Discussing ESG Ratings For Chinese Enterprises

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China’s 2020 pledge to be carbon neutral by 2060 marks the official entry for Chinese enterprises to shift weight on sustainable development. By the end of 2020, over 1000 A-shares Chinese companies have published their first ESG reports, far larger than its 370 in 2009. Many ESG rating agencies, both domestic Chinese agencies and those more international ones like MSCI, have published ESG scores for various Chinese companies.

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However, the unique overtime working culture in Chinese companies, which is drastically different from the rest of the world, requires investors to be extra careful when referencing their ESG reports and ratings for investment decisions.

This article will discuss a key reason behind the difficulty to develop an accurate methodology for evaluating employee treatment and management as part of the company’s ESG performance in the case of Chinese companies, and why it’s relevant to investors looking to invest in Chinese enterprises using ESG ratings as a reference.

Working Overtime in China

Alibaba Group has a BBB ESG rating by MSCI and has pledged to become carbon neutral by 2030. However, its founder, Jack Ma, was a strong proponent of the so-called “996” working culture in China. The number refers to working from 9 am to 9 pm six days a week, and was highly criticized by Chinese workers as a sign of oppression by business managers.

Unpaid or even paid overtime can significantly reduce a company’s labor cost, and there is not much incentive for companies to strictly enforce labor standards by cutting overtime when this part of the labor standard is hard to supervise in China.

In addition, and perhaps rather unique to China, there is the phenomenon of “带薪如厕” which complicated the discussion of overtime work. The internet meme “带薪如厕” was first used to describe the phenomenon of employees spending an abnormally large amount of time in bathrooms during work. This was then later used to more broadly represent slacking off during work while getting paid. This might be seen by some as a counterweight to forced overtime as employees are under less stress while slacking off instead of spending the entire overtime on work; however, in many cases, especially in those large internet companies, slacking off is a privilege of the old employees.

The cost of old employees slacking off during work being the work supposedly belongs to old employees redistributed to new employees, increasing the severity of the new ones’ overtime work. New employees are generally not in the position to oppose old employees out of respectfulness ingrained in Chinese culture towards those who’ve stayed in the field of work much longer than you. In addition, old employees generally established deep bonds with the senior leaders in the companies so as to receive unfair treatment. This complicated our discussion for the fact that the overtime burden on employees is not only a direct repercussion of poor employee management but also of relationships among employees of different lengths of service and of cultural tradition. A rating agency, therefore, needs to think of a way to quantitatively measure how relationships between employees of different seniority and a certain cultural tradition would enhance or undermine a company’s performance when looking to provide an accurate ESG report for a Chinese company.

Collection of Data

Even if an agency chose to omit the impact of employee relationships between different seniorities and that of cultural tradition and believes a direct measurement of the extent of overtime (either forced or unforced) through the gathering of useful data, it will still be virtually impossible.

International rating agencies such as MSCI collect data for ESG rating primarily through government databases, media, and company disclosure. Most domestic Chinese agencies such as CTI, CASVI, and SynTao Green Finance adopt similar strategies for sources of data, which might only work just fine for the “Environmental” and “Governance” parts of the matrix. In fact, it often works splendidly well when rating agencies try to obtain info on the company’s environmental impact ever since companies became highly incentivized to publicize their “environmental accomplishments” under China’s goal to achieve carbon neutrality. If you browse through any ESG reports published by a Chinese tech company in recent years, the overemphasis on its contribution to the environment will be strikingly obvious. Whereas the mentioning of its employee treatment pales in comparison in both truthfulness and relevancy. As an example, JD.com, a U.S. traded Chinese company, answers to its “employee treatment” with an employee satisfaction score of 4.08 out of 5, published in its 2020 ESG report. However, a closer look at the content of the survey reveals that the feedback is only on related services such as canteen, office hardware, shuttle buses provided to employees in the workplace. Employees’ feedback on mattering issues such as overtime is nowhere to be seen in the entire report. It is no surprise since JD.com has been accused of forcing overtime in quite many instances. In 2019, an employee of JD.com alleged the company of extensively implementing the 995 work schedule in a subtle “noncompulsory” fashion. JD’s founder Richard Liu referred to employees complaining about forced overtime as “slackers”.

The lack of transparency in company disclosure blocks agencies from seeing anything negative in terms of employee treatment unless media coverage reveals its ugly facade. This might work for large companies with wide media attention, but for smaller companies, media exposures are rare and thus unhelpful. A general rule also applies to companies of all sizes. Employees are afraid to lose their hard-won jobs after exposing their companies for forced overtime, especially in those companies where pay is significantly higher than the labor market average. There are also those who simply do not want to go through the process of labor arbitration. Successfully proving that the company did engage in forced overtime requires the collection of extensive evidence.

Finally, data in the government database is simply misleading since companies can provide false overtime reports by means such as forcing employees to work overtime at home while not documented and counted as overtime.

Devoid of all sources of reliable data, unless an agency conducts its own survey in every enterprise of its ranking while abiding by market regulation, the overtime measurement can never be seen as reliable. It is asking ESG rating agencies to accomplish what the very labor department is not capable to.

For Investors & Conclusion

Some might raise the question: why put so much emphasis on forced overtime when it only accounts for a small weight in most ESG rating matrices; in other words, does the negligence of measuring forced overtime in an ESG rating actually matter to the overall reliability of the rating in large? The answer is yes since any public exposure of ill-managed overtime practice is a disaster for publicity in China than anywhere else in the world.

In China, most media exposure of labor abuses is met with raging indignation from the public as Chinese youths are more aware of their labor rights than their parents, thus having much less tolerance towards blatant exploitation such as forced overtime. Public anger usually drives the exposed company to suffer from direct loss of sales from boycotts and plunging stock prices. For instance, Pinduoduo Inc, which runs one of China’s largest e-commerce platforms, lost 6.13% percent of its market value (13.4 billion dollars) after public anger over the sudden death of one of its young female employees due to overtime work.

It’s not to say that ESG ratings for Chinese companies are completely misleading. A high ESG rating is not indicative of the company’s sustainable development, but a rather low ESG rating for a Chinese company is generally indicative of it having unsustainable development. For example, MSCI in 2018 lowered the ESG rating for Kangmei Pharmaceutical from B to CCC; six months after which Kangmei was accused of financial reporting fraud.

ESG ratings for most large Chinese tech companies will inevitably go up over the years to come driven by a surging renewable energy market in China; however, for both domestic and foreign investors, when referencing these ratings, it’s important to consider how inflated these ratings are; as presented above, their lack of consideration in the actual treatment of employees, especially in the overtime practice, will eventually lead to an overly optimistic overview of the company’s sustainable future.

About Ling (Egbert) Qin

Current undergraduate at Johns Hopkins University (double major in Physics and Economy). Diverse experiences in medical imaging, cosmic-ray observatories, and cultural heritage NGOs. Interested in astrophysics, preserving cultural heritage, and researching the interaction between scientific developments and the world economy. Can be reached at [email protected]