(Yicai) Dec. 29 -- Environmental, social and governance is no longer optional for Chinese companies expanding overseas, which are doing so at an unprecedented scale.

This year marks a historic moment for Chinese firms, from DeepSeek's artificial intelligence breakthroughs to pharmaceutical innovations, they have reached the global frontier across multiple sectors. China ranks first by output for most kinds of products among the world's 504 major industrial products. 

China's trade surplus exceeded USD1 trillion in the 11 months ended Nov. 30 and will potentially reach USD1.2 trillion by the end of the year, unprecedented in human history.

Yet this achievement prompts reflection: Why does such strength come with such strain? Scholars asked, "Why are we hardworking, but we are not wealthy?" years ago, but today's challenge involves more than weak domestic demand and stagnant household incomes.

China accounts for roughly 30 percent of global carbon emissions and value-added in exports, creating significant global concerns. Germany, Japan, and South Korea managed industrialization with income growth and less international friction, but these challenges may be just beginning for China.

Strong ESG performance will not eliminate overseas challenges, but it can substantially ease them. As Chinese policy shifts toward outbound investment, mergers and acquisitions, and localized operations, moving beyond simple exports, ESG becomes essential for market access, partnerships, and reputation.

Why ESG Matters?

Challenges emerge not only from Western markets but increasingly from developing countries. A single week's monitoring revealed ESG incidents involving Chinese companies in Liberia, Kenya, Congo, Indonesia, Thailand, Ghana, and Peru, including environmental damage, labor rights, product quality, and community relations.

The situation with auto giant BYD in Brazil illustrates the gap. Chinese workers accepted conditions such as surrendering passports, extended overtime, and dormitory housing that seemed reasonable by their domestic standards. However, the Brazilian labor authorities saw potential exploitation and questioned the lack of local hiring. 

Unlike China's early reform era, when foreign investment faced few restrictions, emerging markets today impose rigorous ESG standards from the start. For Chinese companies, ESG increasingly determines market access and partnership viability.

Many Chinese companies lack systematic ESG frameworks, with risk prevention systems remaining underdeveloped, supply chain transparency being limited, and cultural adaptation proving difficult. 

An interesting pattern emerges: foreign companies operating in China typically express appreciation for Chinese workers and the business environment, while Chinese firms abroad often voice frustration with local workers and conditions.

Problems multiply when competitive advantage relies solely on working harder and longer. Companies that view intense competition as a victory risk triggering protective barriers abroad. 

Research on more than 460 listed firms shows that those with overseas operations face significantly higher emission reduction demands from customers than their peers without such operations.

Path Forward: Integration, Not Imposition

ESG must become integral to strategy and operations, not a compliance afterthought. Environmental protection should use digital tools for impact assessment during planning, not remediation after construction, with community engagement requiring genuine dialogue and contribution, not token gestures.

Several companies have shown effective approaches. SEMCORP Group, the world's leading supplier of lithium-ion battery separator film, won European auto contracts by establishing comprehensive carbon footprint tracking and renewable energy commitments early, while Lenovo Group, the world's largest personal computer maker, built board-level ESG governance with annual reporting. In addition, footwear maker Huajian Group learned to develop new market opportunities rather than compete with existing local businesses in Ethiopia.

Senda Group's African ceramic ventures succeeded through community consultation, infrastructure investment, employment commitments, and educational scholarships. Chenguang Biotech spent years building relationships in India, increasing its chili purchases to 60,000 tons from 20,000 tons when the price collapse threatened farmers in 2017, earning enduring trust.

These examples share a common thread: viewing local stakeholders as partners in value creation, not obstacles to overcome.

From Bonus to Baseline

ESG has evolved from an optional enhancement to a baseline requirement. Shein, despite substantial ESG investments, faced EUR1 million (USD1.2 million) in fines in Italy for incomplete environmental disclosures, with similar issues in France and Germany.

Chinese companies possess real capabilities for global expansion, but success requires creating value for all stakeholders, such as customers, employees, communities, and the environment. ESG must shift from defensive compliance to competitive advantage, from regulatory burden to strategic capability.

As China's commercial presence expands worldwide, the question is not whether to embrace ESG standards, but how quickly and effectively companies can integrate them. The path forward requires technical excellence and genuine partnership with global communities.

This article is adapted from a speech by Qin Shuo, an economic observer and founder of Qin's Moments, at a forum held by the Fullgoal Institute for ESG Research of Shanghai University of Finance and Economics on Dec. 26. The institute released a report on 2,478 ESG disclosures from Chinese listed companies last year, analyzed manually and with AI-powered tools.

Editor: Martin Kadiev