Interviewee: Brian CK Ho, EY CCaSS partner
CASVI: Why did you engage in sustainability and impact investment in your career?
Brian: After graduating from sociology, I returned to the research center to focus on how international companies practice public social responsibility around the world. During my research, I came to believe that business would play an indispensable role in sustainable development.
In the past, the development issues of society and specific groups had been addressed primarily by society, government, and NGOs, but relying on the power of business could have a more significant impact, especially if based on a certain economic mechanism.
After that, I followed my former boss to a new organization called CSR Asia and then came to EY after around eight to nine years. Our job is to convince business organizations to create social and environmental value while increasing business value, which can make a doubled impact. It is also based upon such belief that I have been in this sector for more than 18 years.
CASVI: Why did EY set up the CCaSS department at the time? Was it because of market demand?
Brian: I remember the CCaSS was first founded in 1993 or 1994. At that time, the UN proposed the concept of sustainable development for the first time at the summit and everyone was talking about how the business sector could be involved. Under such an international context, EY decided to set up CCaSS global business.
The CCaSS department in China and Asia was founded in 2009 when many Chinese companies extended more and more international businesses because of Beijing Olympic Games held in 2008. I believe EY's management had foreseen that sustainable development and climate change would become more closely related to the company's financial situation. So, in addition to the traditional consulting department, we opened up a new field, which would be very important for many companies. EY had also considered providing a “one-stop” service for its customers by setting up the CCaSS department in this region. Indeed, we later saw that the CCaSS business was driven by markets. Our management was very far ahead in anticipating this requirement, so we invested a lot of resources in this area.
In 2008, the Chinese government issued guidelines, requiring SOEs (state-owned enterprises) to take up more social responsibility. And CSR (Corporate Social Responsibility) began to be widely discussed. But back in time, when speaking of CSR and sustainability, most SOEs mainly focused on how to cooperate with the government to establish a harmonious society according to the government’s agenda. Therefore, in the beginning, our CSR service was more like public relations service.
However, we saw some negative public events such as food safety issues that occurred subsequently due to companies’ misconduct. The public became particularly concerned about the safety of products and employees. And more and more companies became curious about corporate responsibility outside the scope of government goals. Around 2015, investors began paying more attention to the sustainable performance of enterprises. For example, there were many Chinese companies listed overseas. Foreign investors’ concern about sustainable development had pushed forward these listed companies to consider sustainable investment in a more practical way. They started to realize the necessity to manage problems internally, rather than merely regarded it as a public relations activity.
Over the past decade, the market has been changing and going through different stages. And we can see that firms have switched from mainly appealing to the government and the public demands for “responsible firms”, to meeting the capital market’s demands for ESG in the last two or three years, thereby paying more attention to their own ESG performance. In other words, capital determines this change in a corporate’s behavior.
Meanwhile, the cooperation between CCaSS and other departments of EY has become closer. I remember when I joined EY six years ago, other departments thought CCaSS was an environmental department to help the company dispose of waste. But now, I believe most of the partners at EY know that CCaSS’s work belongs to topics in capital markets. We think there are a lot of financial tools that companies can use such as ESG investment, green finance, impact investment, and so on.
Although our team size is limited compared to the rest of EY, I believe that as long as companies face realistic challenges such as sustainability requirements and inquiries from investors, they will surely pay attention to them. In particular, many investors now require more than just ESG policies and ESG reports. They also want companies to think fully about how they can coexist with the environment. For example, some of our clients are often asked by investors how they will adapt to possible changes such as global warming, extreme weather, and natural disasters, and whether the profitability of agricultural and real estate companies will be affected by the risk of climate change. Therefore, on the one hand, enterprises should reduce the negative impact on the environment. On the other hand, they should consider how to control the operation risk brought by environmental issues. This is a very good change.
CASVI: What is the current customer base of CCaSS? How do you effectively serve it?
Brian: Our team has worked with about 180 Chinese companies listed in Hong Kong or U.S. stock markets, most of which are leaders of different industries. They seek services mainly because of specific incentives or external pressures, especially from capital markets requiring them to raise their expectations for sustainability. And if they do not have the expertise internally, they will seek our services.
