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Assessment of State Grid Corporation of China’s Sustainability Strategy

Peter Chien-Tarng Huang

ENVR E-135 December 7th, 2014

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Table of Contents

1. Introduction ................................................................................................................................3 1.1 Business Case........................................................................................................................3

1.2 Positive View ........................................................................................................................4

2. Background ................................................................................................................................5 2.1 Sustainability Footprint .........................................................................................................5

2.2 Corporate Regulatory Compliance & Governance ...............................................................6 2.3 Stakeholder Engagement ......................................................................................................7 3. Discussion .................................................................................................................................10 3.1 Environmental Responsibility .............................................................................................10 3.2 Social Responsibility ..........................................................................................................12 3.3 Economic Responsibility ....................................................................................................13 3.4 Corporate Sustainability Strategy .......................................................................................13 3.5 Corporate Sustainability Management System ...................................................................15 3.6 Supply Chain Management .................................................................................................16

4. Results .......................................................................................................................................17 4.1 Sustainability Metrics and Reporting ..................................................................................17 5. References .................................................................................................................................19

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1. Introduction Being established in 2003, State Grid Corporation of China (SGCC) is a government-owned enterprise that currently ranked 7th in the 2013 Fortune 500. It employees over 1.87 million employees and provides power to over billions of population in China. The company manages over 29 subsidiaries and participates in mainly all of China’s economic, environmental, and social councils or associations. Monitored and controlled by the Chinese government, SGCC’s main activities are to provide clean, safe, economical, and sustainable electric power throughout the 27 provinces in China and conduct government authorized investment activities. Simply put, SGCC is the largest utility in the world. State Grid’s core businesses are the construction and operations of Chinese Power grid and the transformation to smart grid. Outside of China, State Grid Corporation of China began expanding its business operations by acquiring SP AusNet, an Australian Power Company and investing in various overseas operations. In terms of its business code of conduct, SGCC is governed by the core values of integrity, commitment, innovation, and dedication (State Grid Corporation of China, 2012a). Coming from a government-owned enterprise that incorporates sustainable development and social responsibilities into its corporate strategy, SGCC is one of the first Chinese companies to release CSR report and formally embed sustainability into its corporate strategy (State Grid Corporation of China: About Us, 2010). But since China is a communist government, SGCC’s corporate decisions are highly centralized and the corporation governance structure intertwines with various government departments. (State Grid Corporation of China: Corporate Sustainability Report, 2013, 3). This paper is going to focus on the improvements of State Grid’s corporate sustainability as a whole. The paper will make some comparisons with United States based utility company, Pacific Gas and Electric Company (PG&E). Given the nature of a state-owned corporation, the paper will go in depth into the corporate stakeholder engagements, sustainability metrics, and corporate governance. Since SGCC already incorporates GRI index and ISO standards into its sustainability reporting, I am going to evaluate the effectiveness of these guidelines in SGCC’s CSR report. 1.1 Business Case Although State Grid Corporation of China has been investing overseas, this paper will focus mainly on its sustainability operations in China because these operations contribute to SGCC’s core corporate sustainability initiatives and strategies. Being a state-owned utility monopoly, SGCC dictates all of the projects from power generation, transmission, and distribution in its 27 provinces. State Grid Corporation of China’s main business objective is to seize the opportunity to establish a firm footprint of smart grid in China with an efficient distribution and digitalization being its next major phase (Bojanczyk, 2012). SGCC’s Chairman, Mr. Liu Zhenya, believes that the corporation is the catalyst for the 3rd Industrial Revolution and the core values of smart grid such as new energy technology, smart technology, and information technology can create a shared value between its customers and SGCC (State Grid Corporation of China, 2014b). The opportunities for growth fuel SGCC’s CSR strategy to create more integrated shared values with its stakeholders. Within 2011 to 2015, there will be 36 million new urban houses being built with modern building automation, control, and distribution network. As industrial and commercial demands soar in the East and South regions of China, the market for transmission lines is

