to some extent participated.  Chinese exceptionalism represents a form of arrogance at odds with the development of global culture, especially with respect to business practices, necessary for the continued development of harmonious communal global economic ties. Thus, for the Chinese, western usage of human rights can be seen as a weapon to be used against their institutions; for the West, human rights can be seen as a tool to be used by all governments for the betterment of their peoples.

 (From Rosie Bristow, Online Discussion: Sustainability Reporting, The Guardian (UK) April 18, 2011)

Yet, beyond the rhetoric and the political symbolism of specific words, it appears that Chinese institutions are seeking to implement, at least in some form, global expectations of business and business conduct that, at least in the West, is understood as touching on issues of human rights, but in China may be best understood as conforming to Party line notions of harmonious society (和谐社会) and scientific development (科学发展观) principles. "The central government is encouraging state-owned enterprises to fulfill social responsibilities and realize sustainable development. A document released by the State-owned Asset Supervisory Administrative Commission (SASAC) in 2008 urges all central-level state-owned enterprises to focus sustainability management on the following eight issues: legal compliance and integrity, sustainable profitability, product and service quality, resource efficiency and environmental protection, technology innovation, workforce safety, workers’ rights, and social welfare." (From International Finance Corporation and Shanghai Stock Exchange, Sustainability Reporting Guidelines Mapping & Gap Analyses for Shanghai Stock Exchange,  prepared by Syntao June 2011).  

This is particularly apparant in the deployment of Chinese market institutions for the encouragement of a business culture of sustainability reporting. "Non-financial reporting, such as sustainability and CSR reporting, is a fairly recent trend which has expanded over the last twenty years. Many companies now produce an annual sustainability report and there are a wide array of ratings and standards around. There are a variety of reasons that companies choose to produce these reports, but at their core they are intended to be "vessels of transparency and accountability". Often they also intended to improve internal processes, engage stakeholders and persuade investors."  Rosie Bristow, Online Discussion: Sustainability Reporting, The Guardian (UK) April 18, 2011.

Sustainability reporting is a process for publicly disclosing an organization’s economic, environmental, and social performance. Many organizations find that financial reporting alone no longer satisfies the needs of shareholders, customers, communities, and other stakeholders for information about overall organizational performance.

The term “sustainability reporting” is synonymous with citizenship reporting, social reporting, triple-bottom line reporting and other terms that encompass the economic, environmental, and social aspects of an organization’s performance. (From Global Reporting Initiative, FAQs, Sustainability Reporting: Who, How, Why; What is Sustainability Reporting).

Like financial reporting, sustainability reporting requires a development of generally accepted principles to encourage uniformity on reporting.  "Without a similarly accepted framework for sustainability reports, such reports could lack the features that could make them broadly useful: credibility, consistency, and comparability. If the thousands of companies that voluntarily disclose their sustainability impacts did not refer to a generally accepted reporting framework, they would risk producing non-comparable reports, and/or reports which inadequately address the full spectrum of stakeholder interests." (From Global Reporting Initiative, FAQs, Sustainability Reporting: Who, How, Why; Why do We Need the GRI Reporting Framework?).  A number of entities, public and private, have been competing for dominance in the development and control of these commonly accepted reporting and transparency principles.

China, like other states, has begun to use market driven governance devices to encourage the use of sustainability reporting.  

More Chinese companies are producing sustainability reports, according to standard-setter the Global Reporting Initiative (GRI), driven largely by regulation and stock exchange listing requirements. Marjolein Bajhuis, Amsterdam-based director of communications and network relations for the GRI, said the number of sustainability reports produced in China has risen from 600 in 2009 to about 700 in 2010. Of these, around 60 applied the GRI’s guidelines. Chinese firms are increasingly required to produce such reports by regulation – including the listing requirements of the Shanghai Stock Exchange. (From Sustainability reporting on rise in China, Environmental Finance, June 14, 2011).

The efforts of the Shanghai Stock Exchange provide a nice example of the Chinese approach to soft governance in the promotion of sustainability reporting, and through them, of changing business practices with respect to the behaviors highlighted in those reports. In an informational release, Raising CSR standards and disclosure practices (World Federation of Exchanges), the Shanghai Stock Exchange explained:

In May 2008, the SSE issued a Notice on Strengthening Listed Companies' Assumption of Social Responsibility (Shanghai CSR Notice) and the Guidelines on Listed Companies' Environmental Information Disclosure (Shanghai Environmental Disclosure Guidelines). According to the two documents, Shanghai Exchange-listed companies should fulfill social responsibilities, address interests of stakeholders, and commit themselves to promoting sustainable economic and social development.

These two initiatives are based on the philosophy that the SSE’s listed companies are pillars of the national economy and should be encouraged to assume a leadership role in promoting sustainable development. For listed companies that promote CSR, the SSE sometimes offers incentives such as priority election into the Shanghai Corporate Governance Sector, which may benefit a company's public image, or simplified requirements for examination and verification of temporary announcements.

