Can China’s ESG index deliver?

By John Elkington

Chinese leaders complain that everyone else expects too much of them in terms of climate change. Still, speaking at the World Economic Forum’s fourth ‘Summer Davos’, Premier Wen Jiabao said that while China would maintain its rapid economic expansion and continue to stimulate domestic demand, it will balance growth with sustainability. China, he pledged, “will continue to conserve resources and protect the environment and raise the efficiency of resource utilization and the capacity to tackle climate change.”

Great, but a humungous question mark hangs over the country’s ability to deliver on such promises. Worryingly, too, just as China has adopted some of the worst of western carbon-intensive industrial processes, it may also be about to adopt weak market solutions to the sort of environmental challenges that led one minister to declare the giant country “ecologically bankrupt.”

It’s good news that China is launching an environmental, social and governance (ESG) investment index, the CSI ECPI China ESG 40 Equity Index, made up of 40 domestic companies. (The Index is a joint venture between the Chinese Securities Index Company, backed by the Shanghai and Shenzhen stock exchanges, and ECPI, a European ESG research company.) But it’s truly worrying when you hear senior people from major global companies like Rio Tinto or Unilever expressing concerns about the lack of mainstream investor interest in what they are doing on the sustainability front.

Unilever senior vice president Gavin Neath reports that “mainstream investors have [shown] very little interest and give us very little credit for what we do—and there’s little sign that is going to change any time soon.” He notes that only SRI analysts are interested in Unilever’s investments in such areas as drip irrigation in Brazil, solar-powered ice cream freezers and water conservation projects.

Rio Tinto CEO Tom Albanese agrees, noting that they organize regular corporate social responsibility briefings for shareholders—but find that mainstream investors “are not interested in Rio’s [ESG] initiatives because they do not think they are core to the business.”

Both executives think the analysts are wrong. And the huge financial liabilities incurred by BP in the wake of the Gulf of Mexico oil spill may fuel greater interest in ESG factors, though the market-leading Dow Jones Sustainability Indexes only delisted BP after the spill. Their latest ranking of companies is also notable because Toyota—long a darling of the SRI and ESG communities—is also dropped, because of quality problems experienced as its growth outran its quality controls.

If such companies are dropped only after the event, critics wonder, are SRI funds really providing investors with value added? Probably, but I do not believe that the current level of SRI activity will exert sufficient leverage on the global capitalist system to achieve anything like the sustainability outcomes that Premier Wen Jiabao aspires (or should aspire) to. So let’s welcome the new Index—but I wonder whether any native speaker of Mandarin or Cantonese can translate for me the English proverb ‘One swallow doesn’t make a summer’? 

About John Elkington 

John Elkington is Executive Chairman of Volans (http://www.volans.com) and Non-Executive Director at SustainAbility (http://www.sustainability.com). 

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