China's ESG Leaders: Transparent Financial Excellence

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by KnowESG
KnowESG_Chinese companies focused in esg have high quality reporting
Image courtesy of Freepik

According to a recent study by researchers from Charles Darwin University (CDU), Chinese businesses that focus on environmental and social responsibility exhibit excellent financial reporting and accountability.

While concerns about the governance of carbon offset programmes in Australia persist, the CDU study examined 100 randomly selected Chinese companies and found high standards of governance and accounting practices.

Professor Indra Abeysekera, an accounting expert at CDU, along with PhD candidate Mengqian Wu, led the study to assess the financial reporting quality of China's listed environmental, social, and governance (ESG) firms. The researchers examined the accounting practices of 100 companies chosen from a 2021 list of the top 500 ESG firms in China.

The results, published in the Plos One journal, revealed that Chinese companies exhibited no evidence of manipulated earnings, commonly known as earnings management.

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According to Professor Abeysekera, businesses operating within the ESG sector often face the challenge of showcasing immediate returns, as their investments are typically tied to socially responsible projects that yield long-term benefits.

"This study provides valuable insights into the financial reporting practices of ESG firms in China, and the results were quite surprising," Professor Abeysekera stated.

He further explained that the culture of transparency and accountability prevalent among Chinese ESG companies can be attributed to their pursuit of attracting overseas investments.

Moreover, these companies implement sound business strategies that involve investments in short-term, medium-term, and long-term projects, thus ensuring consistent earnings performance over time.

Mengqian Wu, the lead author of the study titled "Financial Reporting Quality of ESG Firms Listed in China," noted that while Chinese ESG firms scored lower in ESG factors compared to their counterparts in other countries, this was primarily due to a lack of focus on sustainability reporting.

Wu highlighted that social determinants encompass various factors such as working conditions, labour relations, conflicts, health and safety, and diversity.

Similarly, environmental impacts include climate change, waste management, pollution, deforestation, and resource depletion.

Executive compensation, corruption, board composition, diversity, structure, political affiliations, and tax planning are a few examples of the variables that affect governance quality.

Many of the randomly selected companies analysed in the study operated in the manufacturing and construction sectors. Wu cautioned that although these firms demonstrated positive results, their increased financial stability might make them more susceptible to risk.

She also noted that the time delay between earnings and operating cash flows in projects related to social and environmental initiatives often puts pressure on companies to compromise financial reporting quality by smoothing out their financials.

Overall, the study highlights the commendable financial reporting practices of Chinese ESG firms and suggests that their financial success is likely to further drive investments in social and environmental projects.

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Source: CDU

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