By Hui Situ, Carol Tilt, & Pi-Shen Seet

Recently, China joined the European Union, the UK, and dozens of other countries in committing to be “carbon neutral” before 2060. While the government’s emphasis on environmental issues could be seen as a mechanism that might encourage firms to pay more attention to their environmental activities and reporting, our study has found that there are limits to government influence and its effectiveness on Chinese firms.

Chinese Corporate Environmental Reporting (CER) is mainly driven by the Chinese government’s requirements, rather than due to stakeholder pressure on the firm to conduct business in an environmentally friendly way. While government emphasis on environmental protection appears to be having the desired effect, as more Chinese firms are willing to engage in environmental reporting, there are still gaps to be filled (for example, they are not as comprehensive and should include a broader range of indicators) before Chinese CER reaches the reporting standards of major international firms from more developed economies.

Existing research has shown that there has been a slow and tentative development of explicit Corporate Social Responsibility (CSR) among former communist economies of Europe, with weak civil society and market institutions and dominant governments. However, this does not seem to be the case in China where CER, as a form of explicit CSR, has grown rapidly. Our research finds that this is due to the exercise of state power in China being different through the state’s use of authoritarian capitalism. We found that the Chinese government has moved beyond traditional governmental regulations and has adopted more sophisticated means to influence firms to improve their CER, namely by exercising their dominant shareholding influence in especially state-owned enterprises and introducing a range of market-based instruments, charges, and incentives that are used as tools to promote environmental protection.

Despite this, there are limits to the Chinese’s governments influence. Our research suggests that the lack of public pressure and the prevailing government influence on environmental issue may lead firms to only report against government signals. Thus, the CER is more likely a legitimacy tool to address the Chinese government’s call to be more environmentally responsible.

We suggest that the Chinese government, when determining policy, should consider encouraging more stakeholders to take note of CER, and can do this by increasing public awareness of the issue(s), promoting green products to consumers, and encouraging more local NGOs to act as watchdogs. Chinese firms will likely respond to these initiatives as we find preliminary evidence in our article and in related research that those that are more exposed to international influences (e.g., Chinese firms listed in overseas stock markets) do take CER more seriously due to other transnational pressures (e.g., the extent of embeddedness in the global production network, international covenants, and inter-governmental organisations) by providing more responsible and comprehensive CER. It follows that Chinese firms, as they globalise, will need to improve their accountability if their reporting is to be useful to the increasing number of stakeholders, including overseas consumers and investors. That is, CER should not merely be a tool to please the Chinese government, but is an essential element of global business.

China’s commitment of net-zero emissions by 2060 is a big step up on climate action. To achieve this ambitious promise, Chinese corporations play an important role. Providing comprehensive and transparent CER is a critical first step.

Reference:

Situ, H., Tilt, C. A., & Seet, P.-S. (2020). The Influence of the Government on Corporate Environmental Reporting in China: An Authoritarian Capitalism Perspective. Business & Society, 59(8), 1589–1629.