State-owned companies throughout the world face the paradox of fulfilling their social mission, creating revenue and leading the ecological transition. How can they deal with this and win across all three? Research from Prof. Qinqin Zheng, School of Management Fudan University, focuses on the case of the Shanghai Metro and the lessons it can provide for public sector firms aiming for people, planet, and profit.

The Green Light to Sustainability Innovation: How the Shanghai Metro ran for low-carbon by Tom Gamble. Related research: Sustainability-Oriented Low-Carbon Innovation in SOEs: A Case Study of Shanghai Metro. Guangyao Yu, Qinqin Zheng, Xueying Lin, and Kaiqi Yuan. MDPI Sustainability, Sustainability 2023, 15(23), 16216; https://doi.org/10.3390/su152316216.

The Difficulty in Being a Role Model

Climate change and the pressing need for governments, the public and private sectors to tackle it has become one of the major issues of our times. International legislation, the UN SDGs and commitments made through the COP series of conferences have seen economies adopting various measures to decarbonise. In the forefront, state-owned enterprises – or SOEs – across the globe are expected to pave the way and act as green pioneers for innovation among their private-sector counterparts for carbon footprint reduction.

However, by their very nature and purpose, SOEs find themselves in something of a challenging situation in this new context – not to say a paradox. This is born from their inherent mission to maintain a diversity of value for their stakeholders: social utility through their goods or services to the public, financial performance, and environmental benefits. In addition, being answerable to the state, the pressure is on SOEs to implement national strategies and policies with expectations to take on an increasing role in protecting the environment through measures such as pollution control. Moreover, as players in the market and naturally supporters of national development, SOEs need to target financial returns and create profit and increased value. As such, public sector companies face a paradox of competition goals – social, environmental, and economic.     

Under such pressure, and combined with aggressive legislation on low-carbon emissions, SOEs in some countries have seen their workforces cut, production output reduced, and high-carbon emitting yet high-profit activities sold off. We could suppose that government policies targeting carbon reduction add to the incentive to push for green solutions, though research has produced mixed results. While some SOEs are indeed influenced – with more available access to state loans for low-carbon initiatives – others have found legislation to have little or even negative results on SOEs’ performance caused by the high costs of replacing or repairing equipment and infrastructure, inadequate investment, and low technical efficiency.

But all is not doom and gloom. In fact, such constraints and pressures have generally pushed SOEs to adopt an innovative approach to sustainability. Indeed, in many instances, it is crucial for them to adopt innovative strategies to deal with the paradox they face – that is, generate profit, provide social utility and benefit, and reduce carbon emissions.

And this provides the setting for new research carried out by Prof. Qinqin Zheng of School of Management Fudan University in Shanghai, one of the foremost academic institutions in Asia. She and her fellow researchers use the context of China and the specific case of the award-winning Shanghai Metro to analyse how SOEs successfully launch sustainability-oriented innovation and – more specifically – sustainability-oriented low-carbon innovation (SLI) initiatives.

Next Stop: A green giant

In the last twenty years, and with an average GDP growth rate of 10%, China has become the second-largest economic power in the world behind the USA. Such economic expansion has come with a price, China topping the list of global carbon emitters as way back as 2009 and experiencing negative environmental impacts. However, China is also among the leading countries worldwide to implement green initiatives and innovations (this correspondent witnessed the progress at first hand during a visit to Shanghai in late 2024), and is not only active in all global sustainability initiatives – for example, the UN SDGs, the Paris Agreement, or the Convention on Biological Diversity – but has gone further than most in proactive measures on greenhouse gas emissions in line with its 2030 Agenda for Sustainable Development (Nestorovic, Cédomir, Geopolitical Perspectives on China’s Sustainability Initiatives, book chapter, 2025).

Indeed, China’s “dual carbon” goals that set the peak for carbon emissions by 2030, coupled with a goal to reach carbon neutrality by 2060, have put enormous pressure on state-owned enterprises to walk the talk and set the example as pioneers for the private sector to follow.

