Obstacles and Opportunities: The Pathway to Net-Zero for the Private Sector in China

Posted February 16, 2022

Launch of the Pathway to Net Zero: SDG Practices of Enterprises in China Report in Beijing

More and more enterprises in China are welcoming the idea of integrating sustainability into the heart of their business strategy.  

In mid-2021, UNDP conducted a survey of 117 enterprises operating in China, 94.9% confirmed they incorporated the Sustainable Development Goals (SDGs) into their corporate action plans. Furthermore, over 80% of companies recognized the impact that China’s goals of reaching peak carbon emissions by 2030 and net-zero emissions by 2060 could have on their business, with 76.8% already taking a variety of low-carbon initiatives.

While this is good news for climate action and the world, as support of the private sector is essential to achieving the SDGs globally, difficulties do persist and new challenges are constantly emerging.

In December 2021, we compiled the results of our survey into a new report, “Pathway to Net Zero: SDG Practices of Enterprises in China”, the second in an ongoing series jointly conducted with PricewaterhouseCoopers (PwC) China and the China Chamber of International Commerce (CCOIC).[1] The report also includes an overview of action points, a ready-to-use toolkit and step-by-step instructions for business leaders keen on undertaking a low-carbon transition and aligning with sustainable development best practices.

The following article outlines the major considerations addressed by the report which corporate managers will need to keep in mind when chewing over their sustainability management strategy in 2022.  

The path to net-zero looks different for each type of enterprise

Not all types of enterprises start from the same place when embarking on the journey to implement sustainable development practices and a low-carbon transition.

Our survey sample consists of a mix of company types, namely: 57% privately-owned enterprises (POE), 21% foreign-invested enterprises (FIE), 17% state-owned enterprises (SOE), and the remaining 4% are equally divided to social enterprises and joint ventures. While the primary focus of the report is not to analyse the performance of these different enterprise categories and provide advice for each, readers should be aware that different types of businesses in China are under distinct regulatory environments. This means different sustainable development strategies will be appropriate for each category.

SOEs in China for instance have been undergoing certain reforms to improve efficiency and boost growth as per a three-year action plan set out in 2013 by the State Council of China and extended in March 2021.[2] The reforms cover, among other things, putting in place more responsive and efficient governance boards, strengthening employee welfare mechanisms to attract skilled talent and substantially implementing research and development activities.[3] Adding to the reform momentum is the government’s new “1+N” climate policy framework – ‘1’ being China’s overall climate action plan and ‘N’ the action plan on peaking emissions – released in October 2021. The policy builds on these existing reforms by adding concrete steps and clearly defined milestones for SOEs to meet the 2030 carbon peaking and 2060 carbon neutrality goals.

While SOEs are expected to take the lead amongst the corporate sector in moving to low-carbon emissions, POEs’ engagement in sustainable development and the march towards net-zero could be the backbone of scaled and lasting progress. In 2017 a popular saying highlighting the importance of POE’s to the Chinese economy emerged, called “56789” – this refers to the fact that POEs contributed to over 50% of tax revenue, over 60% of GDP, investment in fixed income and FDI,[4] over 70% of high-tech enterprises, over 80% of urban employment, and over 90% of the growth in the employment rate.[5]

However, in responding to calls for climate action and working towards the SDGs, POEs tend to face higher barriers to entry. For instance, they have fewer resources to draw on in terms of knowledge and human capital, as well as access to finance to support potential transformation, innovation and adaptation.

Compared with SOEs and FIEs, POEs therefore need more policy and legal support. While the policy environment is gradually becoming more supportive, POE leaders can also proactively seek out partners – suppliers, distributors and affiliated organisations – to gain insights and specific data that can be used to make carbon measurements more accurate and formulate more effective strategies for collective greening.[6]

Engaging in conversations on how to lower emissions and prioritise sustainability with their peers across geographical regions and industries also creates potential for POEs to find and share appropriate resources, as well as promote innovation amongst themselves.

Assessing and reporting SDG impact is lacking

Although the report introduces several toolkits for disclosing and advancing sustainable development practices and the low-carbon transition, a wider conversation is needed around accurately evaluating a company’s performance in these areas. Currently, changes to a company’s sustainability ratings and its performance in the capital markets are still unable to objectively and sufficiently determine the company’s actual impact on achieving the SDGs and the progress that a company has made.