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expanding in an extremely fast pace targeting $269 billion for 2015. With 900,000 kilometers of transmission lines, State Grid reigns over the market in a centralized manner. In its key operations, SGCC’s biggest challenges are effectively solving the four main corporate responsibility issues faced by China's energy development: Safe development, clean development, green development, and friendly development. Safe developments are the focuses of every traditional utility company to create optimized and efficient distribution network through power loss reduction and increased total load supply. Clean Development includes the development of renewable energies and distributed generations into the grid to eliminate the dependencies on fossil fuels (State Grid Corporation of China, 2014a, 5). Corporate sustainability contributes to the biggest business case in SGCC’s Green and Friendly developments. Green development involves heavily with environmental stewardship such as air, water, and soil pollutions from electrification or transmission. Friendly development is to leverage the advantage of smart grid down to various power sources and interact with customers on a more comfortable and economical level (State Grid Corporation of China, 2014a, 5). These two developments tie closely to both social and environmental impacts. By integrating with its stakeholders and forming a complete corporate governance structure, State Grid can closely monitor the trend of the market while increasing its operation excellence through employee training and product developments. It is difficult to dissect whether CSR contributes to the business case in regards to SGCC. However, it is safe to conclude that with almost 2 million employees, having a consistent corporate governance structure and a common goal for corporate sustainability is crucial to drive this gigantic utility corporation moving forward. Based on the study done by Doughty Centre on “The Governance of Corporate Responsibility”, the governance of a corporate responsible corporation will build a culture that is driven by the awareness of sustainability drivers and materiality assessments of CR issues. Moreover, having the trust from a bottom-up perspective also maintains a consistent corporate strategy (Dougthy Centre, 2010, 7). SGCC’S CSR report doesn’t show the metrics of such influences but as Dougthy Centre states, having a strong corporate governance backing up its corporate sustainability strengthens its business case. 1.2 Positive View Beside providing clean and reliable energy, State Grid Corporation of China has one vital vision that incorporates its corporate sustainability: “Ensure safer, cleaner, more economical, and sustainable energy supply and push for a healthier development, more harmonious society and a better life” (State Grid Corporation of China, 2014a, 12). With core values of integrity, commitment, innovation, and dedication, SGCC places sustainable development of the company as its core strategy. To accomplish sustainable development, SGCC focuses on three main goals: 1) Social communication ability and operational transparency 2) Enhancements toward economic, social and environmental shared values 3) Brand reputation and influence. Moreover, SGCC characterizes its sustainable development to be a credible, green, vital, safe, and civic state-owned enterprise. These goals look at promoting integrity both external and internal of the enterprise, committing to serve the customers and its shareholders in a fairly manner, protecting the ecological environment through long-term mechanism, and dedicating its strategy toward innovating employee developments. These developments attach themselves with SGCC’s core values in an effort to achieve the three main goals of the corporation (State Grid Corporation of China, 2014a, 13).

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This paper aims to provide recommendations for State Grid Corporation of China’s vision and values specifically in its governance structure, stakeholder engagements, and operation transparency. Recently, the productivity and financial gaps between state-owned enterprises and privately held companies have considerably widened in China. Chinese government is even undergoing reforms to lure private investors into state-owned enterprises to help improve operational transparency and corporate governance (Wildau, 2014). Ultimately, this paper will recommend SGCC to improve on CSR strategy through operational reforms, thorough reporting, and democratic management. 2. Background This section serves as an outline of State Grid Corporation of China’s sustainability footprint, corporate governance, and stakeholder engagements. 2.1 Sustainability Footprint Before diving into the actual footprints, this section will first clear distinguish the boundary of State Grid Corporation of China’s inventory of activities, products, and services (Farver, 2013, 48). SGCC, being the sole provider and monopoly of electrical power in most provinces of China, owns basically all the process flow of electrical power from generation, transmission, and distribution. Its operations and customer interactions are very reactive. SGCC allows local vendors to openly bid on projects following SGCC’s due diligence and procurement process. SGCC utilizes hot lines for customers to call in with their issues or technical difficulties. Thus, it is safe to conclude that SGCC’s biggest impact is on its operations and products. This section gives an outline of some key points in the Life-Cycle Assessment (LCA) performed on SGCC’s operations, products, related services, and corporate activities. Table 1 below shows a list of SGCC’s sustainability footprint and their impacts on the Triple Bottom Line (economical, social, and environmental). Table 1: State Grid Corporation of China’s Sustainability Footprint and Impacts

Sustainability Footprint Impacts

Product Development

Product R&D on cleaner generation, longer transmission, and more efficient distribution of electricity helps reduce environmental impacts, raw material usages that cut down costs, and expand the reach of electricity to various rural areas initially without electricity (State Grid Corporation of China, 2014a, 43).

Product Usage

Incorporation of SGCC’s smart grid enables the modernization of rural areas and a more energy efficient usage for industrial, commercial, and residential customers. Moreover, public policies such as demand response from the smart grid allows customers to be more self-aware of CSR (Zadek, Forstater, Yu, 2012, 3).

Employee Safety, Health, and Training

With an emphasis on employee training about safety, health, and CSR, SGCC has been investing over half a billion dollars yearly (State Grid Corporation of China, 2014a, 90). Employee CSR trainings are no longer a foreign-imposed compliance in SGCC’s core strategy. In fact, CSR has become a key aspect that

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contributes to SGCC’s competitive advantage (Zadek, Forstater, Yu, 2012, 4).

Philanthropic Endeavors

Programs such as “Acting Mother” promotes heavy employee volunteering and corporate donations towards areas in need. Other philanthropic endeavors such as “Sunshine on the Plateau” or “Young Volunteers Action” organize community recycling/cleaning initiatives or educational programs about the safety and proper method toward electrical hazards (State Grid Corporation of China, 2014a, 52).

Process Improvement

Multiple code of conducts such as “The Standard of Establishing SGCC Integrity System in Bidding and Purchasing” and “Eight Forbids between Purchasing Employees and Suppliers for Clean Acts” enforce operational transparency and integrity with fairness in the procurement process. SGCC also encourages the use of local equipment and labors that greatly stimulate the economy in project locations (State Grid Corporation of China, 2014a, 47).