Enter the Shanghai Metro whose record in coping with the paradox of its mission versus sustainability goals may provide useful lessons for others across the globe to follow.  A typical Chinese state-owned enterprise, the firm first began operating in 1993. Now the owner of the most extensive network in the world – a staggering 20 metro lines, with 508 stations covering 831 km – the Shanghai Metro transports over 10 million users per day, roughly 70% of the total public transport system in the city. Responding to the state-encouraged sustainability goals, the Shanghai Metro was the first to introduce low-carbon initiatives in 2006.

However, it hasn’t been a totally smooth ride for the SOE. Faced with its multiple social, financial and operational goals – sometimes vaguely defined – it has had to navigate through continually evolving environmental protection policies and legislation, as well as constraints on low-carbon development. Moreover, its work isn’t yet over, notably regarding the need to reduce its consumption of electricity which counts for a staggering 2.5 billion kWh annually. On the other hand, its commitment to going green has seen several measures to control and reduce emissions and is something of a show case in terms of innovations that effectively balance its economic, social and environmental obligations.

A Red Light Can Turn Green

As mentioned, constraints can in fact provide a hidden gift, prompting professionals – and corporates – to create solutions and, in the case of state-owned companies, incite them to play an essential role in encouraging sustainability-oriented innovation.

Its societal and financial performance missions aside, increasingly strict environmental regulations on carbon regulation over the past twenty years have set the Shanghai Metro tough targets in energy saving and carbon reduction. Indeed, two successive five-year plans since 2006 have led to energy reductions of 20 and 17% resulting in a lowering of carbon emissions of 18%. Recent developments have included the setting up of a system for controlling energy intensity and consumption, energy indexes and renewed emphasis on carbon reduction.

Given the massive amount of new tracks and stations built, a further constraint on the Metro has been the challenge of combining infrastructure growth – and subsequent large-scale operations – with a parallel objective to reduce carbon emissions. This has triggered emphasis away from construction projects to operating efficiency with the overarching target to reduce the energy consumption of the underground system. Moreover, at the same time, demand for low-carbon transport systems has rocketed, with expectations of quality of service remaining high.

And finally, going deeper into the financial constraints, while previously the renewal and modernizing of energy-carbon intensive equipment – air conditioning, lighting and electric engines – engendered hefty reductions in emissions, the potential for energy savings had gradually shrunk leading to increasingly smaller marginal returns on these investments. The financial pressure hasn’t gone away – especially with the Chinese economy going through a period of lower overall growth – with the government reducing its financial support and revenue from ticket sales down. The answer has been to look for new revenue streams to ensure growth and prevent long-term decline. This is where innovation comes in.   

Innovation Is….

Some of us may have participated in brainstorming and conceptualizing new products or services in our professional lives. However, innovation goes beyond that to encompass a multi-stage process where organisations transform new ideas into enhanced processes, products and services, or business models. These may have various strategic aims that bring particular financial, social and environmental benefits. Moreover, setting up and organising innovation requires large amounts of capital and tech resources and its impact depends on how these resources are managed and made to work together throughout the various departments and teams.

As seen, under pressure from a number of constraints, state-owned firms are forced to innovate sustainability-oriented innovation (SOI) which typically follows a three-stage process of sensing and ideation, configuration, and transformation. SOI emphasises the notion that innovation should not only ensure financial advantage for companies, but also provide environmental and social benefit in line with John Elkington’s Triple Bottom Line of people, planet, and profit. In the specific context of the Shanghai Metro case, it’s more relevant to focus on sustainability-oriented low-carbon innovation (SLI) rather than the broader concept of SOI to address the challenge of benefiting the TBL dimension.

The first phase in innovation – that of sensing and ideation – involves gathering information, analysing it, interpreting it, giving meaning and conceptualising and is accompanied by the generation of ideas. It is important here to first understand the external context, changes, new technologies, threats and opportunities that will impact the company before taking into account the internal environment, reaching consensus and agreeing on potential solutions before moving on to taking action. Not least, innovation is change – and subsequently requires a shift in values and behaviours towards sustainability from the out start. The Shanghai Metro acted on it  by launching a “Low Carbon at Work” project for its employees that promotes awareness, using ecogestures in daily work, and setting up a reward and sanction system to change energy consumption behaviour.   

