Monday, June 17, 2024

On the cards: Nationwide ESG disclosure rules for Chinese companies by 2030

Must read

China’s Ministry of Finance released a draft guideline on corporate sustainability disclosures early last week, indicating that it will establish a unified nationwide standard for reporting by 2030. 

It is the latest signal to Chinese enterprises that they will have to get ready for stricter environmental, social and governance (ESG) disclosure rules, closely following an unveiling of draft guidelines in February this year by the country’s three main bourses on mandatory sustainability disclosures for listed issuers. 

The “Corporate Sustainability Disclosure – General Requirements (Exposure Draft)” released last Monday by the finance ministry is so far the highest-level document on sustainability disclosure in China. According to a notice on its website, the authorities are seeking public opinion on the draft guidelines and aim to raise the bar for sustainability reporting.

Market watchers believe that the latest top-down directives from Beijing, usually the most important force driving corporate sustainable development in the private sector and the backbone of China’s 126-trillion-yuan (US$17.7 trillion) economy, marks a new dawn. It could also signal that guidelines by the International Sustainability Standards Board (ISSB) are ready to be applied in China’s mainland market. 

ISSB standards released in June 2023 are rapidly gaining traction across the world and are already applied in markets such as in Singapore. 

Guo Peiyuan, chairman of independent consultancy Syntao Green Finance, described the set of new guidelines as a “significant step” as it draws up a more comprehensive framework for sustainability disclosure that can be applied nationwide. 

The draft draws extensively from ISSB standards, ensuring consistency in information quality and disclosure, he observed. At the same time, it advocates for a phased approach focusing first on listed companies and larger enterprises and seeks to move from voluntary to mandatory disclosure with preliminary ESG rules in place by 2027. 

“This initiative underscores China’s commitment to enhancing corporate transparency and aligning with global sustainability practices,” he said. 

Closing data gaps and fighting greenwash

Commenting on the February guidelines issued by the Shanghai, Shenzhen and Beijing stock exchanges, Guo, who tracks ESG and sustainable finance trends in the Chinese market, highlighted how the draft guidelines already urge Chinese listed companies ranked in the top five per cent according to market valuation to start aligning themselves to the new national guidelines in the current financial year. “We can expect to very quickly see some progress in disclosures by Chinese companies,” he said. 

Guo points out that the bourses also take a cautious approach to prevent companies from treating sustainability reporting as a box-ticking exercise. The guidelines place a strong emphasis on urging enterprises to focus on the quality of their ESG reports, he said. 

According to the joint guidelines, more than 400 companies, including those in key stock indexes, are mandated to publish sustainability reports by 2026. The corporations together account for more than half of the bourses’ combined market value. Global media has framed the development as an attempt by Beijing to keep up with European rules on ESG to bolster its economy. 

The latest research shows that China’s big listed companies have underperformed their peers in Asia Pacific when it comes to the credibility of their environmental targets and disclosure of greenhouse gas emissions attributed to supply chain partners. 

A spokesperson for Greenpeace East Asia said that unified disclosure standards will be a game changer for China. Yuan Yuan, the environment advocacy group’s Beijing-based climate and energy campaigner, said that transparency is central to sustainability leadership, but insights on what companies are doing to respond to climate change and reduce environmental impact are often hard to come by. 

“Chinese financial institutions frequently claim that a lack of standards for corporate disclosure and poor data visibility hinder their ability to assess climate risk. This also becomes a hurdle for them to develop transition plans,” she said. “As corporate disclosure improves, Chinese financial institutions will be one of the largest beneficiaries.” 

Yuan also called for asset managers to improve their own disclosures of climate-related risks in how they invest in and finance Chinese corporations, adding that there needs to be more clarity behind “net-zero funds” offered by these financial representatives, to ensure that there is no greenwashing of “high-emissions assets or companies”. 

In 2022, Greenpeace East Asia released an analysis of China’s 15 leading asset managers and 37 related mutual funds. Low willingness to disclose the climate impact of assets under management was a consistent trend – 11 of the 15 firms had not put forward any emissions information.

Experts hope that the new rules will drive investments into traditionally high-emitting sectors like steel and agriculture, funding their transition to cleaner production processes. China is the world’s largest emitter of greenhouse gasses. 

Latest article