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ESG Investing / Regulations / Treasury & Capital Markets
China stock exchanges push mandatory sustainability reporting
Draft guidelines underscore international comparability and local relevance for a more mature regulatory framework
Leo Tang 16 Feb 2024

Notwithstanding the gloomy investor sentiment towards Chinese stock markets, which have hit a trough in recent weeks, regulators are determined to set a sustainable path for their development, with new plans for mandatory sustainability reporting.

Coming out right before the Lunar New Year break, a good time for housekeeping and making resolutions for a better future, the draft regulation – proposed by the three major stock exchanges, the Shanghai Stock Exchange (SSE), the Shenzhen Stock Exchange (SZSE), and the Beijing Stock Exchange (BSE) – seeks to mandate publicly listed companies to disclose their sustainability information.

According to the consultation drafts, SSE and SZSE require companies in key indices such as SSE180 and SZSE100, as well as companies with dual listings in domestic and overseas markets, to conduct sustainability reporting by 2026. Those listed on the BSE can publish voluntarily.

The sustainability reports should be published within four months of the end of the accounting year, together with the companies’ annual reports.

In terms of mandatory sustainability reporting, China is a relatively late mover in Asia. Other emerging markets’ exchanges such as those in Indonesia, Thailand, and the Philippines have launched similar regulations before China. However, being late in the game gives China the advantage of absorbing the experience of other markets in sustainability reporting.

Internationally comparable

Being internationally comparable is critical for ESG information disclosure to alleviate the inconsistencies in data measurements and reporting. In this regard, the proposed guidelines underscore the need for comparability in many aspects.

First, it requires reporting entities to follow the principles of double materiality. Double materiality is a concept widely recognized in the European Union’s non-financial reporting, which suggests that companies must recognize their impacts on the environment and society (i.e., impact materiality) and the corresponding impacts of the environment and society on their financial performance (i.e., financial materiality) when they conduct ESG materiality assessment.

Second, it requires reporting entities to disclose their sustainability performance across four key dimensions: governance, strategy, impact and risk management, and targets and metrics, which are consistent with the framework adopted by the International Sustainability Standards Board and the Taskforce on Nature-related Financial Disclosure.

Finally, it stresses climate reporting and transition planning. Specifically, reporting entities are required to evaluate how climate change affects their business model, what uncertainties they take into account when assessing their corporate climate resilience, and how they prepare for climate change in the short, medium and long term.

On accounting greenhouse gas emissions, the guidelines require reporting entities to disclose Scope 1 and Scope 2 emissions, while encouraging the disclosure of Scope 3 emissions.

These requirements make China’s sustainability reporting comparable to those in more developed markets such as the EU, Singapore, and Hong Kong.

With Chinese characteristics

While international comparability is underlined, local features are also given prominence in the proposed guidelines. For example, the draft regulations cite “rural revitalization” as a key issue under social reporting, encouraging reporting entities to disclose their contributions to poverty alleviation and public charity if their operations are focused on rural and underdeveloped areas. The concept is aligned with China’s national development strategy, and can be regarded as resembling community investment with Chinese characteristics.

Another unique aspect of the proposed guidelines is “scientific ethics”, which is not seen in the sustainability reporting requirements in other markets. Specifically, it mandates reporting entities that engage in research and development activities in frontier industries such as life sciences and artificial intelligence to disclose ethical standards they abide by, the governance and implementation of these standards, and any incidents of breaches of these standards.

Finally, the guidelines make an explicit reference to protecting small and medium-sized enterprises, requiring large corporations that have significant overdue payments to SMEs to disclose the outstanding amounts and solutions.

Towards a rounder ESG regulation

A well-rounded ESG regulation has several essential components: ESG-related legislation, green taxonomy, carbon pricing schemes, corporate ESG and climate disclosure requirements, and ESG financial products labelling systems.

In the case of China, ESG-related legislation (various environmental protection and commercial laws), green taxonomy (the China-EU Common Ground Taxonomy), and carbon pricing schemes (the National Emission Trading System and voluntary carbon market) are already in place. The launch of the mandatory sustainability reporting represents the fourth pillar of China’s ESG regulation, thereby establishing a rounder and more mature regulatory framework.

China’s green finance is in rapid development. Data from the SSE show that the exchange supported the issuance of transition and sustainability-linked bonds amounting to over 473 billion yuan (US$61.3 billion) in the past three years. On the reporting side, 1,023 SSE-listed companies have published some form of corporate social responsibility report, ESG report, or sustainability report for the 2022 financial year, reaching an overall disclosure rate of 47% as of the end of 2023.

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