According to a Bloomberg Businessweek investigation, the ratings that asset manager BlackRock applies to companies in its flagship sustainable investing fund – and the biggest ESG fund in the world – have “almost nothing to do with the environmental and social impact companies have in the world”.[7]

Evaluating impact can be difficult without a high quality database compiled transparently and continuously over time, consistent in methodology and accessible to third parties. An essential question then is how we can track companies’ progress if those same companies find it difficult to carry out any tracking internally. It is also tricky to tell apart companies taking real climate action from those who may simply be applying climate solutions that could be seen as “greenwashing”.[8]

Most companies in China haven’t yet started benchmarking their SDG impact with clear KPIs and defined outcomes.[9] But the good news is that more are beginning to realize the importance of starting to measure their activities. The proportion of companies who stated in their five year plan that they intend to adopt a benchmarking process increased by a whopping 152% from 2019 (13%) to 2021 (33%).

To support companies with this procress, UNDP developed its flagship SDG Impact Standards providing investors and businesses with the knowledge and tools to strengthen their contribution to the SDGs. Grounded in existing principles, standards, and market best practices, these standards establish a common framework for measuring, reporting on, and authenticating the SDG impact of investments.

Accelerating technological and policy innovation

In the efforts of companies to take active steps towards reducing their carbon footprints, many frontier technologies have the potential be major gamechangers. For example, Artificial Intelligence is currently being used to reduce energy use from data centers around the world by controlling systems that keep servers cool and optimizing efficiency.[10] AI is also being used to improve the efficiency of wind energy by using historical turbine data to make power generation from wind more predictable, and thereby more attractive to businesses.[11] Carbon capture, utilization, and storage (CCUS) technology also continues to develop. Last month, Sinopec completed construction of China's first CCUS project, which will reduce carbon emissions by 1 million tons per year, the equivalent of planting nearly 9 million trees or taking 600,000 cars off the road.[12]

Well-designed public policies are important to help commercialize and scale up new technologies, as well as forge stronger demand for sustainable products and services. In China, the government has shown strong policy support for the green transition, as laid out in last year’s ‘Action Plan for Carbon Dioxide Peaking Before 2030’, published by the Department of Resource Conservation and Environmental Protection. The Plan outlined clear policy support in setting a standardized carbon emissions system, improving related legislation, optimizing economic policies, and establishing sound market mechanisms to achieve peak carbon emissions by 2030.

For companies looking to ready themselves for the green transition, understanding public policies will be crucial. Local governments also have a critical role to play in helping to implement these policies on the ground and establishing an enbabling environment for companies to increase their contributions to net-zero. In Chengdu, for example, UNDP is working together with the government to accelerate a green transition by catalyzing innovative low-carbon solutions in the city’s Hi-Tech Zone.

Moving forward, enterprises in China that are keen to improve their sustainability performance should invest in R&D, understand public policy and connect with peers and partners whose knowledge and resources would supplement business growth. Challenges facing companies to reach net-zero are common around the world and will require coordinated global efforts and policy interventions to create incentives and level playing fields. Indeed, with now less than 10 years left to achieve the SDGs the reality is clear: if we are to halt climate change, the world needs all hands on deck. There is no time to waste.

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Authored by Wei Zhang and Xun Li

[1] https://www.cn.undp.org/content/china/en/home/library/policy-advocacy1/pathway-to-net-zero--sdg-practices-of-enterprises-in-china.html

[2] http://english.www.gov.cn/premier/news/202103/05/content_WS6041a15cc6d0719374afa116.html

[3] http://www.gov.cn/xinwen/2021-12/31/content_5665713.htm

[4] GDP stands for Gross Domestic Product; FDI stands for Foreign Direct Investment.

[5] http://www.xinhuanet.com/politics/19cpcnc/2017-10/21/c_129724207.htm

[6] http://www.gov.cn/gongbao/content/2019/content_5397748.htm

[7] https://www.bloomberg.com/news/articles/2021-12-31/how-blackrock-s-invisible-hand-helped-make-esg-a-hot-ticket?cmpid=BBD123121_BIZ&utm_medium=email&utm_source=newsletter&utm_term=211231&utm_campaign=bloombergdaily

[8] https://www.bloomberg.com/news/articles/2022-01-04/how-to-tell-real-climate-solutions-from-false-ones

[9] Pathway to Net Zero

[10] https://internetofbusiness.com/google-using-deepmind-ai-to-reduce-energy-consumption-by-30/

[11] https://deepmind.com/blog/article/machine-learning-can-boost-value-wind-energy

[12] https://finance.yahoo.com/news/sinopec-completes-chinas-first-megaton-131200258.html