JRI's Trial Implementation of ESG Research on

Chinese Listed CompaniesEiichiro Adachi

Head of ESG ResearchThe Japan Research Institute,

Limited.

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Outline

1. JRI at glance

2. Current development of CSR and s

ustainable finance in China

3. JRI's trial implementation of ESG re

search on Chinese listed companies

4. Lessons learned and plans for future

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JRI at glance

• The Japan Research Institute, Limited is a "knowledge engineering" company, a company that offers comprehensive, highly value-added information services, through the coordinated application of its three functions, that is, information systems, consulting, and think-tank.

• We are also active in research of both domestic and foreign economic issues and formation of policy recommendation, as well as consulting in a wide range of fields such as corporate strategies and public administrative reform. Our ESG research has been provided since 1999.

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Background

• Building a harmonious society

• The Company Law of the People's Republic

of China (revised in 2005)

– Article 5; When undertaking business

operations, a company shall comply with the

laws and administrative regulations, social

morality and business morality. It shall act in

good faith, accept the supervision of the

government and the general public, and bear

social responsibilities.

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Hu Jintao in APEC Meeting in 2008• Regulation and guidance should be

enhanced and corporate social

responsibility strengthened, he said.

• "An important lesson we have learned

from the ongoing financial crisis is that

while trying to maximize economic

returns, enterprises should follow a

prudent, well-thought-out and responsible

approach in market operations," he added.

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Green lending campaign• On December 19, 2006, the People’s Bank of China

(PBOC, China’s central bank) announced its collaboration with the State Environmental Protection Administration (SEPA) to integrate information on corporate pollution records into the database for corporate credit.

• PBOC then urged all commercial banks in China to conduct a strict environmental screening process when lending money to companies. This became widely known in China as the “green lending campaign” or “environmental storm in the banking sector”. Banks in China are forced to follow this policy.

• Energy efficiency and emission control became two other hot issues in the banking sector because they are on the top of the Chinese government’s agenda. An official from the China Banking Regulatory Commission (CBRC) announced that CBRC was drafting a piece of guidance which aimed to link a company’s energy efficiency and emission performance to its credit standing.

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Shenzhen Stock Exchange

• Shenzhen Stock Exchange (SSE), one of the

two stock exchanges in mainland China,

first launched a CSR Guideline for Listed

Companies in 2006 and since then has

shown its interest in CSR and SRI. In this

guideline, SSE encouraged its listed

companies to be more socially responsible,

and in particular to disclose non-financial

information through CSR reports.

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TEDA Environment Index• In December 2007, SSE announced that it was

cooperating with the TEDA Group in developing the TEDA Environment Index. This index consists of 40 listed companies. The companies on the index were selected from ten environment-relevant sectors according to their environmental and governance performance. Launched on January 2, 2008, TEDA Environment Index was said to be the first environmental index or even SRI index in Chinese history. It is a milestone for SRI development in China. The index set up a benchmark for SRI style investment, which might be able to indicate the long term values and risk resistant capacity which result from ESG concerns.

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State-owned enterprises (SOEs) to implement CSR• In January 2008, the Chinese Government

State-owned Assets Supervision and Administration Commission (SASAC) issued an official policy to facilitate and encourage State-owned enterprises (SOEs) to implement Corporate Social Responsibility (CSR) in order to achieve sustainable development of SOEs. Most largecap Chinese listed companies are SOEs and are controlled by SASAC. This move by the SASAC signaled that promoting CSR will be one of the major focuses of SASAC in 2008

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Green Securities Policy• The "green securities policy" stipulated

that highly polluting companies must pass environmental inspections when applying for an initial public offering (IPO) or re-financing.

• Since the launch of Green Securities Policy in February 2008, about 38 Initial Public Offerings (IPOs) were reviewed under the requirement of this policy, roughly 20 companies were also refused IPOs because they failed the environment review in accordance with the policy.

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Shanghai Stock Exchange

• The Shanghai Exchange in May 2008 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.

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Investment management industry in China

• By 2008, the investment management industry in China had 60 mutual fund investment management firms and 422 products, with AUM reaching US$286 billion, down from US$440 billion in 2007. Approximately half of the 60 mutual investment management firms were joint ventures between Chinese entities and foreign entities.

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Institutional investors in China

• Major institutional investors in China include mutual investment management firms, insurance investment management companies, the National Council for Social Security Fund (NCSSF) and Qualified Foreign Institutional Investors (QFIIs).

• To become QFIIs, foreign investors need to apply for a licence and a quota to trade in China’s domestic A-shares market.

• By July 2008, 59 QFIIs were licenced and their quota to invest in the Chinese A-shares market reached US$10.67 billion.

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Sustainable Growth Equity Fund

• The Bank of China Sustainable Growth Equity Fund, manages its investment portfolio from two dimensions: profitability and sustainability, was established in 2006.

• While the whole market was booming, the fund was not very attractive as its investment style was rather conservative. When the market slumped, however, the fund showed its strength. From October 16, 2007 to January 4, 2008, the Shanghai Stock Index dropped by 12.7 percent while the Sustainable Growth Equity Fund still managed to grow by 7.6 percent. It provides a good case to educate investors who care about long term values to enhance their risk resistant capacity by using the SRI strategy.

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National Council for Social Security Fund

• The Sustainable Growth Equity Fund is not alone. Statement by Li Keping, the Vice Secretary General of the National Council for Social Security Fund, indicated that this large-scale pension fund might consider SRI as its future investment style. Li said in September 2007 that the Social Security Fund would promote a long-term value investment style and consider corporate governance and socially responsible investment.