Business Activities

SGCC co-hosts the World Smart Grid Forum 2013 shows a global sustainable vision toward the innovation of not only its technology but also the development of energy, economy, society, and environment (State Grid Corporation of China, 2014a, 73).

State Grid Corporation of China’s sustainability footprints follow ISO 26000: Social Responsibility Guide, GRI G4 Sustainability Reporting Guidelines, and guidelines by China’s State-owned Assets Supervision and Administration Commission related to environment and society (State Grid Corporation of China, 2014a, 3). Although SGCC’s CSR report mentions comprehensive risk management approach toward its process map and associated activities, I could not find any standards or guidelines such as ISO 31000 that supports its risk management method (Farver, 2013, 41). 2.2 Corporate Regulatory Compliance & Governance Following ISO 26000, State Grid Corporation of China’s management expresses the importance for social responsibility. Moreover, SGCC’s management strives to become effective in incorporating the principles of social responsibility into its decision-making and operation implementations. According to ISO 26000 and disregarding the various decision-making processes different companies use, “All organizations should put in place processes, systems, structures, or other mechanisms that make it possible to apply the principles and practices of social responsibility” (International Organization for Standardization, 2010, 2). Being a state-owned enterprise in China, SGCC does not follow regulatory requirements such as the Sarbanes-Oxley Act. The corporation’s major decisions from a top-down perspective are closely monitored and controlled by the Central Committee of the Communist Party of China (CPC). To put that into context, SGCC is simply controlled by the Communist Party of China (State Grid Corporation of China, 2014a, 10). In addition, SGCC follows the GRI G4 Sustainability Reporting Guidelines but it clearly does not adhere to GRI G4-40 that states that “Report the nomination and selection processes for the highest governance body and its committees, and the criteria used for nominating and selecting highest governance body members” (Global Reporting Initiative, 2013, 2). Not discrediting the CSR reforms pushed forward by the CPC, but State Grid

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Corporation of China lacks a transparent management structure due to the corporation’s nature. Thus, I do not think the decision-making process in SGCC’s governance structure adheres to its core values of integrity, commitment, innovation, and dedication let alone the three responsibilities of human, product, and environment. Beside the CSR Report, Green Projects Development articles, and a couple of mentions about Supplier Code of Conduct, State Grid Corporation of China clearly lacks any publically available corporate compliance documents or business code of conducts. Although SGCC states clearly its values and claims to have publish documents such as The Standards of SGCC Suppliers Qualification Verification or adhere to The Enforcement Regulations on Implementing the Eight Provisions on Improving Work Style and Tying with the Public Closely by the 18th Political Bureau of the CPC Central Committee, these information are not publically available to ensure the greatest transparency in terms of SGCC’s corporate regulatory compliance & governance (State Grid Corporation of China, 2014a, 114). I cannot assume that the statements made by SGCC in its CSR report are true and thus I do not believe SGCC had fully incorporated and addressed the three responsibilities into its regulatory compliances and governance. State Grid Corporation of China’s executive management consists of one President & CEO plus ten executive vice presidents. There are no publically available information on the roles and responsibilities of the executive members (State Grid Corporation of China, 2012b). This conflicts with SGCC’s adherent toward the GRI G4 that clearly states that the roles of the highest governance body should be clearly defined. Specifically, I cannot conclude the roles that the highest management plays on SGCC’s purposes, strategy, risk management, sustainability reporting, and remuneration/incentives. In terms of regulatory compliances and governance, SGCC fails to reach the standard disclosures of GRI G4 (Global Reporting Initiative, 2013, 1). Lastly, although SGCC does a great deal integrating CSR into its operations such as its CSR Implementation Handbook for Power Supply Stations or various job openings related to CSR, the corporation still lacks a central department or office that oversees these operations, integrations, and implementations (State Grid Corporation of China, 2014a, 110). The nonexistence of a Corporate Compliance office or Sustainability department makes me ponder on how SGCC evaluates its CSR initiatives effectively. More importantly, I do not envision SGCC fully evaluating and integrating CSR to its almost 2 million employees without a strong and direct supervision. Without careful evaluation and management, I do not believe SGCC has fully addressed the three responsibilities until clearer management roles are defined and a Corporate Compliance office has been established. 2.3 Stakeholder Engagement State Grid Corporation of China has stated clearly in its CSR report that the strengthening of its communication with stakeholders is key to a mutual trust and cooperation that are based on similar core values and sustainable developments. As SGCC begins to develop businesses and investments overseas especially in recent years, its stakeholders pool has grown even bigger now with respect to foreign policies, organizations, governments, and varieties of suppliers and customers (State Grid Corporation of China, 2014a, 70). During its Value Creation & Social Concern Assessment (similar to a materiality assessment), SGCC relies on the voice and concerns of its stakeholders greatly. Moreover, SGCC believes deeply that creating a shared value between the corporation and its stakeholders through mutual trust and harmony is the

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greatest strategy toward achieving higher competitive advantage (State Grid Corporation of China, 2014a, 30). Table 2 below lists all of the stakeholders and their engagements according to SGCC’s CSR report. Table 2: State Grid Corporation of China Stakeholder Engagements

Stakeholders Engagements Customers Ensure quality customer support line

Project surveys and post-sale dialogues to ensure satisfaction Disclosure of electrical generation and transmission information available on the internet (State Grid Corporation of China, 2014a, 32).

