ATRenew ESG Report Shows Progress, But Still Work to Be Done

Smartphone recycler discloses more details about carbon emissions, steps to improve its governance in its second environmental, social and governance report

Key Takeaways:

• ATRenew’s greenhouse emissions increased substantially last year due to expansion of the scope of reviews
• Company’s second ESG report also disclosed more details about new activities to improve governance, such as anti-corruption checks
• Company also introduced the framework of the Task Force on Climate-related Financial Disclosure for the first time while developing a methodology to measure its contribution to reductions in greenhouse gas emissions

By Warren Yang

If there’s one thing clear about the latest self-report card from ATRenew Inc. (RERE.US) about its performance in environmental, social and governance (ESG) factors, it’s that the smartphone recycler means business about this emerging theme that is increasingly important to investors.

In its latest annual ESG report that’s more than 100 pages long, the company laid out its achievements related to each letter of the acronym in 2021. Just judging by the volume of the report, anyone can see ATRenew had a lot more to say this time than in the previous year.  

And ATRenew’s latest ESG report is not just lengthier but also suggests that the company actually stepped up efforts to get better across all three areas.

Investors are increasingly seeking companies that get ESG right, and for a good reason. Climate change, for one, is a real risk for businesses. For example, a natural disaster that can result from climate change can wipe out an operation overnight. Also, government efforts to reduce greenhouse gas emissions and promote social good are constantly changing, resulting in policies that affect companies, for example, by potentially raising costs to comply with new requirements. And of course, bad governance is always a problem.

So perhaps, it’s not coincidence that stocks of companies with high ESG ratings in China generate better returns than the overall market, as data from index provider MSCI shows. Companies with good ESG records can get higher valuations as they become increasingly sought by investors. 

Obviously, there are many factors outside ESG that can affect the value of a stock. ATRenew is still unprofitable despite posting strong revenue growth. And its stock has lost nearly half of its value this year to trade at a TTM price-to-sales (P/S) ratio of less than 0.4. By comparison, Carvana (CVNA) a U.S. car recycler that issues corporate governance reports, trades at a P/S of 0.15. Rent the Runway (RENT.US), a clothing recycler that plans to provide more detailed information related to ESG in its annual reports starting next year, trades at a P/S of 0.9.

In examining ATRenew’s ESG actions, the “E” can be a good place to start, given that it’s an increasingly critical element as China, like other countries around the world, gets serious about green development. China wants its carbon emissions to peak by 2030 and reach neutrality by 2060.

Also, particularly for ATRenew, a key appeal of its main business is that recycling phones is good for the environment by helping reduce electronic waste. So, a look at how the company is actually doing in terms of green growth can be a way of validating its business model.

Greenhouse emissions jump

One thing that stands out quickly in ATRenew’s ESG report for 2021 is that its greenhouse gas emissions increased substantially from 2020 – by more than fivefold to a total of more than 30,000 tons.

As bad as that looks, however, the sharp increase owes to a voluntary decision to expand the reviewing scope of energy consumption included in so-called Scope 3 greenhouse emissions, not because it suddenly became a power guzzler.

Under the Greenhouse Gas (GHG) Protocol, Scope 1 emissions are from resources that a company owns and controls, whereas Scope 2 covers greenhouse gas produced from purchased power. Emissions from everything else that indirectly result from a company’s operations are included in Scope 3.

That means a business can include as much or as little as it wants in Scope 3. For the 2020 report, ATRenew reported emissions from four sources in Scope 3 – downstream leased assets, business travels, and upstream and downstream transportation and distribution.

For the 2021 report, the company doubled the extent of Scope 3 emissions by adding capital goods, operational waste, employee commute and product disposal.

Also, it adopted the framework of the Task Force on Climate-related Financial Disclosure (TCFD) for the first time, while developing a methodology to measure its contribution to reductions in greenhouse gas emissions through the recycling and reusing of pre-owned phones.

Considering that all of these adjustments are voluntary, the underlying message is that ATRenew isn’t just making environmental disclosures just for the sake of showing how well it’s doing in the short term. Instead, it’s signaling to investors that it is committed to reducing greenhouse gas emissions over the longer term while providing high-quality data with all-sided exposure, even if more data isn’t always so attractive.

Outside the “E,” ATRenew also seems to be making strides in the “G” element, or governance, an area that is highly relevant to Chinese companies, given the country’s long list of corporate scandals. Good governance is important for a company like ATRenew that handles devices with volumes of private data that could be leaked, leading to reputational damage and also potential remedial government actions.

In the new ESG report, the company provides more granular details on its efforts to prevent mishaps than in the prior year. It says its risk management committee held meetings to discuss nearly two dozen issues last year. It also touted that it established 70 rectification and improvement plans after reviewing all accidents, while coming up with 40 matrixes for risk control. ATRenew also reported irregular anti-corruption checks several times, something it didn’t mention in 2020.

ESG reporting standards by and large are a work in progress, varying from jurisdiction to jurisdiction. In the U.S., where ATRenew is listed, the Securities and Exchange Commission (SEC) introduced guidance for companies to disclose climate change-related risks in 2010. But it doesn’t spell out any specific reporting requirements, allowing companies to get by with minimal disclosure.

But there are incentives for companies to improve their ESG game.

For starters, regulators, including the SEC, are expected to progressively tighten ESG disclosure requirements for listed companies, so it doesn’t hurt to get ready in advance. In the U.S., there is a pending proposal to implement specific disclosure requirements for climate-related risks.

That’s why playing the long game can pay off when it comes to ESG. At the end of the day, it’s all about doing the right things and, equally important, being up front with investors about what you’re doing. In this regard, the progress ATRenew demonstrated in its latest ESG report marks a step in the right direction.

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