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Industrial Social Responsibility Fund

• The Industrial Social Responsibility Fund was established on Apr. 30th, 2008 by AEGON-INDUSTRIAL Fund Management Co., Ltd. This fund firstly considers comprehensive factors those exert great influences on enterprises development in decision-making proceedings.

• These evaluation factors cover the area of the economic indicators, sustainability, legal factors, ethics, and other factors.This fund aims to prompt the fulfilment of enterprises social responsibility and to promote the harmonious development of the society while pursuing an excellent investment performance.

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JRI's Trial Implementation of ESG Research on Chinese Listed

Companies• JRI has screened Chinese listed companie

s in perspective of good performances for their CSR activities.

• The research methodology was based on the one which used for Japanese SRI funds.

• Two Chinese research partners were consulted in order to become tuned into Chinese contexts.

• Questionnaire survey and search for articles were conducted in China.

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Questionnaire survey

• 1,645 companies were targeted (Shanghai, Shenzeng, Hongkong and Singapore stock exchange).

• The period; July 2008 to November 2008

• 309 companies answered (the response rate was 18.8%).

• The questionnaire consisted of 70 questions in total.

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Criteria for screening1. Governance(18)2. Protection of employees’ rights and in

terests(14)3. Protecting profit and right of supplier

s, customers and consumers(12)4. Contribution and communication to lo

cal community(8)5. Environmental Performance(18)

( ); the number of questions on the questionnaire

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Score diversification of result

R2 = 0.139

R2 = 0.3994

0

10

20

30

40

50

60

70

0 10 20 30 40 50 60 70

Social and Governance performance

Envi

ronm

enta

l per

form

ance

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Example of profile sheetElectrical machinery

Baoshan Iron & Steel Co., Ltd. (600019)宝山钢铁股份有限公司

Trend Survey on CSR Management

questionnaire 2008

Released Report Sustainability Report 2007, Annual Report 2007

URL http://www.baosteel.com/plc/index.asp

<Sector Comment> China's mining industry has made rapid progress in the construction of CSR system. To protect energy supply in the industry are the most important social responsibility. Various enterprises to speed up a new technical and technological research and application, for the efficient use of resources and recycling. And they had made great progress, but on the whole, when compared with international standard, there still has a large gap. Enterprises attach great importance to production safety, but still face a high risk situation. Various enterprises actively improved the working environment protect the rights and welfare of employees, but it differs very much among enterprises.

Products and Services

Corporate Behaviour

Po

sitive Actio

n

(E) Baosteel has been promoting clean production in an all-around way using the following measures: strengthening the source control, adhering to the refining raw material guideline, purchasing raw materials with low sulfur content as far as possible, paying attention to the process management, actively promoting the application of energy saving and consumption reduction technology, and effectively decreasing the emission of green-house gases (GHG), improving the end treatment with focus laying on paying attention to flue gas desulphurization, smoke dust treatment, and standard-reaching reduction of wastewater discharge.

(P2)The Company has adopted an international advanced quality management system, and its main products are all recognized by the international authoritative institutions.

(P1)The company fully complies with the laws, regulations, and standards for safe production. The policy of ”Safety First, Prevention the Center and Comprehensive Governance” has been implemented to guarantee employees’ safety and health.

(P1)Baosteel pursues an “equal opportunity” value concept, which is reflected in the policy/decision-making processes and embodied in different type of employees or different social groups.

(P2)In July 2008, Baosteel took the lead in starting "Green Procurement Action Plan" on purchasing material spare parts in interior steel industry. Henceforth, Baosteel will adopt products from the suppliers which not only have equivalent efficiency, but also passed ISO14001 environmental management system certification first. The establishment of this "threshold" will guarantee the environmental protection, energy conservation and recycling of the purchase materials effectively, meanwhile, this action will help Baosteel to widening the roads for the expansion of continuous development ulteriorly.

(P2) Baosteel recommends that suppliers attach importance to environmental protection, and proper, effective resource utilization, and jointly promote a green production chain. Concerning the un-renewable feature of raw materials, Baosteel actively promotes the “production-supply-research” work to develop low-grade ore, hot briquette iron and other new raw material varieties, which reduce influences on society.

(G) Since 2003, this company has issued the Annual Report on Environment to the public every year. Since 2005, new contents of social responsibility and operation performance have been super-induced and its title was changed to Annual Report on Sustainable Development

(G) In 2007, the company hired renowned international accounting firm to help establish the internal controls and implement a comprehensive assessment in corporate level and 12 major business processes. Accreditation included financial disclosure and reporting, procurement and payment, sales and receivables, inventory management, fixed asset management, personnel management salaries, investment management, cost management, fund management, budget management, general computer control and under the control of the company and so on.

(E) Measures of Environment Management such as: Adopting advanced clean production processes and pollution control technology for newly built projects; Ensuring stable operation of EP facilities by means of strict facility management, maintenance and repairing, etc.

Risk M

anag

emen

t

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Lessons learned and plans for future (1)

• The questionnaire survey is never that simple.– Making a phone call for the introduction before

hand.– Explaining socially responsible investment and

the purpose of the survey.– But, the Chinese companies are not so familia

r with answering questions from others excepting governments.

– Also, there is no focal point for this kind of survey.

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Lessons learned and plans for future (2)

• Other sources of information are so limited.– There is very few information for the company

who did not answer the questionnaire.– But the number of companies who published C

SR report is now growing. It might achieve 290 according to the latest seminar held by Shanghai stock exchange.

– On the other hand, it is still not so easy to get negative information.

– Plausibility check is also difficult.

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Contact Information

Eiichiro Adachi Head of ESG research +81.3.3288.4616

Asako Imamoto Manager, business development +81.3.3288.4616