Organizations Conduct national conferences or local forums Featured various research centers and institutions Co-publish documents with major organizations on key issues (State Grid Corporation of China, 2014a, 80).

Partners Cooperate on key technical researches. Jointly promote sustainability development and fair business conduct. Co-publish and improve various regulatory standards such as SGCC Regulating Guidelines on Power Trade and SGCC Application Directory for Standardization Construction (State Grid Corporation of China, 2014a, 45).

Communities Point-to-point assistance. Public welfare events and conferences. Educational events. Employee Volunteer programs (State Grid Corporation of China, 2014a, 48).

Investors Since State Grid Corporation of China is a state-owned enterprise, there will be no private investors. Although the Chinese government is pushing for more privatization of its state-owned enterprises, there is no publically available information on any private investors (Wildau, 2014).

NGOs State Grid Corporation of China does not seem to interact with any NGOs beside local labor unions. Since its decisions are centralized by the Central Committee of the Communist Party of China, SGCC probably does not feel the need to involve in trade unions or any sort of NGOs. However, with its current global vision, SGCC needs to not only obliged to local laws and its standards. It also has to be more involved in International NGOs.

Media Beside its main website, SGCC has been involved in social media and a more bottom-up mechanisms for media to voice its concerns toward the corporation. It is no longer an upward accountability to the state but an interactive relationship for SGCC and the media (Zadek, Forstater, Yu, 2012, 16).

Competitors State Grid Corporation of China literally has no competitors in its primary market and acts as a monopoly.

Suppliers State Grid Corporation of China establishes consulting and contracting service centers for suppliers across China. The dialogue engagements mainly surround the procurement process and sourcing (State Grid Corporation of China, 2014a, 46).

Employees Management promotes staff congress, president’s liaison meetings, and seminars for operational transparency (State Grid Corporation of China,

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2014a, 114). SGCC calculates a total of 228000 pieces of rational advices received.

Serving over billions of customers, State Grid Corporation of China needs to have a strong customer engagement platform. In its CSR report, SGCC clearly states its mindset of an interactive, intensive, and centralized information service, evaluation, and monitoring platform. It utilizes 65 indicators for its evaluation process and 116 indicators for its monitoring mechanisms. All these indicators are not accurate without the valuable feedbacks of its customer engagements and interactions (State Grid Corporation of China, 2014a, 35). However, SGCC’s customer engagements are relatively reactive. There’s no clear indication on how SGCC attempts to make contacts or start conversations with its customers. All these service feedbacks are based on reactive customer support service calls. One of the main benefits of being a proactive stakeholder-engaging corporation, according to The Stakeholder Engagement Manual, is the preemptive planning of its products and services (Krick, Forstater, Monaghan, Sillanpaa, 2005, 11). SGCC should consider going down that route. Figure 1: State Grid Corporation of China’s Stakeholder Engagement Process

Figure 1 above displays a well-defined strategy toward stakeholder engagement for SGCC. It involves identifying, prioritizing, implementing, and evaluating the topics. However, due to the nature of a state-owned enterprise and the lack of engagements with NGOs, trade unions, and investors, I question whether these engagements and issues are truly brought up to the highest management. SGCC lacks a systematic approach toward stakeholder engagement in terms of embedding these topics to governance. According to AA1000 Stakeholder Management

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Standard, integrating stakeholder engagements into relevant decision-making process and governance structure is the most direct way to make an impact (AccountAbility, 2011, 14). The most effective method will be forming a systematic stakeholder engagement management team that handles these prioritizations, implementations, evaluations, and topics directly and reports to the highest management. 3. Discussion This section goes in depth on all the key elements of State Grid Corporation of China’s Sustainability responsibilities, strategies, and managements. 3.1 Environmental Responsibility China as a country has recognized the importance of protecting its ecological system because its ecological system greatly affects the country’s sustainability for economic growth and development process. Under China’s 12th Five-Year Plan and comprehensive national standards, state-owned enterprises such as State Grid Corporation have been actively and aggressively addressing its environmental responsibilities (Zadek, Forstater, Yu, 2012, 5). Protecting and restoring the integrity of the ecological system has been SGCC’s mission behind the implementation of a complete smart grid. Most importantly, maintaining a sustainable life and natural processes are the key drivers to a successful business and the environments that it operates (Farver, 2013. 97). With the establishments of energy conservation service companies and social energy saving programs, SGCC is openly advancing and exchanging the application and knowledge of a sustainable smart grid. To achieve that, SGCC founded public welfare projects and environmental training sessions for employees, customers, suppliers, and vendors. Moreover, SGCC is devoted to integrating renewable energies, Electric Vehicles (EV) development and distributed generations across its service areas. These alternative energy supplies cut down China’s fossil fuel usage, reduce carbon emission, and eliminate the disruptions of nature when building transmission lines or distribution networks. In 2013, SGCC has successfully integrated distributed generations and renewables to over 2,721 households and 75% of them are self-sustained, meaning that they are not relying on the power grid anymore (State Grid Corporation of China, 2014a, 60). Figure 2 below shows a complete set of SGCC’s environmental approach in regards to customers’ degree of concern and the effect on integrated value creation. At the top right corner, where the customers express the highest concern and the corporation creates the biggest value, is the development of green and clean energy with energy efficiency. Being a utility company in a face-paced developing country, SGCC has been very successful in its execution of a low-cost, high-tech, and safe smart grid. The purpose of smart grid is not only to create a scientific efficient power that is safe and reliable to the customers, but it also strives for a green industrial chain with low carbon emission, energy efficiency, and self-sustained consumption. With the integration of alternative generations such as solar panels, SGCC has reached the output of a developed country such as Denmark or Germany (State Grid Corporation of China, 2014a, 58). What impressed me the most about SGCC’s environmental responsibility is its focus on China’s infrastructures and its dedications toward UN Global Compacts. UN Global Compact’s environmental principle 9 has stated that it is crucial for a corporation to encourage the diffusion