The firm is active in gaining and interpreting institutional information including five-year plans, government statements and industrial policies to assist in understanding and decision-making. And in this sense, it transitions from passive to active mode, interpreting and transforming government guidelines into a license for rapid innovation.

The second stage of innovation is configuration. It is here that the various internal players – directors, project managers and team leaders – need to set up, manage and coordinate the organisation’s resources and capabilities to obtain value from the initial ideas. Practically, this amounts to a 4-pronged approach of acquiring and leveraging resources, creating new departments and structures, research and experimental development, and cooperation and learning.   

And lastly, transformation calls for the implementation and development of the innovation into practice, all the while aiming for continuous a review and renewal to maintain a competitive edge. In essence, transformation refers to applying a range of new techniques and management practices to bring an innovation to market. In the Shanghai Metro case, this has manifested itself in the establishment of a low-carbon management system, applying low carbon technologies, developing a low-carbon business, and building low-carbon collaboration networks.

Ticket to Ride

Given the context, constraints and innovation process, Shanghai Metro’s track record in sustainability-oriented innovation is impressive. Linked to its vision for the future to provide a safe, efficient, and high-quality low-carbon commuting service while building a “green metro”, notable accomplishments are the improvement of the energy monitoring system, a four-stage road map for low-carbon practices, and the setting up of a Rail Transit Technologies R&D Center – facilitating cooperation between industry, universities and companies – that has undertaken more than 600 R&D projects and obtained over 100 patents in the last ten years.

In addition, Shanghai Metro uses something called the Sunshine Procurement Platform to work with environmentally-friendly suppliers and has signed a long-term partnership with Longi and Huawei to provide low-cost, efficient and customised components for solar panel construction, enabling Shanghai Metro to achieve the industry’s first “Metro + Photovoltaic” initiative.

Another innovation relates to construction of new underground stations in the guise of award-winning (International Tunnelling Association and LEED Silver certification) “non-excavation” techniques involving the recycling of waste for road repair, backfilling and foundations which has resulted in converting over 100,000 cubic meters of waste materials into valuable, on-site resources, reducing solid waste pollution, and minimizing disruption to the transportation system.

In terms of developing low-carbon business, Shanghai Metro set up the subsidiary New Energy Co., Ltd whose main business revolves around energy conservation consulting and power development. Its achievements include the reduction of 37,795.32 tons of carbon dioxide emission through photovoltaic systems and the generation of 58m Yuan in revenues that are ploughed back into the Shanghai Metro to finance its green revolution. Going further, the firm has expanded its consulting activities to cover low-carbon certification and green tech services.

Customer awareness also plays a part in the big picture of sustainability. As a fully-automated Smart Metro, Shanghai Metro offers incentives for citizens to use the underground system, promotes green and eco-friendly lifestyles, and offers QR-code promotional campaigns to adopt them.

The Journey Ahead

State-owned companies and governments worldwide can draw several key lessons from this case. Clearly, encouraging sustainability-oriented low-carbon innovation activities – acquiring low-carbon resources, building low-carbon management systems, investing in low-carbon technologies, cooperating with low-carbon networks, and learning from others are important factors. SOEs would be wise to keep an eye on shifts in technology and changes in low-carbon developments. Sustainability in general, and sustainable innovation, need to be at the core of the SOE’s mission and endorsed by senior management and state stakeholders. Government frameworks for their SOEs also need to be more supportive of sustainability and allow for dedicated funding for SOEs to achieve their green goals. They could also help by setting up trading platforms for low-carbon tech to stimulate R&D and the commercialization of it.

All in all, far from shying away from the tensions and constraints generated by the paradox of a state-owned firm’s social and financial requisites and sustainability goals, these should be embraced to trigger innovation and solutions. For the invention, development and roll out of new ideas is a source of continuing vitality for both firms, the planet, and positive change in society.

Useful links:

• Read a related article: Sustainability and innovation
• Visit the School of Management Fudan University website
• Apply for the Fudan-MIT Sloan IMBA.

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