In our experience, the key to the effectiveness of our services for sustainable development is the active involvement of the management team. Over the past six years at EY, I have found that sustainability and ESG are not well understood by most companies’ executives, and only a few top firms’ management understands these concepts. Some managers would ask, "If no one else has done it, why do we have to pay for it? Plus, the relevant compliance doesn’t have these requirements, right?” Now many executives are aware of the importance of such concepts, but only a few are asking further questions about how management can do better. Therefore, I think we should do more in this respect.
Besides sharing leadership information, we should organize some cases to help business executives understand the value of these concepts, such as some good attempts of peer companies, specific expectations of investors for sustainable development, etc., so that business executives can think about whether it is necessary to take ESG seriously and invest more resources in sustainable development.
As a consulting service provider, we need to show these companies both the business value of pursuing sustainable development and more importantly the positive ROI (return on investment) credit to sustainable development. But the current sustainable consulting sector still remains formless. And I can't guarantee that all the services people offer will meet the same standards. Some consulting services may simply help companies write reports, or even help them do the greenwashing.
CASVI: How do you view greenwashing in the Chinese market? What positive changes should we do to answer the criticism from the public on greenwashing?
Brian: I have to admit that greenwashing is happening, even in some big companies. Some of them advertise that they spend a lot of money on green and public education, but their internal environmental management is actually poor. However, there are two sides to the greenwashing phenomenon. The other is that companies believe that creating a responsible brand image will enable them to gain more public recognition. This is a good sign, even if some of them don’t know what it means to be sustainable, or they are not fulfilling their responsibility for sustainable management. Therefore, in judging whether the sustainable development activities of an enterprise are substantial, the external supervision of the media or the public is particularly important. For example, the media can judge and evaluate whether a company is doing greenwashing and publish the corresponding negative list. But it is true that in China the media will face a lot of restrictions. For example, if a state-owned enterprise is doing greenwashing, it is difficult for the media to directly reveal this matter.
It is possible to depend on consumers’ oversight, like the case in the West. A wave of CSR followed in the 1990s when consumers criticized labor-poor firms and boycotted their products. But whether consumer-driven sustainability works in the Chinese market depends on the level of consumer education. It is very difficult for ordinary consumers to identify and assess whether a business is doing greenwashing.
Investors want to be able to make judgments and evaluations in a standardized and objective manner, including making full use of information from third-party rating agencies because rating agencies have a more systematic way of evaluating the behavior of business, thereby helping investors judge whether the business is truly sustainable in terms of internal management.
What's more, even if a business is motivated to do something good for society, it still needs to be constantly tracked and measured, and investors can push the process. That’s why I would say “money talks”. As long as asset owners are willing to keep investing, they can always demand the social impact they want their businesses to achieve. Such a process will drive the output of more and better social improvements.
CASVI: From EY's point of view, is it necessary for companies to integrate sustainable development into their business objectives?
Brian: Yes, I think it's absolutely necessary. And that’s why capitalism is constantly rethinking the problems in the current structure of the economy. Nine years ago, Michael Porter created the concept of shared value. Today, the concept of stakeholder capitalism has emerged internationally, meaning what companies need to take into account the welfare of their stakeholders as they pursue their interests. This concept is similar to that of shared value.
But at the same time, it's hard for a company to redefine what it's supposed to do, especially if it's a big company. For example, the CEO and CFO of a large company usually have tenure, during which they only consider the relatively short-sighted goal of making as much money as possible for the company, so there is a structural incentive problem. That is why there are international standards and measurements that recommend linking executive compensation to a firm's commitment to sustainability. While most companies in Asia, including Greater China, are not beginning to link executive compensation to their sustainable outcomes, this will be a crucial point for the future.
CASVI: What kind of CCaSS business is growing most significantly today?
Brian: Between 2015 and 2016, the main business need came from helping companies write ESG reports, mainly because of compliance requirements in the stock market.
