The new document published by a state-backed think-tank in June provides clear guidance on standards for environment, social and governance best practices in China
By Tim Nicholls
The Guidance for Enterprise ESG Disclosure launched on June 1 is the first China-focused environmental, social and governance (ESG) disclosure standard issued in the country. While its reporting guidelines are not mandatory, it represents a step forward for the private sector and a good foundation in this huge market for further regulatory developments.
The voluntary set of guidelines was published by the China Enterprise Reform and Development Society (CERDS), a state backed think-tank. CERDS worked alongside large companies in various industries, such as Ping An Insurance (2318.HK; 601318.SH), China Mobile (0941.HK; 600941.SH) and China Shenhua Energy (1088.HK; 601088.SH) to create a set of metrics, disclosure principles and requirements for all three areas of E, S and G.
This ESG disclosure standard is the country’s first to be based around Chinese laws, regulation and policies, making it highly relevant, while also seeking to meet international standards where possible. This is a significant step because there are currently no mandatory ESG disclosure requirements for mainland China-listed firms and to date there have been no China-focused metrics to reference.
The standards cover a broad range of topics, including hundreds of metrics and sub-metrics, many related to environmental matters, as well as different categories of indicators and disclosure principles.
Experts have called the guidelines “a move in the right direction” and, while not mandatory, “a promising first step” by filling current gaps in ESG disclosure in mainland China and shedding light on relevant interpretations for this market.
The new guidance comes as China focuses on enhancing regulation for ESG reporting. On the international front, the China Securities Regulatory Commission (CSRC) has said that general sustainability and climate disclosure standards being developed by the International Sustainability Standards Board (ISSB) will have a significant impact on Chinese companies listed overseas. It was also stated that the next step for the regulators is to create standards for mandatory disclosure in China.
What do the guidelines cover?
The Guidance for Enterprise ESG Disclosure is comprehensive and includes the following:
1. 118 ESG metrics;
2. Three categories of indicators, including primary, secondary and tertiary indicators that pertain to various areas such as resource consumption, climate change, labor rights and governance mechanisms;
3. Disclosure principles for companies to follow, including the provision of quantitative and qualitative data. This includes items such as a list of greenhouse gases that the company is emitting, descriptions of the status of supply chains, descriptions of support that the company is offering employees and more.
Implications for companies
Domestic and multinational companies are already beginning to see the implications of the new guidance on their ESG strategies in China. Domestically, the immediate impact will mainly be on larger Chinese companies, which possess the expertise and resources to comply with the disclosure standards that smaller companies may not be able to achieve.
As the guidelines were developed in compliance with China’s existing domestic regulation in mind, companies that are operating primarily in the Chinese market may well appreciate the relevance. More globally-focused ESG standards may be perceived as less suitable for these companies.
On the other hand, this same point may become an issue for multinational companies looking at these standards, as such companies may face pressure from external investors. They will have to take internationally recognized ESG frameworks into consideration to ensure there are no clashes from what their stakeholders expect from their disclosures.
Tim Nicholls is managing director at Paradigm Consulting Asia, a public relations consultant. Contact him at Email: email@example.com
(In the event of any conflict between the English and Chinese versions of this blog, the English version should be the reference.)
This commentary is the views of the writer and does not necessarily reflect the views of Bamboo Works