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As early as 2021, the State-owned Assets Supervision and Administration Commission of the State Council required state-owned central enterprises and local enterprises to play a leading role in the construction of the ESG system. In 2023, China's central listed companies have achieved full coverage of ESG-related reports. On June 4, 2024, the State-owned Assets Supervision and Administration Commission of the State Council formulated and issued the "Guiding Opinions on the High-standard Fulfillment of Social Responsibilities by Central Enterprises in the New Era", requiring practical strengthening of environmental, social and corporate governance (ESG) work, incorporating ESG work into the overall management of social responsibility work, and actively grasping and responding to the opportunities and challenges brought about by the development of ESG.

While ESG work has made great progress, the controversy and criticism of ESG cannot be ignored. Some critics believe that although the three elements of ESG, E, S and G, can be realized technically, they may conflict in goal direction when combined, which means that companies and investors often need to balance the various elements of ESG in decision-making. How companies make trade-offs and reconcile the conflicting economic and non-economic interests of multiple stakeholders is a huge problem. Other critics believe that in reality, ESG is widely used as a marketing gimmick, and ESG decoupling, pseudo-ESG and greenwashing are popular, forming the so-called performative rather than real ESG. Other criticisms are directed at ESG ratings, pointing out that ESG ratings are seriously divided, which can easily cause information confusion and confusion for investors, companies and other stakeholders. Regarding ESG information disclosure, some opponents also point out that in reality, ESG information disclosure is insufficient and poor in quality, and companies' ESG information disclosure is often symbolic rather than substantive.

Reflecting on the shortcomings in current ESG practices and innovating new directions in ESG practices have become issues that we must think deeply about.

1. ESG Concept from the Perspective of Traditional Corporate Governance

Influenced by traditional corporate governance theories, social responsibility theories, etc., there are still many shortcomings in the current ESG practices of state-owned enterprises. In summary, they are mainly reflected in the strong evaluation, balance and individual views in ESG practices. These tendencies will bring many adverse effects on ESG practices.

First, a relatively obvious evaluation perspective is reflected in the ESG practice orientation.The evaluation concept can be traced back to the initial formation of the ESG concept. In 2004, then UN Secretary-General Kofi Annan and some of the world's top investment institutions launched a joint initiative, calling for the environment (E), society (S) and corporate governance (G) as important factors in evaluating investment decisions. Since then, ESG has become a specific concept. As an investment evaluation standard, ESG has quickly gained widespread recognition in the investment community, and soon corporate management has also given positive feedback. As a result, many ESG rating agencies have released their own ESG rating conclusions, which have attracted great attention from investors in the capital market. Business operators also attach great importance to their ESG ratings and actively adopt various business behaviors and information disclosures that meet ESG requirements, in order to improve their ESG rating results. Under the evaluation concept, the focus of all parties is on the rating conclusions. Investors, state-owned enterprises and regulators all attach great importance to the ESG evaluation conclusions.

Second, ESG practices show a relatively obvious balance in content.This is also closely related to the formation of the ESG concept. When the ESG concept was first proposed, it was hoped to reverse the investment evaluation criteria that over-focused on economic value and achieve a balance between economic value and social value. Later, it was gradually enriched into the environment (E), society (S) and corporate governance (G). The content of the balance also expanded to a variety of balances such as economic value and social value, financial value and non-financial value, and between stakeholders. The ESG balance concept is prominently reflected in the ESG evaluation system. Although there are many institutions in the market that issue ESG ratings, and the rating systems adopted by each institution are not exactly the same, the basic framework of the rating system is basically the same. They all use the environment (E), society (S) and corporate governance (G) as the first-level indicators, and then construct the second-level and third-level indicators respectively to form a comprehensive and complete indicator system, and obtain the final rating result through weighted average. Under the guidance of the rating system, the corporate ESG practice also reflects a clear balance concept. For example, the ESG report format issued by state-owned enterprises at all levels is also carried out in accordance with the three aspects of E, S, and G, disclosing what positive work the enterprise has done.