The Shanghai notice encourages all listed companies to enhance their own CSR awareness and develop a strategic CSR plan for their operations. Listed companies may disclose the goals and achievements of their CSR activities and annual social responsibility reports through announcements posted temporarily on the SSE website. To assist with this, the SSE has also developed the concept of social contribution value per share (SCVPS) - a new method of measuring companies' value creation. SCVPS is calculated by adding the tax revenues paid to the state, salaries paid to employees, loan interest paid to creditors (including banks), and donations to - and other value for stakeholders, minus any social costs that arise from environmental pollution and other negative factors. SCVPS is intended to allow the public to understand the value companies create for their shareholders, employees, customers, creditors, communities, and society as a whole. Companies may choose to disclose their SCVPS calculation in their annual CSR reports.

The Shanghai Environmental Disclosure Guidelines indicate that the SSE may “adopt necessary punishment measures” against companies and relevant personnel for violations of the disclosure rules and regulations. They do not, however, define “necessary punishment measures”. It is therefore unclear what sanctions or fines could be imposed for violations.

A similar measure has also been taken by the Shenzen Stock Exchange, which issued CSR Guidelines for Listed Companies in 2006.

In these efforts, of course, the Shanghai Exchange is seeking to move into the vanguard ranks of Exchange governance of issues of social and corporate responsibility.  See, e.g., Dan Siddy, Delsus Ltd., Exchanges and Sustainable Investment (2009).  More recently,  "IFC, the private sector investing arm of the World Bank Group, has collaborated with the Shanghai Stock Exchange (SSE) to investigate current best practice in international and Chinese sustainability reporting practices, and ultimately to develop a more comprehensive reporting guideline for listed companies. As the first step, IFC and the SSE contracted SynTao, a knowledge leader on sustainability reporting in China, to undertake a mapping and gap analyzing study."  International Finance Corporation and Shanghai Stock Exchange, Sustainability Reporting Guidelines Mapping & Gap Analyses for Shanghai Stock Exchange,  prepared by Syntao June 2011, at 3.    

The abstract describes the project this way:

In recent years the number of companies releasing sustainability reports has continued to increase on a global level as well as in China specifically. According to Klynveld Peat Marwick Goerdeler (KPMG), in 2008, 79 percent of global 250 companies published sustainability reports. In China, the number of sustainability reports reached over 700 in 2010. There is a widely established expectation that companies wanting to obtain a leadership position and become competitive in the global marketplace need to effectively manage their environmental and social performance, disclosing challenges and achievements in a sustainability report. Moreover, corporate product and service innovation should aim to contribute to society's well-being. Studies show that in China, however, most companies release sustainability reports for reasons of reputation and development of government relationships, not fully taking advantage of opportunities for risk management and investor relations. The study included a wide literature review and interviews with a selection of key stakeholders. A general comparison was undertaken of the characteristics of 25 existing international and national frameworks related to corporate disclosure. (World Bank, Research, Announcement and Abstract: Sustainability reporting guidelines mapping and gap analyses for Shanghai stock exchange, June 1, 2011).

 The recommendations included the following;

0. Stock Exchanges are increasingly stepping in to help address the need for improved dialogue between investors and listed companies on the topic of sustainability. The Johannesburg Stock Exchange in South Africa now requires that listed companies prepare an integrated annual report, which includes coverage of sustainability performance. The U.S. Securities and Exchange Commission issued guidelines in 2010 requiring companies to weigh the impact of climate-change laws and regulations when assessing what information to include in corporate filings.
   
   The Shanghai Stock Exchange (SSE) has followed this trend by becoming one of the first stock exchanges to issue a directive for companies to publish a sustainability report. Understandably, SSE has adopted a cautious approach by not being overly prescriptive about what companies should report. This approach has been successful in helping to generate an overwhelming response by Chinese companies to produce their first sustainability reports.
   
   Publishing a first sustainability report can be resource intensive for a company, but, if internal capacity is built, the process can become much less costly in subsequent years. The current guideline is therefore a good starting point.
   
   Nevertheless, this study finds that existing frameworks provide guidance that is either too vague or too broad when it comes to the issues that companies should cover, and that they too often still allow companies to tell a good story without providing rigorous and verified data on performance.
   
   A forward-thinking framework for sustainability reporting could therefore greatly assist Chinese companies to move more rapidly towards sustainable practices that generate value for their business as well as for stakeholders. It could also provide a platform for proactive engagement between companies and investors.
   
