COSCO receives 3.5 stars out of 5 on environmental reporting

The Sustainability Report by COSCO could not be more different from the one by MSC, which we reviewed a few days ago. The main differences between both are the following: COSCO's length is barely 35 pages, while MSC's is 138 pages; COSCO includes environmental numbers in its report, MSC very few; COSCO reports only about the key issues, and does it with a "minimalist" style of providing no more than the needed information, MSC has a much longer narrative (the 138 pages is for something), illustrated with examples. Those two are, maybe, the two most disparate Sustainability Reports of all the ones we are evaluating. Why, then, are we giving both the same score of 3.5 out of 5 stars? That is the fascinating challenge of having to analyze documents that do not follow a mandatory template. In the case of COSCO, it is like going to ask a question to a mathematics or physics teacher—the answer is brief and with data, while in the case of MSC, it is like going to ask the same question to an English literature or history teacher—a much larger reply, even more enjoyable, but with much fewer data. Hence, it just happens that after analyzing both very carefully, we conclude that 3.5 is a fair score for each of them.

Besides being much more concise and to the point, COSCO's report has another characteristic that separates it from the one by MSC and all the others. This feature is more difficult to notice but, if one pays enough attention as with Hansel and Gretel, one notices the first pebble on the floor, and farther away a second, a third, and more pebbles, and despite its report has only 35 pages, one is able to track the entire path and to find that feature that separates COSCO's report from all the others. The Sustainability Reports are supposed to be written because your clients, employees, and shareholders are demanding a proper reporting of the environmental, social, and governance (ESG) of the company. And not just them, but also because the national, regional, and local governments, communities, NGOs, and other stakeholders have become much more inquisitive about those ESG impacts. What we found is that in the case of COSCO, there is another actor, a very relevant actor, and the Sustainability Report talks mainly to it—the Communist Party of China (CPC)! COSCO certainly "talks" to its clients in its report, but the document basically reports to the CPC that COSCO behaves according to Chinese policies and respects all the relevant national laws and regulations. Those are the pebbles. China is China, and the CPC is the core of the Chinese government. That is why the report is so brief and to the point. COSCO submitted its report in Chinese, and the English translation is only a token of respect to its non-Chinese clientele or stakeholders.

Our reviews are about environmental reporting, but given this sui generis feature of COSCO's report, we share some of those pebbles that appear in non-environmental sections of the report:

No words needed: "For the sustainable development of the company, we established the Sustainable Development Committee, consisting of general manager, party committee secretary, and various department heads."

COSCO pays loyalty to the main international initiative of the Chinese government: "As a leading company in industry, COSCO SHIPPING Lines always adheres to globalization development, playing an important role in supporting the Belt and Road Initiative, and continuously contributes to national and public activities (...) Since implementing the Belt and Road Initiative, the Company has been strengthening cooperation with local governments, which greatly facilitated local economy and gained good effects as well as wide recognition from the public."

Anti-corruption has been high on the priorities of the Chinese authorities: "The Company strengthened anti-corruption training for all employees through group learning, seminars, and intensive discussions. In 2019, COSCO SHIPPING Lines organized a total of 107 learning sessions for the theory learning central group of the [Comunist Party of China] CPC Committee within its system, in which 2,601 members participated. It also held 11 Party lectures, in which 154 employees attended, as well as 49 lectures on case warning and education, with 1,599 participants."

Another side of the anti-corruption battle: "During the process of procurement of supplier management, the Company complies with the laws and regulations of each operating location, such as the Law of the People's Republic of China on Tenders and Bids, Regulations for the Implementation of Bids, Regulations on Engineering Projects Requiring Bids (...)

And one more reference to government institutions: "Based on the internationally adopted COSO-ERM framework and the Basic Rules for Enterprise Internal Control issued by the Ministry of Finance of the PRC, China Securities Regulatory Commission, the National Audit Office, China Banking Regulatory Commission and China Insurance Regulatory Commission, as well as the actual operation conditions of the Company, we have established an effective risk management system."

We made those previous references, which are not related to environmental issues because they help to understand the approach that COSCO takes regarding environmental reporting: It continues reporting to the party/government. Here are some of the examples:

COSCO states that it complies with all the essential environmental laws in China, and, only at the very end, one international convention: "We value green production, and strictly abide by domestic and foreign laws and regulations related to environmental protection, including but not limited to the Environmental Protection Law of the People's Republic of China, the Energy Conservation Law of the People's Republic of China, and the Marine Environment Protection Law of the People's Republic of China, the Law of the People's Republic of China on the Prevention and Control of Environmental Pollution Caused by Solid Waste, the Law of the People's Republic of China on the Prevention and Control of Water Pollution, the Implementation Scheme of the Domestic Emission Control Areas for Atmospheric Pollution from Vessels and the International Convention for the Prevention of Pollution from Ships."