Third, ESG practitioners show a more obvious individualistic view.When ESG is proposed as an investment evaluation standard, there must be a very clear evaluation object, such as a specific investment project or a specific enterprise, and the corresponding ESG evaluation conclusion is also for a specific evaluation object. Influenced by this, the tendency of individualism continues in ESG practice. The ESG management of state-owned enterprises is based on the enterprise itself, and optimizes and improves the E, S, and G practices of the enterprise, but pays less attention to the impact of the enterprise's own behavior on other related enterprises in the upstream and downstream supply chain and in the industrial system. The State-owned Assets Supervision and Administration Commissions at all levels and other institutions also show a clear tendency of individualism in ESG supervision. At present, most ESG regulatory policies formulate regulatory requirements based on individual enterprises.

2. Dilemmas and Myths of ESG Practices in State-owned Enterprises

The ESG evaluation, balance and individual concepts, which are influenced by traditional corporate governance and social responsibility theories, will bring many dilemmas and myths in the new era of in-depth development of state-owned enterprise corporate governance reform.

First, the evaluation perspective will encourage the formalization of corporate ESG practices.From the evaluation perspective, all parties focus on the ESG rating conclusions, which are drawn by rating agencies based on various aspects of the company's information and comprehensive measurement and evaluation through the rating system. This will deviate to a certain extent from the company's ESG practice itself, and paying too much attention to the ESG rating itself will cause this deviation to be artificially manipulated and become more alienated.

In order to obtain better ESG evaluations, companies may adopt various strategic behaviors such as selective disclosure, false statements, and catering to evaluation standards. These behaviors may lead to improved evaluation results, but they are not helpful for ESG practices themselves. Therefore, under the evaluation concept, such as greenwashing, reporting good news but not bad news, ESG report homogeneity, and formalism have become issues that have been criticized. At the same time, the evaluation concept may also lead to differences in evaluation conclusions and thus make ESG practices inconsistent. With the increase in ESG rating agencies, the differences in ratings among rating agencies are becoming increasingly prominent. The intensification of rating differences has affected the recognition of the ratings themselves and also brought confusion to corporate ESG practices.

Second, the balanced view may lead to division and confrontation in corporate ESG practices.The balance view emphasizes that enterprises should pay attention to the balance between economic value and social value, financial value and non-financial value, etc., which is of great help in correcting the one-sided emphasis on economic value while neglecting green environmental protection, social responsibility and other issues. However, the balance view also reflects a default premise, that is, economic value and social value, financial and non-financial value, etc. are two different aspects, which are independent and even conflicting in business operations, and operators should achieve balance and consideration between the two through trade-offs. Under the guidance of the balance view, state-owned enterprises may regard green environmental protection, social responsibility and other aspects of ESG practice as an additional burden on enterprises, which is another aspect that enterprises need to pay attention to in addition to creating economic value. Such a concept will bring about opposition and resistance to non-economic value in ESG.

Third, the individual view will constrain the development of overall ESG practices such as industrial systems and supply chain networks.From the perspective of the individual, the object of ESG evaluation is the individual enterprise, the content of regulatory policies is also mainly based on the individual enterprise, and the ESG practice of enterprises is also focused on their own behavior. But in fact, in the modern business environment, individual enterprises do not exist in isolation in the economic and social environment, but exist as a link in the industrial system and supply chain network. The individual behavior of enterprises not only affects the network in which they are located, but is also affected by the business ecology in which they are located. Therefore, it is incomplete to discuss ESG issues only from the perspective of the individual, which may ignore the impact of the ESG behavior of enterprises in the industrial system and supply chain system, and will also affect the optimization and upgrading of the entire industrial system and supply chain.

III. Breakthrough and innovation in corporate governance of state-owned enterprises under the new three perspectives of ESG

On the basis of a deep understanding of existing problems, we need to find a way out. Corresponding to the old three views, the new ESG practice orientation should be directed towards the view of action, the view of momentum and the view of ecology.

