By Arendse Huld, Associate, Editorial and Research at China Briefing

ESG reporting in China is on the rise. Policymakers are strengthening mandatory reporting regulations as they seek to increase oversight over companies’ activity and ensure they fulfill their environmental and social responsibilities. 2021 saw the release of several new measures requiring more companies to disclose environmental information.

The scope of mandatory ESG reporting is still relatively limited, and is reserved for companies in heavily-polluting industries and a certain subset of public companies. However, there is also a positive trend of voluntary ESG reporting in the country, as investors and other stakeholders place a higher degree of importance on social and environmental responsibility.

Therefore, companies operating in China should be aware of the policies and regulations mandating ESG reporting and the accepted standards for reporting.

Current ESG Policies and Regulations

ESG reporting was first introduced in 2016, when seven authorities, including the People’s Bank of China (PBOC) and the China Securities Regulatory Commission (CSRC), jointly issued the “Guiding Opinions on Building a Green Finance System.” The guidelines laid the foundation for a mandatory environmental information disclosure system for publicly-listed companies.

Other major legislation and regulations governing environmental and governance reporting include:

·        Clean Production Audit Measures (2016): Requires certain companies to undergo clean production audits to diagnose the cause of high energy, material consumption, and heavy pollution. The policy aims to reduce energy and material use, and discharge toxic and hazardous materials.

·        Listed Company Governance Code (revised 2018): Requires all listed companies to disclose ESG information.

·        Format Standards for Annual Reports and Semi-Annual Reports of Listed Companies (revised 2021): Highlights environmental protection and social responsibility of listed companies by separating relevant ESG and CSR provisions into independent chapters.

·        Measures for the Administration of Information Disclosure of Listed Companies (2021): Requires listed companies to disclose governance information.

·        Measures for the Administration of Legal Disclosure of Enterprise Environmental Information (2022) (“Environmental Disclosure Measures”): Requires major dischargers of pollutants and listed companies with a history of environmental violations to disclose environmental information.

Although non-financial disclosures are still mostly voluntary, businesses are finding mounting demand from customers and investors to disclose their business’ impact as sustainability concerns grow. Furthermore, China’s two key carbon targets - reaching peak carbon emission by 2030 and carbon neutrality by 2060, are likely to spur more ESG reporting and other sustainability and social development goals.

Scope of ESG Regulations

There is currently no comprehensive legislation covering the ESG responsibilities of all companies in China. The scope of mandatory ESG reporting also varies for different companies, with the strictest requirements saved for major polluters. Thus far, some level of mandatory ESG disclosure is required for the following companies:

-         Public companies and their subsidiaries

-         Bond-issuing companies and their subsidiaries

-         Major dischargers of pollutants and their subsidiaries, as declared by environmental regulators

-         Companies that are required to undergo mandatory clean production audits under the “Clean Production Audit Measures” (companies that discharge pollutants above national or local standards, companies that exceed prescribed energy consumption limits, and companies that use or discharge toxic and harmful raw materials)

Although the “Listed Company Governance Code” stipulates that all listed companies must submit ESG reports, it doesn’t clarify what information must be disclosed or the reporting standards. Therefore, there are no comprehensive requirements for all public companies to disclose environmental information.

However, the “Environmental Disclosure Measures” and the “Format Standards for Annual Reports and Semi-Annual Reports of Listed Companies” require listed companies to disclose whether they have been penalized for environmental violations the previous year in their annual reports. Meanwhile, the “Environmental Disclosure Measures” provide more detailed requirements for information disclosure, mandating public companies and bond-issuing companies that have previously violated environmental laws and regulations to disclose environmental information.

Despite not requiring all companies to submit ESG reports, the “Environmental Disclosure Measures” still encourage companies to voluntarily disclose any relevant information that could be conducive to improving environmental protection and controlling and preventing pollution. It also encourages companies to report measures taken to reduce carbon emissions during the reporting period.