But now I think the biggest demand is for concrete advice on how to communicate sustainability to investors, such as how to upgrade an ESG rating, and how to access sustainability-related indices, especially for large companies.
We find that the overall market demand has shifted from a regulatory to a capital-driven model. It can be understood that the sustainable demand of the enterprises at first came from the pressure of regulation, and now it comes from the investors. Frankly speaking, of the more than 200 companies I have worked for, I have rarely met a business leader who was subjectively convinced that they needed to do sustainable work because it was a meaningful good deed.
CASVI: Which clients of CCaSS are in the process of evaluating impact results? Have you encountered any difficulties in the evaluation process?
Brian: The Greater China region is still in a very early stage, where people are still thinking about how to thoroughly carry out sustainable development from the internal management. And the impact outcome assessment is more like a one-time thing. But if there is a need, we can help them build long-term value models and track their sustainable performance from three perspectives of Input, Output, and Outcome.
However, the biggest challenge is that only a handful of leading companies ask for an impact assessment. I hope that more and more companies will recognize the concept of impact measurement and realize that they need impact assessment data to make communication with stakeholders more effective. For example, rather than describe how much resources they have invested or how positive they are, it would be better to describe the actual impact of their investment in sustainable development and come up with some quantitative data to support it.
CASVI: Could you share a specific example of impact outcome assessment?
Brian: So far, most impact outcome assessments have focused on the area of community initiatives. For example, a customer of an international cosmetics company invested 100 million RMB over a 10-year period in a child's heart rehabilitation program. From the perspective of the Input side, the metrics included how much money they donated, how much the project cost, whether some volunteer sales agents entered the project, and so on. From the perspective of the Output side, we just directly measured how many children had been helped and how many children had been supported by surgery.
The outcome side was more integrated. We divided it into direct and indirect categories. In the direct section, we measured how much longer children could live after surgery, and how much less the family would spend with this help. In the indirect part, we assessed how many local doctors were able to gain new knowledge and training in surgery with the help of international doctors. In addition, I remember that some large public foundations used this project as an illustration of their proposals for children with heart disease at the session of the National People’s Congress to demonstrate whether China’s policies should pay additional attention to this group. So effects on public policy were actually part of the outcome of the project.
Overall, we measured impact outcomes based on a monetizing approach that “valued” impact and compared the impact value with the initial investment, resulting in a return on ROI of 30%. Of course, this example may not adequately illustrate how a business incorporates sustainable development considerations and assessments into its business operations themselves. This example is primarily an assessment of the results of a donation project. But from the perspective of our current clients in Greater China, it is true that we have seen few examples of a comprehensive impact outcome measurement for sustainable development. Some companies will consider the materials and energy consumption used in production. But I think there are still few companies monetizing the impact of production on the society or environment in a quantitative way.
One concept is called green accounting. Puma, for example, is doing it, measuring the social cost of production. But very few companies do like Puma.
However, there are more and more discussions about how to integrate the financial information and non-financial information in the report, so as to reveal the whole value creation of the enterprise. It's not clear how long it will take to come to this stage. But in the future, we'll be able to see the actual extent to which the company is doing good by its disclosed information.
CASVI: What do you think is the most exciting part about China's impact investing market?
Brian: The exciting part, I think, is the growing awareness of sustainability ecology among asset owners, including the concepts of sustainability, ESG, green finance, and impact investing.
As long as investors at the top of the value chain are more aware, they can make demands on other stakeholder groups to promote the development of the whole sustainable value chain.
In addition, a number of regulations and policies are also being promoted. So, I think each group in the current value chain is going to face some incentives and external pressure at the same time, leading them to take a deeper look at sustainability.
CASVI: Do you think whether China's impact investing market is equipped with the prerequisite for its vigorous development?
Brian: Of course, I think the beauty of impact investing is that it can help any country tackle different challenges in an efficient way. I think in our country, there is a great demand for impact investment in solving environmental and social problems. And I believe that some of the very successful business models that we are looking at can respond to that demand, especially when we talk about how companies can find solutions to social problems as well as find business opportunities in them. I’m optimistic in this direction.