First, the ESG practice orientation of state-owned enterprises should shift from an evaluation perspective to an action perspective.The action view emphasizes that companies should shift their focus from ESG ratings to ESG practices themselves. Ratings are evaluations and feedback on practices, but companies should focus more on ESG actions themselves. This is neither focusing on the ESG rating conclusions of companies, nor simplifying ESG management to compiling annual ESG reports, nor implementing some show-off ESG activities. The action view emphasizes that companies should pay attention to the specific content of ESG, and pay attention to how to optimize and improve the environment, social responsibility, and corporate governance according to the specific circumstances of the company. In layman's terms, ESG management can be understood as a reflection on deep-seated corporate issues such as how state-owned enterprises create value, for whom they create value, and how they create value, as well as the improvement of corresponding practices. ESG practices under the action view can also be used as a summary of the value creation methods of state-owned enterprises.

More specifically, the ESG practice of state-owned enterprises under the action view needs to build an action content guidance system that adapts to the characteristics of Chinese state-owned enterprises, as well as an ESG evaluation standard system that is compatible with it. The standards of Western rating agencies cannot be simply copied here. The SASAC and state-owned enterprises need to formulate Chinese ESG practices and evaluation systems based on the Chinese institutional background.

Second, the content of ESG practices of state-owned enterprises should shift from a balanced perspective to a dynamic perspective.The balance view emphasizes the balance of all aspects in ESG practice, but it also invisibly leads to the separation and resistance of corporate management to ESG. By shifting from a balance view to a momentum view, the organic integration of ESG can be achieved in terms of business philosophy. The momentum view focuses on emphasizing that corporate ESG practices are the source of stimulating the momentum of value creation, especially in the new era. New momentum such as green innovation, digitalization, and technological innovation does not come from traditional factors such as capital and labor, nor from traditional incentives, but should be achieved through innovative practices in corporate ESG. Specifically, state-owned enterprises should focus on new sources of momentum such as green investment, improvement of value creation models, technological innovation-driven, greening, and digital transformation. They should strive to stimulate new momentum for the development of new quality productivity through a reasonable combination of the three aspects of E, S, and G.

From a broader perspective, the momentum view and the balance view are not contradictory. Balancing economic value and social value, and balancing the demands of various stakeholders can actually be understood as a way to gain development momentum. After all, a development model that places too much emphasis on economic value and ignores social value cannot last long. However, there are more ways to gain corporate development momentum than just balance. ESG practices can provide more new momentum for development.

Third, the subjects of ESG practice in state-owned enterprises should expand from the individual perspective to the ecological perspective.State-owned enterprises play a very critical role in China's economic system. They play an irreplaceable and important role in national economy and people's livelihood, industrial leadership, public services, strategic security, etc. In the supply chain and industrial chain, many state-owned enterprises bear the heavy responsibility of chain leader, which has an important impact on leading the continuous upgrading and transformation of the entire industrial system. Studies have found that the closer the state-owned enterprises are to the center of the supply chain network, the better their ESG performance.

On this basis, state-owned enterprises at the center of the network should not only do a good job in their own ESG, but also give full play to their influence in the upstream and downstream supply chains and in the industrial system, and improve overall ESG performance through supply chain management, collaboration and other forms. Only in this way can they better promote the upgrading and transformation of the traditional industrial system, develop strategic emerging industries, and ultimately better promote the goal of cultivating and developing new quality productivity.

(The author Gao Hanxiang is an associate professor at the School of Accounting of Zhejiang University of Finance and Economics and a researcher at the Innovation Studio of Shanghai International Engineering Consulting Group Co., Ltd.; Xu Xin is a professor and doctoral supervisor at the School of Economics and Management of East China Normal University, director of the Shanghai University Think Tank, and chief expert at the Innovation Studio of Shanghai International Engineering Consulting Group Co., Ltd. Professor Xu Xin continues to pay attention to new economic forms such as new technologies, new industries, new formats, and new models, and is concerned about the governance of emerging technologies. This column takes "Industry and Governance" as the theme and explores the forward-looking issues of scientific and technological innovation in economic and social development.)