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of environmentally friendly technologies (Farver, 2013, 98). Although the promotion of electricity replacement does not bring the highest degree of customers’ concerns, but only a state-owned utility enterprise such as SGCC has the authority and power to conduct industry-wide electricity replacements on industries such as architectures, traffics, commercial, industrial, and residential. Whether it’s replacing coal-fired boilers with electric cookers or gas heating with regenerative electric heaters, SGCC is leading the charge against environmental pollutions (State Grid Corporation of China, 2014, 62). With recent Air Quality Index soaring in major Chinese cities, SGCC is replacing a lot of traditional coal-burning devices, which cause 60% of air pollution, with regenerative electric units (Air Quality Index China, 2014). Figure 2: State Grid Corporation of China’s Environmental Protection Topics

The metrics on SGCC Environmental responsibilities look impressive as the corporation shows positive signs in clean energy development, power conservation, carbon emission reduction, and EV developments (State Grid Corporation of China, 2014a, 91). However, SGCC lacks a formal reporting metric following the GRI guidelines or ISO 14001. ISO 14001 is probably the best environmental management system that evaluates the performance of a company’s environmental policies (Farver, 2013, 100). If SGCC can take on international standards such as ISO 14001, it will have a more complete and comprehensive evaluation metric.

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3.2 Social Responsibility Evaluating the social responsibility of SGCC is similar to evaluating the efforts made by the Communist Party of China since SGCC takes direct order from the party. However, it is interesting to note that SGCC does a good job evaluating and performing at its social responsibilities. SGCC’s social responsibilities can be separated into five main categories: General Service, Public Donations, Win-win Partnership, Transparent Operation, and Employee Development. General Service dictates all of SGCC’s operations to serve electricity to households around the country and to decrease the average gap of blackout time between cities and rural areas. SGCC shows a positive sign across the board for its general services as the corporation improves its smart grid implementation, technology innovation, and project applications. Public Donations include donations made by SGCC and employee volunteer services, which also show optimistic improvements. Win-win partnerships contain cooperation and collaborations with external organizations and communities on key issues such as green technologies. Transparent operation also shows great enhancements on the disclosure of information and information accessibility. Lastly, SGCC management believes highly in employee development and training. Considering the growing number of investments on employee training and labor unions, it is safe to say that SGCC is expanding and addressing its social responsibilities outside of the scope of state-owned enterprise (State Grid Corporation of China, 2014a, 90). State Grid Corporation of China follows the UN Global Compact for its social responsibilities on three specific fields: Human Rights, Labor, and Anti-Corruption (State Grid Corporation of China, 2014a, 114). SGCC implements intense online management on procurement, asset management, human resources, capital allocation, and bidding processes for a total transparency that’s based upon its core value of integrity. Furthermore, these online management programs inspect key issues regarding SGCC’s energy operations down to single households and communities: making decision-process and correction plans more flexible and effective to initiate. One of the key criticisms on developing countries and state-owned enterprises is the condition of labor forces and the human rights toward equality employment. SGCC devotes itself to ensure reasonable working conditions obliging to labor laws, equal opportunities for employments, and applicable health/safety programs. In addition, it signs labor contracts to 100% of its employees and pay social insurances for all of them. SGCC also focuses on employee development and the diversity in the workforce with a growing percentage of female employees. Thus, SGCC is successfully achieving an employee turnover rate of only 0.64% in 2013 (State Grid Corporation of China, 2014a, 105). The only suggestion I can give to SGCC is the total transparency of its reporting guidelines, parameters, and associated documents. SGCC is not reporting the whole scope of its social responsibilities by simply referencing all of its GRI indexes to certain pages of the CSR report. Although the metrics and evaluations are remarkable for SGCC, it’s not complete as it lacks supporting guidelines and indexes along with designated documents and ratios. Northern California utility company Pacific Gas and Company (PG&E) has a complete section showing each of the GRI G4 indicator, descriptions, and associated documentation related to each of the indicators. Using complete GRI reporting protocols, PG&E is providing a better picture to its social responsibility than SGCC (Pacific Gas and Company, 2013).

