China has offered guidance for companies as they strive to craft ESG initiatives that will assess risk for investors while leaning heavily toward government priorities
China’s recently implemented guidance for enterprise disclosure standards on environmental, social, and governance (ESG) initiatives aims to establish a framework that officials say is more conducive to assessing risk and performance indicators for investors steeped in the domestic market. The guidance draws on international developments in ESG priorities, but leans heavily towards priorities established by the Chinese government, such as the drive for common prosperity and social stability.
While a growing body of regulatory guidance for ESG reporting has been emerging in China, developments have been fragmented and some of the guidelines remain voluntary, leading to skepticism over uniform adoption. At the same time, ESG-related enforcement remains a priority for regulators.
Voluntary disclosure guidelines published in June by the China Enterprise Reform and Development Society (CERDS), a think-tank overseen by the state-owned Assets Supervision & Administration Commission, aim to establish uniform disclosure practices that are uniquely tailored to China-focused ESG priorities.
Developed in the context of laws and regulatory interpretation of policies established by the Peoples Republic of China, the guidance for enterprise ESG disclosure is meant to establish disclosure principles with a heavier emphasis on domestic ESG priorities such as the long-term initiative for “common prosperity”.
Chinese regulators have promoted the guidance as a working solution to standardized corporate ESG disclosure reporting in China that is more relevant to investors in the domestic market than standards based off practices in the United States of the European Union. Of note, the guidance considers compliance with Chinese ESG regulations, along with data security and cybersecurity laws, as an integral part of governance-related disclosure. The inclusion of disclosure obligations related to regulatory compliance is a departure from international practice.
The recent guidance is comprised of three tiers of indicators with corresponding metrics to each tier. Most of the indicators align with ESG issues highlighted in international disclosure standards such as climate change and labor rights. Similar to disclosure requirements implemented in other jurisdictions, the guidance sets out standards for the disclosure of quantitative data related to environmental sustainability such as greenhouse gas emissions and wastewater pollutants.
Presently, compliance with the guidance is voluntary and it is uncertain how widely it will be adopted by Chinese businesses; however, the recent guidance adds to growing mandatory ESG requirements that are applicable to organizations operating in China.
Chinese regulators have promoted the guidance as a solution to standardized corporate ESG disclosure reporting that is more relevant to Chinese investors than standards based off practices in the West.
Since 2018, listed companies in China have been encouraged to disclose ESG information under the Listed Company Governance Code. China’s central bank, the People’s Bank of China, issued a pilot guideline to financial institutions in 2020 on environmental information disclosure.
In February, new measures were implemented to impose annual ESG reporting requirements on businesses that were considered to be major emitters of pollutants and publicly traded companies that had been penalized for environmental violations within the past 12 months.
In practice, a growing number of companies are issuing ESG reports, and the trend is expected to continue. A recent report published by the World Economic Forum and PwC China found that as of mid-2020, there were 1,021 companies listed on the Shanghai and Shenzhen stock exchanges that voluntarily had published annual ESG reports, compared with 371 companies in 2009.
ESG-related enforcement activity has remained a priority for regulators in China as well, especially in cases in which misconduct could pose a risk to social stability. Central-level authorities, including the Supreme People’s Court and the National Development & Reform Commission, issued mandatory guidance on working conditions and overtime following a spate of investigations and fines against e-commerce and technology companies for labor violations that elicited public outrage on social media.
The national goal to transition to a lower-emissions economy in China has further compelled regulators to step up their enforcement actions against environmental violations. A previous revision of environmental protection laws in 2015 granted authorities more leeway to crackdown on violations, resulting in year-on-year increases in total fines issued.
While there has been some speculation that the Chinese government may ease up on environmental enforcement to facilitate economic recovery, environmental compliance risk remains. Earlier this year, the Ministry of Ecology & Environment issued plans to establish environmental law enforcement teams to strengthen inspection. The formation of the teams is part of a broader five-year plan to improve efficiency of enforcement activities by 2025.
ESG reporting by Chinese companies is in its early stages, and regulatory requirements are fragmented across industries and government agencies. Recently issued voluntary guidance on ESG disclosure standards from CERDS could form the basis for a China-focused reporting regime.
And while these disclosure standards share some similarities with ESG reporting regulations in other jurisdictions, the guidance from CERDs places heavy emphasis on compliance with Chinese law, and as such, reporting requirements are likely to vary substantially from US or EU frameworks.