RERE.US
ATRenew releases its fourth ESG report

The recycling specialist showcased a continued reduction in greenhouse gas emissions intensity and its progress in other corporate responsibility efforts in its fourth annual ESG report

Key Takeaways:

  • ATRenew’s greenhouse gas emission intensity continued to decline in 2023, as it also took steps to further reduce other forms of pollution from its operations
  • The company’s latest ESG report shows it’s proactively boosting its disclosures as future mandatory requirements look increasingly likely

  

By Warren Yang

ATRenew Inc. (RERE.US) is staying ahead of the curve in an environmental, social and governance (ESG) game that’s gaining global traction, though not without controversies. The company has good reason to showcase its “E” credentials due to its role as a recycling specialist, but its latest ESG reportalso showed it’s paying attention to the “S,” not to mention the “G” element where deficiencies are a frequent source of shortcomings for Chinese companies.

While at it, ATRenew is continuing to grow its business at a respectable rate, laying the foundation for it to report non-GAAP net profits twice since 2022, showcasing how a company can be a responsible corporate citizen while also making money.

Among other things, ATRenew’s latest ESG report released last week included a continued reduction in the intensity of its greenhouse gas emissions. Such efforts dovetail with China’s stated goals of reaching peak carbon emissions by 2030 and going carbon neutral by 2060. Syncing with such government goals not only makes good sense from an ESG perspective in this case, but is also critical to doing successful business in China due to the importance of good government relations.

ATRenew has built its business around recycling smartphones and an increasing number of other goods, including not only other electronics but also unrelated product areas like luxury bags, watches and gold.

In its latest ESG report, the company detailed its creation of a new process to manage climate risks based on recommendations of the Task Force on Climate-related Financial Disclosures (TCFD), a global body that informs investors on what companies are doing to mitigate climate change. It also conducted analysis of the impact of the global warming scenarios created by the Network for Greening the Financial System, another global body of more than 100 central banks and financial regulators. Such steps marked the company’s first time to systemically identify climate risks and opportunities, and also highlighted its engagement on environmental issues as part of the global community.

While making progress in tackling ESG issues, ATRenew also boosted its total net revenue more than 30% to about 13 billion yuan ($1.8 billion) last year from 2022 and its non-GAAP   operating profit jumped from 7 million yuan in 2022 to 252 million yuan in 2023.

ATRenew’s latest annual ESG self-report card came as the U.S. Securities and Exchange Commission (SEC) is trying to – though with some difficulty – introduce specific requirements for climate-risk disclosure. In early March, the SEC finalized rules that require U.S.-listed companies like ATRenew to disclose climate-related information, which was widely considered a landmark step that followed two years of public debate. But less than a month later, the SEC delayed implementation of the rules after facing a flurry of petitions for a review, even though the final version was already watered down from its original proposal.

In the absence of such unified standards, U.S.-listed companies are currently required to provide ESG-related factors that are material to them, though they don’t need to issue standalone reports like ATRenew’s. Disclosures on ESG matters in some form has become standard practice for many larger companies. But a significant number of smaller ones have yet to follow suit. According to an annual survey by WSJ Pro, about 37% of companies have yet to publicize their sustainability and ESG information, and 20% currently have no plans to start doing so.

Going deeper

Regardless of external requirements, ATRenew is continuing to deepen its ESG reporting, perhaps anticipating a time in the not-too-distant future when unified standards may finally come out.

“At ATRenew, we prioritize ESG risk as a key component of our corporate risk evaluation system,” the company said in its report. “We dynamically manage ESG factors according to our business guidelines, aiming to mitigate potential ESG risks and enhance our ESG performance.”

While ATRenew’s report details efforts across all three ESG areas, getting the “E” right is relatively critical for the company, given its business model that boils down to making the Earth greener by reducing waste through recycling.

The intensity of the company’s greenhouse gas emissions – or the amount of greenhouse gas produced for every 1 million yuan in revenue generated – decreased about 6.7% in 2023 year-on-year, although the pace slowed from a 19% reduction the prior year.

The company’s carbon dioxide emissions come entirely from purchased electricity, which is classified as Scope 2 under the Greenhouse Gas (GHG) Protocol. Additionally, and significantly, it continued to disclose its Scope 3 emissions that indirectly occur across all its upstream and downstream activities, such as use of transportation for purposes like distribution and employee commuting.

Such data is complicated and tedious to assemble as it involves tracking and estimating emissions from a wide variety of sources. The SEC included mandatory disclosure of Scope 3 emissions in its original proposal for climate disclosure requirements two years ago. But many companies balked at the idea, with the result the SEC dropped that element from its final rules.

ATRenew has actually done more rather than less when it comes to disclosing such data. In the 2021 report, it significantly expanded its definition of Scope 3 emissions by adding capital goods, operational waste, employee commuting and product disposal to its earlier definition that consisted of downstream leased assets, business travel, and upstream and downstream transportation and distribution. In 2023, ATRenew excluded operational waste from Scope 3 due to its small proportion.

Among its other environmental initiatives last year, ATRenew expanded its recycling of packaging materials, while working with its recycling partners to dispose of electronic waste in environmentally friendly ways to reduce pollution from such sources by nearly 18 tons. It also required suppliers of its products for recycling to reuse metal materials during dismantling.

Outside the “E” area, the company also reported progress on various “S” and “G” elements. Those included gender diversity, with the share of female senior managers rising to 28% by the end of 2023 from about 23% a year earlier. Two of the company’s eight board members are also female, showing it is making progress in gender diversity but still has some distance to achieve full parity.

The company’s efforts aren’t just internal boasting. Morningstar Sustainalytics, an ESG rating firm, puts ATRenew in the “low risk” category, giving it the fourth-best score among 85 companies in the online and direct marketing retail sector.

Despite the ESG progress and its improving profitability, ATRenew’s shares look heavily depressed. Even after a rally that has seen the stock more than double from a trough in early February, the shares are still down more than 80% from their IPO price in 2021 and trade at a price-to-sales (P/S) ratio of just 0.3. Still, ATRenew certainly seems to be in a strong position to benefit from the current regulatory climate that favors companies on sustainable growth trajectories.

The company’s long-only sustainability and impact investors include Fideuram Asset Management and Schroders Investment Management, holding 2 million and 1 million of its ADSs, respectively, according to a filing at the end of March. That seems to show its ESG efforts are perceived as having upside potential for the company and its stock over the long run.

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