Towards environmental, social and governance disclosure in China

Sustainability disclosure in China

In April this year, the Beijing Stock Exchange (BSE), Shenzhen Stock Exchange (SZSE) and Shanghai Stock Exchange (SSE) issued sustainability disclosure guidelines for listed companies for the first time. According to the Zhong Lun law firm, BSE disclosure is voluntary, possibly because it targets small and medium sized enterprises. However, SZSE introduced mandatory disclosure for companies listed on the SZSE 100 Index and on the ChiNext Index, and SSE did the same for the SSE 180 Index and the STAR 50 Index. These companies need to publish their sustainability reports for 2025 before 30 April 2026. This is the first time the principle of double materiality is introduced for sustainability reporting in China - meaning that companies not only need to report on how environmental, social and governance (ESG) factors affect their financial performance using financial metrics such as cash flow, revenue growth and profitability, they also have to report on how their activities, operations, and value chain impact external stakeholders, including society and the environment at large.

• Zhong Lun law firm

Shortly after, the Chinese government went further. In May 2024, China’s Ministry of Finance launched a public consultation on the "Corporate Sustainability Disclosure Standards – Basic Standards" (hereafter: Basic Standards), with the following text: ‘Sustainable development is an inevitable choice for the prosperity and progress of human society. With the global attention to environmental, social and governance (ESG) issues, strengthening corporate sustainable information disclosure has gradually become a general trend […]. Most requirements of international standards are applicable in China’.¹

According to the Ministry of Finance, China will have a gradual introduction of mandatory sustainability disclosure, starting with listed companies to non-listed, from large enterprises to medium and small enterprises, and from qualitative to quantitative requirements. The goal is that by 2027, China will have successively adopted the Basic Standards as well as Standards for Climate-related Disclosures; and by 2030, a unified national standard system for sustainability disclosure will be established.

On September 4, China’s Ministry of Finance appointed an Advisory Committee for Sustainability Disclosure Standards, including academics, and government official and business leaders like Peiyuan Guo, Chairman of Syn Tao Green Finance, who represents the United Nations Environment Programme Finance Initiative in China.

• Syn Tao Green Finance
• United Nations Environment Programme Finance Initiative

These developments point to a new trend: the convergence of Chinese non-financial sustainability disclosures with global standards.

Towards convergence with Europe

There are three noteworthy points in the document indicating convergence with global standards.

First, it describes China’s path to harmonization with the International Sustainability Standards Board (ISSB) created in 2021 at COP 26 in Glasgow by the International Financial Reporting Standards Foundation (IFRS). As an independent standard-setting body within the IFRS Foundation, the ISSB is backed up by the G7, the G20, the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions.

• International Sustainability Standards Board
• International Financial Reporting Standards Foundation

This is significant because IFRS standards allow businesses to communicate sustainability-related information across global capital markets, enabling companies to provide the same information globally – and critically, allowing investors to compare them and ask for improvements where needed.

IFRS S1 sets out the requirements for disclosing information about an entity’s sustainability-related risks and opportunities, effective from 1 January 2024, as follows:²

• The governance processes, controls and procedures the entity uses to monitor, manage and oversee sustainability-related risks and opportunities;
• The entity’s strategy for managing sustainability-related risks and opportunities;
• The processes the entity uses to identify, assess, prioritise and monitor sustainability-related risks and opportunities; and
• The entity’s performance in relation to sustainability-related risks and opportunities, including progress towards any targets the entity has set or is required to meet by law or regulation.

China’s Ministry of Finance provides the following introduction to the draft document for consultations: ‘The draft Basic Standards and S1 are generally connected in terms of information quality characteristics, disclosure elements and related disclosure requirements. This institutional arrangement is conducive to the formulation and implementation of specific standards, and is also conducive to the convergence of China's sustainable disclosure standards with international standards.’³

Secondly, if applied as the draft envisages, the Chinese Basic Standards will mandate Chinese companies to report on ESG along similar lines as European firms using the European Sustainability Reporting Standards (ESRS):

• European Sustainability Reporting Standards (ESRS)

Finally, both the Chinese Basic Standards and the European Sustainability Reporting Standards include double materiality, including impacts on social and environmental standards in its value chains:⁴

Active ownership

Active ownership refers to shareholders engaging with a company they have invested in to influence the company’s decisions. They can have bilateral meetings with the company, vote in their Annual General Meeting, or collaborate with other shareholders to make the company adopt a certain course of action. In the past decade, a lot of institutional investors have adopted active ownership policies, alone or supported by initiatives like the Principles for Responsible Investment’s Active Ownership 2.0. Many European investors have active ownership policies, such as LGIM, Robeco, and Norges Bank. This may also become a trend in China. In 2022, the Insurance Asset Management Association of China (IAMAC) published the ‘ESG Stewardship Initiative for the Chinese Insurance Asset Management Industry’, setting out a six-point initiative. The Hong Kong Monetary Authority ‘expects managers of Hong Kong equities and China active equities portfolios to comply with the Principles of Responsible Ownership promulgated by the Securities and Futures Commission on a “comply-or-explain’ basis.’⁵

• Principles for Responsible Investment’s Active Ownership 2.0.
• LGIM
• Robeco
• Norges Bank

… and why this is good news.

Many European investors with whom I have worked have expressed frustration at the lack of responsiveness of Chinese companies when they have asked for specific information related to sustainability. In addition, consumer associations, civil society organisations and many others have long advocated for more transparency on social and environmental standards by companies.

But a key point is that more transparency on ESG can also be advantageous for Chinese companies themselves.

From a business perspective, convergence on ESG disclosure is not only good for investors. Chinese companies that are ready to include ESG disclosure data on their reports will be first movers and will be able to comply with European norms such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, enhancing the competitiveness of Chinese exporters and avoiding the disruption of supply chains to global markets.

• Corporate Sustainability Reporting Directive
• Corporate Sustainability Due Diligence Directive

From a consumer perspective, these regulations will encourage companies to offer products that are made according to better standards, with less emissions and less pollution, in companies with decent working conditions, which have suppliers that respect their workers domestically and abroad. Chinese companies that are able to comply with global standards will be able to reap off the benefits in terms of market image and consumer preference.

Finally, in an age where trade protectionism is on the rise, convergence in global sustainability standards also sends an important signal to help counteract ‘friendshoring’ and narratives that fuel geopolitical tensions - which, if escalated, may have serious consequences and not only to companies and consumers.

• Friendshoring

References

¹ Source: Corporate Sustainability Disclosure Standards - Basic Standards (Draft for Comments). Appendix 2, Section I- Background. Based on an automatic translation by Google.
² IFRS - IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information
³Source: Corporate Sustainability Disclosure Standards—Basic Standards Appendix 1 (Draft for comments).
Read the summary in English
⁴ Sources: Corporate Sustainability Disclosure Standards—Basic Standards (Draft for comments) and ESRS Set 1 (efrag.org), ESRS Set 1 (efrag.org)
⁵ Hong Kong Monetary Authority - Active Ownership (hkma.gov.hk)

Authors

Claudia Melim-McLeod

Visiting Fellow, Centre for Business, Climate Change and Sustainability

Acknowledgements