   The gap-analysis between the SSE Directive on CSR Reporting and the four best-practice examples in this study provide suggestions for further improvement. The short-term focus should be to standardize the SSE Directive and to enrich the document with more information about potential indicators that companies can report on. Recommendations for SSE are listed below:
   
   

   Priority should be given to certain performance indicators. SSE can comprehensively or gradually prioritize certain indicators over others, thereby strengthening the guideline over time. Some suggested indicators are: energy consumption, GHG emission, solid waste and water pollutants, occupational health & safety and product safety.
   
   SSE will benefit by consulting with key stakeholders when drafting the guideline. Concerns of key stakeholder groups, especially government and regulators, investors, the media and NGOs, should be considered. By this means, the guideline can be in line with government policy and the interest of mainstream investors.
   
   SSE may consider developing specific guidelines for pilot sectors. Some sectors, such as heavy polluting sectors and the financial sector, which are highly impacted by environmental and social factors, can have sector specific guidelines.
   
   SSE may consider developing a specific guideline for pilot issues. Some issues are critical for China at the current development stage. A specific guideline focusing on the energy (carbon) issue, water, or food safety would be highly supported by government and be attractive to investors. It is highly recommended to consider the carbon issue. IFC’s Carbon Efficiency Index and Carbon Disclosure Project may provide valuable experiences to SSE.
   
   Third party audits are emerging as an invaluable component in the sustainability reporting process. An independent audit contributes to credibility of the final report; but more importantly, can help to guide companies towards particular improvements. SSE may consider recommending or requiring that companies include a third party audit of the sustainability report.
   
   Integrated reporting is a new trend. In future, financial reporting and sustainability reporting may become more integrated, leading to the publication of one single annual corporate report. It would be good if SSE can consider this trend when developing the new sustainability guideline.
   
   SSE should take measures to encourage the use of the guideline. Possible measures are: training, seminars, grading scheme of application disclosure level, mandatory third party audits, and recognition of key stakeholders.

   
   Importantly, best practice reporting and performance frameworks, as shown by this study, emphasize corporate strategy and systems for managing risks, impacts and opportunities of sustainability. Greater disclosure about these aspects will enable stakeholders to engage with the company and create shared value, while also contributing to overall improved management and business performance.(Id., at 4-6).

The recommendations are interesting for a number of reasons.  First, they recognize the string governance value of reporting regulations.  See, Larry Catá Backer, Global Panopticism: States, Corporations and the Governance Effects of Monitoring Regimes. Indiana Journal of Global Legal Studies, Vol. 15, 2007.   Second, they recognize the power of soft regulation through the use of market mechanisms in which enforcement is effectively captured to the investment community.  See, Larry Catá Backer, From Moral Obligation to International Law: Disclosure Systems, Markets and the Regulation of Multinational Corporations. Georgetown Journal of International Law, Vol. 39, 2008. .  Of course, the result is more effective and responsive governance, but that governance reflects investor rather than citizen concern--it moves governance from state to market. Third, the power transfer effect of such governance is meant to be ameliorated through polycentirc methodologies--for example the inclusion of the state as a significant stakeholder in the design of reporting  guidelines.  But importantly, the state is reduced to one of several stakjeholders, rather than the key or single stakeholder.  The result is inevitable since the regulatory ambit of the Shanghai market exceeds, in effect, the territorial limits of the Chinese state.  Fourth, the recommendations also recognize the flexibility of the sustainability reports as a tool of market sector regulation--the suggestion that guidelines be tailored to pilot sectors suggests that information, and the emphasis on particular behaviors, can serve as an effective method of managing conduct--especially conduct that can be tied to consumer or investor expectations (though not directly political expectations, except indirectly through the participation of the state in the generation of guidelines content). Fifth, the emphasis on market integrity devices is also telling.  Third party audits, and the use of Exchange personnel for technical assistance suggests both the emphasis on integrity mechanisms and the importance of the Exchange as an acculturating institution.

There is tremendous value in these efforts.  By engaging in this work, the Shanghai Exchange is in a position to greatly influence the content and scope of  sustainability reporting directly, and corporate behavior indirectly.  It can now become an influential voice in developing its own standards and affecting the development of third party standards, including those, like the GRI standards, with particular influence in the West.  That, in turn, can affect the direction of global consensus on corporate responsibility directly, and the focus of human rights discourse, especially as it affects business, indirectly. But the IFC reports (this is not the only recent effort (e.g., IFC, Assessing and Unlocking the Value of Emerging Markets Sustainability Indices, June 2011) suggest the way in which soft law frameworks, managed by international organizations networked with state run or partnered market framework institutions that are driven by the expectations of capital and consumers, can have a substantial and sustained effect on the behaviors of corporate actors.  Regulation is now a complex affair, and the relationship between regulation and sovereignty, between the people of a place and the rules that manage their behavior, is more tenuous still. See, Larry Catá Backer, Private Actors and Public Governance Beyond the State: The Multinational Corporation, the Financial Stability Board and the Global Governance Order (August 13, 2010). Indiana Journal of Global Legal Studies, Vol. 17, 2011.