One of China’s key challenges as it continues its ineluctable progress towards becoming the world’s largest economy is balancing growth with its environmental responsibilities. The new leadership acknowledged as much at the 18^th Party Congress, pledging to designate environmental protection as a key project, cut energy consumption and pursue a cleaner, more sustainable energy model. A KPMG report published in October 2012, written by Norbert Meyring and Leah Jin, highlighted the chemical industry as one of the key industries that needs to support this government plan to help China achieve a “cleaner economy”. Below is a summary of their report.

Image courtesy of KPMG. Taken from their study, China’s Chemical Industry Enters a New Era with Sustainability.

China is in the midst of a great transition. No longer willing to be slotted in the class of big polluters, it has undertaken one of the most comprehensive sustainability action plans in history, and the chemical industry will be fundamental to turning this vision into reality.

Change, however, cannot come at the cost of growth, and China will need to perform a delicate balancing act as it moves from the older, fast-paced industrial model to a slower pace of development based on upgraded value chains and energy-efficient business.

The chemical industry, meanwhile, has to deal with the current macro-economic forces brought on by a slow US economy and lingering debt crisis in Europe that is dragging down end-user demand.

Early in 2012, the Chinese government cut its annual economic growth target to an eight-year low of 7.5 per cent compared to the actual 9.2 per cent GDP growth of 2011, aiming to promote a steady and sustainable pace of development, keep prices stable and guard against financial risks by keeping the total money and credit supply at an appropriate level. This is the first time since 2005 that China has lowered its annual economic growth target after setting it around 8 per cent.

In the next few years, the chemical industry in China will face several challenges, but there is room for optimism too. According to a survey conducted by KPMG, in April and August 2012 among chemical industry players in China, the mood was positive. Chemical enterprises surveyed by us predict a 10 per cent growth for their companies in the next five years, mainly from the China market.

In China, the forces driving sustainability will come from its new environment-friendly laws. Under the 12th Five-Year Plan (5YP), the country is evolving its regulatory regime to clamp down on energy-guzzling industries and incentivising clean and green energy sectors. Its ambitious urbanisation drive is now being tweaked with ‘green’ regulations requiring buildings to be energy efficient. There is greater demand for smart transport that consumes less fossil fuel and an urgent need to stabilise water sustainability. All these factors and large government investment will act as major growth drivers for chemical companies by generating a need for new materials, advanced polymers and specialty chemicals.

Companies will need to constantly assess, manage and format their risk mitigation strategies so as to remain compliant with regulatory regime changes and other macroeconomic factors. Sustainability targets are unleashing new waves of demand for upgraded material and companies will need to apply themselves intensely into product innovation and invest more in research and development.

In order to leverage the opportunities generated by sustainability and streamlining business costs, KPMG suggests a four-pronged strategy for chemical companies in China to achieve their next stage of growth:

Enabler’s Role with Product Innovation

The chemical industry plays its biggest and most important role as ‘enabler’ of a sustainable economy with its product innovation skills. While sustainable development means achieving a balance between people, planet and profit, for the chemical industry the most fundamental element remains ‘products’.

Innovative products and initiatives from the chemical industry will play a crucial role in addressing the challenges the world faces today, and in helping provide solutions to those that lie ahead.

Stakeholders Extend Sustainability Dialogue

The chemical industry’s products and services play a crucial role in addressing environmental concerns by providing sector-wise solutions. An important aspect of this is conducting stakeholder dialogue at every level. Externally, joining forces with stakeholders ranging from governments, suppliers, vendors, to local communities and customers in order to communicate a company’s beliefs and targets is an essential part of operations these days. Internally, communication flow between shareholders, directors and employees is also becoming critically important to modern companies.

Image courtesy of KPMG. Taken from their study, China’s Chemical Industry Enters a New Era with Sustainability.