Most illustrative is even how COSCO presents its environmental measures not in the framework of the IMO's preliminary strategy (in reaction to the Paris Agreement), as all other companies do, but from the perspective of the Chinese government goals: "The 13th Five-year Plan to Save Energy and Cut Emissions issued by the State Council specifies the targets of energy conservation and emission reduction during the 13th five-year plan period, setting a goal to cut energy consumption by 15% by 2020 per ten thousand yuan of GDP from 2015, and to keep the total energy consumption within 5 billion tons of standard coal. Besides, domestic emissions of chemical oxygen demand, ammonia nitrogen, sulfur dioxide and nitrogen oxide should not exceed 20.01 million tons, 2.07 million tons, 15.8 million tons and 15.74 million tons, which decreased by 10%, 10%, 15%, and 15% respectively compared with 2015." COSCO will move as fast or slow on decarbonization, depending on how fast or slow the Chinese government moves. That is the beacon that guides COSCO's actions.

Although the report was brief, COSCO was able to describe at enough length some environmental issues: "Meanwhile, in order to understand energy data more accurately, we have formulated the Energy Review Procedures and the Management Procedures for Energy Benchmarks and Performance Parameters. Employees can identify energy factors that can be controlled or influenced in the production activities and business operations according to energy review methods and requirements of the Energy Review Procedures. In this way, we can assess energy impacts to determine the energy factors of priority control and discover the equipment, facilities, systems, and procedures that have serious impacts on energy consumption so as to achieve the goal of energy conservation and consumption reduction. Moreover, we collect and monitor fuel consumption, capacity and mileage on a daily basis and issue Weekly Report of Fuel Management, the Monthly Report of Fuel and Lubricant Oil Management and Monthly Best Fuel Consumption Per Nautical Miles and Fuel Rating for Each Ship to ensure the goal is implemented."

Here is another case clear explanation of what the company is doing: "In order to continuously optimize the route and improve the fleet's fuel efficiency and operating performance, and to implement the company's safety, on-time, cost reduction, and efficient operation goals, we rely on ship fuel budget management (pre-guided), operation monitoring (monitored during the event), and fuel cost analysis (post-analysis) to achieve closed-loop management of fleet operating costs. At the same time, we strengthened daily dynamic monitoring of ships, and tracked and reported ship stoppages, track detours (drifting midway), and medical rescue and other changes on a 24-hour basis, we increased the monitoring frequency of ships with unreasonably speeding, control the unreasonable peak value and high consumption points, promptly urge them back to a reasonable interval. Guided by the best operating practices for ships, we adhere to the combination of stable working conditions and optimal shipping routes, and strive to achieve safety, on-time and economic balance of ship operations."

And this other that is very much related to the previous one: "In order to ensure the operating efficiency, we have launched the IOP project to improve the nonstop rate of vessels and operating efficiency at the port, to best control vessels' waiting time and cut the turnaround time, so as to reduce oil consumption. Ports that have promoted IOP projects throughout the year 2019. The berthing arrangement and berthing operation efficiency are generally stable. Most of the port operations efficiency are improved, especially the Far East Tianjin, Dalian and Ningbo ports, overseas Port Klang. The waiting time has also decreased significantly in general, especially Shanghai and Ningbo Ports, our main terminals in the Far East, with a large year-on-year decrease."

One aspect we liked (very few companies do that) is how COSCO brings a recurring weather phenomenon into the picture to illustrate how the company is preparing itself: "Typhoon has brought great risks and challenges to ship navigation and safe production around terminals. The coastal areas of China are typhoon-prone areas, and it is very common for south-eastern coastal areas to be hit by typhoons every year (...) We have formulated the Instructions on Prevention of Typhoon and the Regulations on the Prevention of Flood and Typhoon and established prevention and emergency mechanisms. Each year, we conduct guidance on flood and typhoon prevention, make predictions of typhoons, strengthen safety inspections to ensure zero safety risks, and deploy tasks to clarify the responsibilities of all relevant personnel."

And then it comes the core of the environmental section: the decarbonization effort. The following table shows the main numbers for CO2 emissions (the report also includes NOx and SOx). Regrettably, the report only shows information for the last three years, not allowing to appreciate a medium-term trend up to now (the base year for the IMO is 2008). In other words, there is data, but not too much data. The reader is left with three images (2017-2019) rather than with a short-movie (more years).

COSCO wants us to appreciate a reduction of 5% in CO2 emissions intensity from 2018 to 2019 (the reduction from 14.9 to 14.18), a significant percentage, despite the reduction of total CO2 emissions was only 1% (the reduction from 16,014,898 to 15,931,758 CO2 tons). COSCO is not alone, however. We will see that other liners are confronting the same problem: they may reduce the CO2 intensity, but since their fleets are increasing (COSCO added ten large vessels in 2019), there is a natural trend to push an increase in fuel consumption. That is the quid of the matter: How to be a successful company (and COSCO is a successful company) whose demand/supply keeps increasing, but that, at the same time, it must achieve large intensity reductions in CO2 in order to reach significant reductions in absolute volumes of CO2?!

In brief, COSCO has produced a Sustainability Report that differs significantly from all the others of the largest liners in the world. COSCO is not reporting on ESG in the traditional way that we are used in Western countries. Its main recipient is the Chinese Communist Party, the core of the Chinese government. Although the report goes to the point, it is too brief. Length matters: if other companies are having thirty pages or so of environmental reporting, while COSCO has barely seven, it is evident that COSCO's report is not as encompassing as the others. However, it provides environmental numbers, not many, but it provides, and that matters a lot.

Gliese Foundation

October 28th, 2020