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3.3 Economic Responsibility Being an important aspect of economic responsibility, Risk management has been very narrowed minded in SGCC’s strategy. As a state-owned enterprise, SGCC’s risk management process follows solely on the Basic Standard for Enterprise Internal Control issued by the Ministry of Finance of the Chinese government (State Grid Corporation of China, 2014a, 53). Since the corporation lacks a board of directors and a comprehensive governance structure, I think the two most common risk management frameworks used by US companies, Turnbull framework and COSO framework, don’t really apply to SGCC. It is a myth of how SGCC assesses and manages its risks. ISO 31000 gives a good framework for SGCC to follow as it attempts to broaden its stakeholder engagements. By integrating the stakeholders into risk assessment processes, SGCC can build on ISO 31000 and develop a culture of a more inclusive risk management procedure. Ultimately, taking it a step further, SGCC can use a modified balanced scorecard to evaluate business objectives on the basis of the triple bottom line. That way, SGCC has the ability of not only managing risks but also avoiding them altogether (Farver, 2013, 129). According to “Economic Sustainability The Business of staying in Business” by the Sigma Project, it is vital to a corporation to manage intangible assets and the wider economy. Topics like brand reputation and customer loyalty do not apply to SGCC due to its nature of a state-owned enterprise (Doane, MacGillivray, 2001, 3.1.2). However, SGCC still focuses heavily on building its brand image as it attempts to seek overseas operations through global conferences, forums, and research institutions. So far, SGCC has done a tremendous job climbing so fast to the top 10 companies on Forbes list. However, SGCC still has internal issues regarding the proper guidelines and measures toward its intangible assets such as labor. Qualitative measures such as hiring procedures are not transparent to the public. Issues such the lack of standard operating procedure for supply chain management are lingering as well, which will be carefully addressed in the supply chain management section (Farver, 2013, 124). Diving deeply in SGCC’s CSR report makes me realize how loosely SGCC ties its GRI indicators to economic performance, let alone the non-existence of environmental performance. GRI G4 EC2 is supposedly tied to financial implications and activities for SGCC due to climate change. However, SGCC’s CSR report references EC2 to a section of a message from the president (State Grid Corporation of China, 2014a, 115). SGCC even mentions the combat for global climate change as one of its leading actions for green environmental development. As a next step, SGCC can consider tying indirect economic impacts to its direct economic performance such as EC9 (significant indirect economic impacts) to EC2. That way, the company will form a better model for analyzing its qualitative measures. Lastly, China lacks a common act such as the Sarbanes-Oxley Act that enforces large corporation to disclose full financial reporting. In fact, SGCC is not privately nor publically owned so it does not ought to release forms like Form 10-K. Though, it will be relevant for Chinese government to push for reforms that enforce large enterprises like SGCC, given the financial scale these enterprises operate in, to release similar forms as the Form 10-K. 3.4 Corporate Sustainability Strategy State Grid Corporation of China possesses a thriving corporate sustainability strategy that integrates and addresses all of its activities, products, and services. Most importantly, it organizes abstract concepts into its operations with the mindset of its three responsibilities and

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provides sufficient tangible measurements to give a clearer outlook of its performance. The part about whether these tangible measurements are sufficient enough to display the whole picture is not the discussion of this section. Although the whole planning process for SGCC’s sustainability strategy doesn’t necessary start from the executive suite and then down to the operations, SGCC has done a good job realizing the stakeholders’ values and prioritizing them on basically all of their operations. In an overview, SGCC has uniquely positioned its strategy well to capture and involve a variety sets of business activities (Porter, 1996, 3). SGCC’s sustainability strategy consists of a key concept that utilizes the following formula for the implementation of the corporate strategy down to every operation: Figure 3: State Grid Corporation of China’s Work Concept of CSR Implementation

The left-hand side of the equation determines the strategy behind the mutual reinforcement of all the company’s activities for a common CSR mindset. Just like Michael Porter says, making the company activities fit together is a crucial part for making a corporate sustainability strategy successful (Farver, 2013, 135). The “Re”, which stands for the rethinking of responsibility, applies to all business operations and the continuous improvement with the concept of CSR in mind. There are four main strategies behind this part of the equation and they greatly demonstrate the integration of the core values of SGCC. First, keeping the CSR concept in its business operations establish “an external vision and comprehensive value concept” to address the shared economic, social, and environmental values (State Grid Corporation of China, 2014a, 107). Second, SGCC actively thinks and rethinks its people, business, and operations by coordinating social and environmental impacts into its stakeholder. Third, SGCC aims to boost efficient communication both publically and internally while using transparent operations to gain awareness from stakeholders. Fourth, SGCC focuses on setting up a long-term strategic planning process to prominently expand on the first three strategies. The right-hand side of the equation shapes SGCC’s shared value strategy. SGCC’s employees’ work from an internal perspective carries out greater integrated social and environmental impacts as the corporation believes in the intertwinement between creating shared values and business operations (State Grid Corporation of China, 2014a, 107). Two concepts documented in SGCC’s CSR report greatly reflect the concept describe in Michael Porter and Mark Kramer’s Harvard Business Review article “Creating Shared Value”- Externalize internal work and Internalize external expectation. Popularizing the shared values created by SGCC’s internal operations in the minds of the public greatly advance the corporation’s brand image. Understanding the external expectations and stakeholders’ demands is central to SGCC’s internal risk management, CSR strategy, and overall business operations. SGCC has a shared value strategy that looks and re-looks decisions and opportunities through the lens of shared value. The ultimate goal is a