Requirements for ESG Reporting

Annual Environmental Reports

Under the “Environmental Disclosure Measures,” companies are required to submit an annual “Legal Disclosure Report of Environmental Information.” Additionally, companies may sometimes be required to file ad hoc reports throughout the year. These are usually used to disclose updated information, such as changes to company details, administrative licenses, updates on administrative penalties, and changes to legal representatives.

The annual report must contain details on environmental management (such as ecological and environmental administrative licenses, tax, pollution liability insurance, and environmental protection credit evaluation); information on the production, management, and discharge of pollutants; ecological and environmental emergency response mechanisms; prior environmental violations; and other information.

Publicly-listed companies and bond-issuing companies must also disclose the annual financing format, amount, and investment targets, as well as information on the climate change impact and ecological and environmental protection of the projects they have financed.

Annual Governance Reports

The “Measures for the Administration of Information Disclosure of Listed Companies” require public companies to disclose information on corporate governance in their annual and semi-annual reports.

The annual reports must disclose a broad scope of information, including (but not limited to):

-         The shareholdings of the company’s top ten shareholders

-         Shareholders holding more than 5 percent of the shares

-         Controlling shareholders

-         Positions of directors, supervisors, and senior management personnel

-         Changes in shareholding and annual remuneration

-         Board report

-         Management discussion and analysis

-         Major events during the reporting period and their impact on the company

-         Full text of financial accounting reports and audit reports

Terminology and Data Standardization for Information Disclosure

The relevant data and expressions that companies use in their environmental disclosure reports must comply with the “Format Guidelines for Legal Disclosure of Enterprise Environmental Information,” which took effect on February 8, 2022.

However, for non-mandatory ESG disclosure, the “Global Reporting Initiative (GRI) Sustainability Reporting Standard” has become increasingly popular in China. The Reporting Standard is the most commonly used and globally recognized reporting style, modeled after the generally accepted accounting principles (GAAP). Large companies, such as China Mobile and BMW Brilliance Automotive Ltd, are now using the simplified Chinese translation of the GRI standards released in 2018.

Legal Liabilities and Penalties

Companies that breach the requirements outlined in the “Environmental Disclosure Measures” by failing to disclose, or disclosing incorrect or inaccurate information, could be liable for penalties of RMB 10,000 to RMB 100,000. Penalties issued for violating environmental information disclosure requirements will also be included in the company’s credit record.

Companies that engage in any of the following behavior may be liable for fines of up to RMB 50,000:

-         Failing to meet the guideline requirements for disclosing environmental information

-         Disclosing environmental information after the prescribed time limit

-         Failing to upload environmental information to the designated disclosure system

Impact of ESG Policies

ESG reporting is becoming increasingly widespread in China, even among companies that are not required by law to disclose ESG information. Voluntary ESG reporting has increased significantly in China over the past decade. According to J.P. Morgan, 86% of companies listed on the CSI 300 Index – the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges – produced ESG reports in 2020, up from just 49% in 2010, despite not being required to do so.

Moreover, in the first three quarters of 2021, the number of ESG public funds surged in China, with 48 new ESG products being released, close to the total of the previous five years. As of September 2021, the total assets under management of ESG public funds jumped to nearly RMB 250 billion - almost double the size of the same period of the year before, according to a white paper released by Caixin.

However, Chinese companies still fall behind organizations in many other regions, which has turned some environmentally-conscious investors away from China. According to MSCI, the majority of Chinese companies scored significantly lower than the global average for ESG reporting, despite seeing improvements over the last two years.

There is a growing demand from investors, consumers, and other stakeholders for companies to produce ESG reports, not to mention the possibility of stricter rules in the future as China seeks to meet its environmental and sustainability commitments. Therefore, forward-looking businesses should be ready to adopt and communicate sustainability strategies to stakeholders and the government to keep abreast of developments and project a positive image.

Source: Ticker 2022 Summer