Greening the Supply Chain

Over the last 30 years, China’s turbo-charged industrial policy has helped push it to the centre of the international stage, transforming it into the world’s most confident manufacturer, the largest exporter and destination for investment. But the strategy of the past may not be the model to take the country to a sustainable future. China needs a sustainable industrial and trade policy that involves entire supply chains.

The scope and size of environmental challenges linked to Chinese economic activity through various global product chains is mammoth, but the need now is to quantify the explicit nature of those challenges and seek solutions along respective product chains. Adopting recognised environmental management systems such as the international ISO 14001 standard and EU Eco-Management and Audit Scheme (EMAS II) that emphasise environmental performance indicators will make Chinese businesses internationally competitive and open up new markets.

Companies in China are focused not only on manufacturing, logistics, distribution and exports, but on growing consumer demand for sustainable products. The development of China’s supply chain infrastructure and its sustainability is one of the priorities of the government.

Shifting away from the earlier emphasis on low-cost manufacturing and energy-intensive industries, Chinese government policy is now focusing more on positive contributions to corporate social responsibility (CSR) initiatives. The 5YP prioritises sustainable development of supply chains through social responsibility.

Forging a green chemical supply chain, however, involves deep scrutiny, communication and collaboration. Increased regulation, cost optimisation measures, and rising consumer concerns about business ethics need to be at the core of supply chain operations.

Image courtesy of KPMG. Taken from their study, China’s Chemical Industry Enters a New Era with Sustainability.

Sustainability Reporting: Buzzword for Future Growth

Chemical companies which manage to integrate product innovation with enlightened supply chain management and transparent communication with stakeholders will have an edge over others. The fourth and final step in this sustainability management programme is sustainability reporting—a process for publicly disclosing an organisation’s economic, environmental and social performance and the way it is being managed.

Today, companies are beginning to discover that corporate reporting not only provides financial value but new business opportunities as well.

According to a KPMG study, financial value overwhelmingly comes from two sources: direct cost savings and enhanced reputation in the market. ‘Green’ products, for example, not only reduce waste and cost to provide direct savings, but also provide dividends by way of enhanced reputation, from both investors and consumers.

Over the years, companies have evolved to produce corporate sustainability reports for both internal and external reasons. Internally, it can identify and manage sustainability risks and opportunities; assess the progress of its initiatives and ensure employee welfare. Externally, sustainability reporting protects and enhances a company’s brand and reputation; meets regulatory, legislative, government and listing requirements; addresses stakeholder demands and demonstrates a management that is proactive.

Applying a ‘sustainability lens’ to corporate reporting can result in four major benefits: revenue growth, risk management, corporate reputation and brand enhancement and cost optimisation.

Recently, companies surveyed by KPMG agree that sustainability will be crucial and will become an integral part of strategic planning process and key business decisions. The difficulty lies in overcoming the knowledge gap as most organisations are unable to link their business strategies to larger sustainability goals.

These hurdles will need to be worked out. In the coming years, China can make a smooth transition to a cleaner economy only if chemical companies succeed in making sustainability a core business practice, deeply embedded in their cost and profit structures.

KPMG is a global network of professional firms providing Audit, Tax and Advisory services. They operate in 146 countries and have 140,000 people working in member firms around the world. The independent member firms of the KPMG network are affiliated with KPMG International, a Swiss cooperative. Each KPMG firm is a legally distinct and separate entity and describes itself as such.

KPMG China has 13 offices (including KPMG Advisory (China) Limited) in Beijing, Shenyang, Qingdao, Shanghai, Nanjing, Chengdu, Hangzhou, Guangzhou, Fuzhou, Xiamen, Shenzhen, Hong Kong SAR and Macau SAR, with more than 9,000 professionals.

Norbert Meyring is partner in charge of the Chemical Sector in Asia Pacific and China, based in Shanghai. Leah Jin is an advisory partner based in Shanghai dealing with climate change and sustainability. The full report can be downloaded here.