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sustainable development and growth of the corporation and the society (Porter, Kramer, 2011, 66). 3.5 Corporate Sustainability Management System State Grid Corporation of China’s sustainability management system follows a similar flow of actions stated by ISO 14001. Plan, Do, Check, and Act are the four main stages of ISO 14001-sustainability policy (Farver, 2013, 146). Although SGCC does not clearly states the usage of ISO 14001, SGCC’s CSR report indicates a relative similar cycle of continuous improvement that revolves around prioritization, implementation, and evaluation. SGCC has done a decent job at planning its sustainability management system. Within each of its various footprint in the CSR report, readers can see graphs like Figure 2 where SGCC prioritize various topics and associated stakeholders’ values. These graphs emphasize the importance of understanding the risks and impacts of all the company’s policies, operations, activities, and even influences on stakeholders. Even issues like corruption and fair trade are clearly defined under UN Global Compact principle and Chinese law enforcement documents (State Grid Corporation of China, 2014a, 114). SGCC can improve its sustainability management system by having a specific division or department of the corporation overlooking these planning. Moreover, SGCC can consider implementing true guidelines such as ISO 140001 as its planning benchmarks. Taking it a step further, SGCC can include trade association standards or other NGO guidelines to diversify its planning criteria to not just be fully dependent on Chinese government standards as the corporation expands overseas. SGCC’s “Do” stage has been also effective in terms of a top-down management approach. The corporation integrates CSR into all of its projects through a standard operating procedure that details pre-project, on-project, and post-project implementation. This mechanism allows clearly defined roles among employees and stakeholders. With the help of employee training and regulatory requirements, CSR has been embedded into SGCC’s operations in terms of employees’ competency, role, awareness, training, and proper responsibility. SGCC takes a step further by integrating CSR into job positions, local teams/vendors, professions, and employee promotion management (State Grid Corporation of China, 2014a, 113). SGCC can make an attempt to foster more internal and external communications as mentioned in Section 2.3: Stakeholder Engagement. These communications should be formalized and documented regularly to ensure the best procedure and needed actions to take. SGCC’s “Check” and “Act” stages are the two weakest links in its sustainability management system. Although SGCC puts a great amount of effort into its monitoring and evaluation process, there is no clear indicator to a lot of its compliances and implementations. Readers can see some big key metrics in terms of SGCC’s environmental and social impacts but there are no clear suggestions that signal improvements, preventive actions, or corrective activities. On the other hand, Pacific Gas and Company publishes a Key Sustainability Indicators report with targets that are associated to every corporate plan stimulated from their footprint. It gives a very decisive and well-defined overview of PG&E’s sustainability evaluation and review (Pacific Gas and Company, 2014). SGCC can follow a similar framework to evaluate formally and target its sustainability activities in the management system. Ultimately, SGCC can consider a formal

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management review committee for its “Act” stage to push forward continual improvements in an effective manner. 3.6 Supply Chain Management State Grid Corporation of China’s headquarter acts as a centralized procurement center for all of its suppliers. The Standard of Establishing SGCC Integrity System in Bidding and Purchasing and the Eight Forbids between Purchasing Employees and Suppliers for Clean Acts are the two dominant documents that SGCC published for its own employees and suppliers to ensure a honest, open, competitive, and fair supplier bidding process (State Grid Corporation of China, 2014a, 46). Below is an overview of SGCC’s supply chain management. Figure 4: State Grid Corporation of China’s sustainable procurement overview

Apart from honest procurement process, SGCC creates e-commerce platforms to ensure the openness and efficiency to improve supplier management and transparent operations. The company bases all of its suppliers on the SGCC Environmental Management Measures to ensure the lowest pollution, emission, and proper labor rights for the suppliers. Most importantly, SGCC extends its shared value sustainability strategy concept to suppliers as well. The corporation shifts its original corporate sustainability responsibility to corporate shared values. SGCC is devoted in helping suppliers develop by providing technology, consulting, financial, and labor support. The extent of an improved and greater economy fosters SGCC’s growth as well (Farver, 2013, 168). The sole purpose of that is for suppliers to grow with SGCC and implant these suppliers in SGCC’s CSR management system and culture (State Grid Corporation of China, 2014a, 47).

