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SCMP: China aims to establish a national standard for corporate sustainability disclosure by 2030 as part of efforts to improve economic sustainability, tackle climate change and catch up with its global peers when it comes to environmental, social and governance (ESG) reporting.
The Ministry of Finance has started seeking public opinion on a set of draft guidelines that aims to monitor such disclosures by companies and push ESG development in China, according to a notice on its website.

“At present, most disclosures of sustainable information by Chinese enterprises are voluntary, and they rely on inconsistent standards, which is not conducive to the verification, rating and supervision process, and for the supporting role sustainability disclosures play in investment decision-making and economic development,” the ministry wrote in a statement published on Monday that explains the background to the draft guidelines.

According to the proposal, China will introduce basic regulations for corporate sustainability disclosure and climate-related disclosure by 2027, with the aim of establishing a nationwide standard by 2030.
The release of the draft measures during the International Organization of Securities Commissions’ annual meeting taking place in Greece this week sends a strong message to global investors that China is committed to aligning with international reporting standards and taking ESG issues seriously, according to Bon Cheung, assistant manager of Civic Exchange, a Hong Kong public policy think tank.

In February, the Beijing, Shanghai and Shenzhen stock exchanges published their first climate and sustainability disclosure guidelines. These mandate that some 400 listed companies, which account for more than half of the market value of China’s bourses, must publish sustainability reports covering their emissions and decarbonisation plans by 2026.
The companies must report on the impact their activities have on the environment as well as the risks and effects of environmental factors on their business, the so-called double materiality. They are also encouraged to disclose the indirect carbon emissions in their value chains, known as scope 3 emissions.

Although aimed at listed companies, these guidelines could have a knock-on effect on the country’s privately owned companies as well, prompting them to make decarbonisation plans and improve their ESG efforts, according to analysts.
The guidelines targeted at introducing unified disclosure standards in China will be a “game-changer”, said Yuan Yuan, a Beijing-based climate and energy campaigner at Greenpeace East Asia.

“When we talk about ambition, accountability, or even climate leadership – transparency is central to all of it,” she said. “Chinese financial institutions frequently claim that a lack of unified standards for corporate disclosure and poor data availability hinders their ability to assess risk when it comes to climate change. This extends to becoming a hurdle in developing transition plans.”

The set of proposed guidelines released on Monday is the highest-level document to emerge so far on sustainability disclosure in China. It adopts the principles and structure of global disclosure benchmarks set by the International Sustainability Standards Board while tailoring them to its own context, according to Cheung.

“Notably, the draft avoids a one-size-fits-all approach, proposing a step-by-step expansion of coverage,” he said.

According to the finance ministry, Monday’s guidelines would gradually expand from listed companies to privately-owned enterprises, from large firms to small and medium-sized ones, from qualitative requirements to quantitative requirements, and from voluntary disclosure to mandatory disclosure.

There were 5,346 listed companies on the Chinese domestic stock market at the end of 2023, according to the China Association for Public Companies (CAPCO), a non-profit organisation under the China Securities Regulatory Commission, the markets watchdog. Of those, 2,115 companies, or roughly 40 per cent, had released their sustainable development reports, an increase of nearly 300 companies from 2022, according to CAPCO.

The financial industry had the highest proportion of companies to have published their sustainable development reports, at over 90 per cent last year, while most other industries had a rate of around 40 per cent, according to CAPCO.

The number of sustainability funds had tripled in mainland China to 246 as of June 30 last year from 78 as of December 2020, the year when the world’s largest greenhouse gas emitter announced its dual carbon goals of reaching peak emissions by 2030 and net-zero emissions by 2060, according to US financial services firm Morningstar.
These funds received a net inflow of 31.7 billion yuan (US$4.38 billion) in the first half of 2023, a 6 per cent increase from a year earlier despite the challenging Chinese stock market, Morningstar said, while pointing out more needs to be done in terms of disclosure requirements and educating investors.

“Recognising this, Hong Kong should seize the opportunity to leverage its extensive experience and ESG advisory services to accelerate the adoption of sustainability reporting standards in China,” said Cheung of Civic Exchange.

 

Originally published on SCMP on 29 May 2024.