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The only recommendation for SGCC to better its supply chain management is to implement a well-stated method or guidelines for tracking performance and communication. Since the corporation is already following the UN Global Compact principles, it should be responsible for reporting the progress of their suppliers and delivering implementation plans for the suppliers as well (Farver, 2013, 165). 4. Results This sections details the reporting of State Grid Corporation of China’s CSR report and the metrics that it uses. 4.1 Sustainability Metrics and Reporting Going back to the three main goals of SGCC: 1) Social communication ability and operational transparency 2) Enhancements toward economic, social and environmental shared values 3) Brand reputation and influence, SGCC’s CSR report obviously is still not demonstrating an extensive and complete indication of these three goals. Whether it’s a clear governance role distinction or a formal evaluation of stakeholder engagements, SGCC needs to show a well-defined relationship and linking between the goals and the metrics. Communication evaluations and shared value generations are two very complicated subjects to find metrics for. Implementing a framework similar to AA1000 to measure stakeholder engagements can assist SGCC in realize the accuracy of their dialogues and the strategic values behind them (AccountAbility, 2011, 41). Operational transparency has become a tremendous issue as State Grid Corporation of China begins its investments and operations overseas. At the same time, brand reputation has become extremely importantly not only because of the attempt for overseas activities but the fact that SGCC is 100% tied to the Chinese government. In the events of allegations made of SGCC about the misappropriated usage of over $1 billion on grid system investments, having a strong and secure brand reputation goes a long way (Areddy, 2014). Moreover, with the consortium that grants SGCC the operation of Filipino power, SGCC’s position to become a total transparent corporation is on the verge (Scissors, 2009). In order to become transparent while achieving a higher brand reputation, SGCC needs to publish its financial report such as Form 10-K. More importantly, SGCC needs to reform its reporting framework of its CSR report to be based upon proper international guidelines. Although SGCC currently utilizes the GRI and ISO 26000 as standards in its reporting, the current CSR report rarely makes reference to these standards and the whole reporting framework on various footprints seems to be based upon SGCC’s or Chinese government standards. Adopting and integrating various ISO standards with its current ISO 26000, SGCC can give a more diverse and complete reporting framework. Examples can be integrating ISO 31000 for its risk management and assessment process. Overall, expanding out of its current superficial sustainability metrics and touching as much key performance indicators (KPI) based on GRI guidelines as possible will provide a well-rounded scope for all of SGCC’s footprints. Ultimately, I encourage SGCC to take on the charge of developing a predominant report that combines financial and CSR reporting. This ultimate report can solidify SGCC’s position as the world’s leading utility company and most likely guarantee an embracing brand reputation (Farver, 2013, 191).

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In terms of the metrics, SGCC is not on par with the other fortune 500 companies. Even with the reference of GRI guidelines, SGCC’s sustainability metrics only report quantitative and trivial data. Although these metrics show specific progresses in its three responsibilities, SGCC doesn’t report to the fullest of its capability in terms of qualitative data and intangible assets. SGCC should go back to its four stages of sustainability management system based on ISO 14001 and assess key priorities again to find more consistent and relevant metrics in regards to its GRI guidelines. More importantly, this will allow the last two stages of “Check” and “Act” to be more effective in terms of setting goals and continuous improvements through thorough management evaluations. To achieve a more inclusive metric system that incorporates all three responsibilities to a certain extent where management can evaluate the performance and forecast growth/implementations, I believe SGCC can integrate lagging, leading, and linking indicators to their CSR report. SGCC currently reports various lagging indicators such as business revenue. Although these lagging indicators speak a lot about the corporation’s position in terms of financial performance, lagging indicators that report on social and environmental impacts are also applicable to the growth of SGCC. Corresponding to the previous paragraph, I believe the integration of lagging indicators with reference to GRI guidelines can provide much more qualitative measurements of the corporation’s past performance. These qualitative measurements will give a general trend of the direction that SGCC is heading with its sustainability strategy. Leading indicators are what SGCC lacks in its CSR reporting right now. These leading indicators measure future performance on the triple bottom line. Given the qualitative nature of these leading indicators, SGCC will be able to determine data such as attitude, behavior, qualitative productivity, and competency. I believe SGCC sustainability management system will be able to manage the impacts on social and biodiversity initiatives more effectively with leading indicators. Additionally, SGCC can conduct more detailed planning, forecast, and analysis on the issues raised by the government or stakeholders (Farver, 2013, 175). With a combination of leading and lagging indicators, SGCC can properly manage its goals and targets in an accurate manner. However, like described in Section 2.3: Stakeholder Engagement, SGCC needs to have a more systematic approach toward its stakeholder engagement strategy to fully capture these indicators precisely. To facilitate the mixture of leading and lagging indicators, I also suppose that SGCC can apply linking indicators. The purpose of these linking indicators is not merely to associate one indicator to another financial benefits. Its ultimate purpose is to ensure that a sustainable improvement does not occur in the expense of another area. Preventing trade-offs in its sustainability strategy can thus be greatly reduced if SGCC correctly utilize these linking indicators to relate to one another (Farver, 2013, 177).

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from http://www.sgcc.com.cn/ywlm/aboutus/message.shtml Wildau, Gabriel. (2014). China Announces plan for reform of State-owned Enterprises.

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