At China’s annual “two sessions” meetings that took place last month, the topics of peak carbon emissions and carbon neutrality were high on the agenda with government leaders and delegates from the private sector discussing ways in which to support the country’s carbon neutrality goals. Over the past few months, there have been a number of developments in ESG regulations and policies in China, including the release of the “Draft Amendment to Company Law”, new rules on environmental disclosures and other environmental regulations and policies.
In this blog post, we look at several of these recent developments.
Draft Amendment to Company Law
On 24 December 2021, the Standing Committee of the National People’s Congress published the Draft Amendment to Company Law (the “Draft Amendment”) which was for public consultation until 22 January 2022. The Draft Amendment adjusts the article of “social responsibility” for the first time since the concept “social responsibility” was introduced into the Company Law in 2005. New ESG provisions have been included in the Draft Amendment to reflect more specific requirements in this area. The ESG provisions include:
- when engaging in business activities, companies are required to take full consideration of the interests of relevant stakeholders (e.g. employees and consumers) and the greater public interest (e.g. the protection of the ecological environment). They are also encouraged to participate in public welfare activities and publish their social responsibility reports (Article 19); and
- an “employee director” is mandatory for any company with more than 300 employees (Article 63).
The Draft Amendment also includes other more specific corporate governance provisions, for example, in respect of directors, supervisors and SMPs, the Draft Amendment includes further descriptions of their duties (e.g. duty of loyalty and duty of diligence), sets out their liabilities in the case of misconducts and their reporting obligations under “connected party transactions”.
Recent developments on environmental disclosure requirements
The Ministry of Ecology and Environment (the “MEE”) issued the Plan for the Reform of the Legal Disclosure System of Enterprise Environmental Information (the “Plan”) in May 2021. According to the Plan, a mandatory environmental information disclosure system is to be established by 2025 to cover certain enterprises (discussed below).
In order to implement the Plan, MEE recently issued Measures for the Administration of Legal Disclosure of Enterprise Environmental Information (the “Measures”) and Format Guidelines for Legal Disclosure of Enterprise Environmental Information (the “Guidelines”), both effective as of 8 February 2022. The Measures and the Guidelines set out the details for the legal disclosure system of “enterprise environmental information”.
According to the Plan and the Measures, the companies that are subject to the mandatory obligation to disclose the environmental information include:
- key pollutant dischargers (the list of which is updated annually by the MEE at a local level and generally include medium-sized and large enterprises in sectors such as thermal power generation, non-ferrous metallurgy, pharmaceutical industry, etc.);
- companies subject to mandatory production audits (for example, companies whose emission of pollutants exceeds the national or local standards); and
- publicly listed companies (and their subsidiaries) and companies that issue bonds which have been subjected to certain penalties for ecological or environmental breach.
Municipal ecology and environment departments will compile a list of companies subject to the mandatory environmental information disclosure requirements each year.
Companies subject to the mandatory obligation of environmental information disclosure will have to compile annual disclosure reports as well as ad hoc disclosure reports. Annual reports will include the following information:
- basic information of the company;
- environmental management information (which includes licences, tax, insurance, credit evaluation in the respect of environmental protection);
- information on the production, management and discharge of pollutants;
- information on carbon emissions;
- information on emergency responses in ecological and environmental aspects;
- any environmental breach;
- ad hoc information, as required; and
- other information required by laws and regulations.
For companies subject to mandatory production audits, publicly listed companies and companies that issue bonds, there is additional information required to be disclosed.
One point to note is that the environmental information disclosure scheme is linked to the credit record of the business. Environmental information disclosure will, therefore, be among the key criteria for the credit appraisal of companies, and administrative penalties imposed on relevant companies for environmental disclosure breach will be recorded on the companies’ corporate credit record.
Other recent environmental policy and regulatory developments
- On 18 February 2022, the National Development and Reform Commission ("NDRC"), the Ministry of Industry and Information Technology ("MIIT") and 10 other government departments released Several Policies to Promote the Steady Growth of the Industrial Economy. These policies aim to support the growth of the industrial economy and include provisions related to, for example, the promotion of energy saving, recycling of resources and the transition to green and low-carbon development.
- On 30 January 2022, the NDRC and the National Energy Administration ("NEA") released Opinions on Improving the Institutional Mechanism and Policy Measures for Energy Green and Low-Carbon Transformation. The measures are to support the implementation of the plans to peak carbon emissions and achieve carbon neutrality in the energy sector. According to this document, by 2030, China should have established the basic systems and policies for green and low-carbon development of energy, and have formed an energy production and consumption pattern where non-fossil fuels will not only satisfy the increase in energy demand, but also replace existing fossil fuels at scale, and “where the abilities to guarantee energy securities are comprehensively enhanced” (see our previous blog post).
- On 18 January 2022, the NDRC and the NEA released the Guidance Opinions on Acceleration of Constructing a Unified National Power Market System. This guidance includes the objective of establishing a national unified power market system, the national market and provincial (or district/city level) / regional market to operate jointly, new energy to fully participate in market trading and the allocation of power resources to be further optimised countrywide by 2030.
- On 28 December 2021, the State Council released the Comprehensive Work Plan for Energy Conservation and Emission Reduction during the 14th Five-year Plan Period. This requires, among others, that the national energy consumption per unit of GDP be lowered by 13.5% compared to the level in 2020. This work plan has also set out the work allocation among ministries for 10 key projects with the goal of achieving reductions in emissions.
For specific industries and construction projects:
- On 7 February 2022, the MIIT, NDRC and MEE released Guidance Opinions on the Promotion of High-quality Development of the Iron and Steel Industry - this aims to further promote the green and low carbon transition for the iron and steel industry and peak carbon emission before 2030.
- On 3 February 2022, the MIIT, NDRC, MEE and NEA released the Implementation Guide for Transforming and Improving Energy Efficiency and Carbon Reduction in Key Areas of High Energy-Consuming Industries (2022 Edition) - this provides guidance on energy efficiency and carbon reduction for 17 industries, including the oil refining industry, modern coal chemical industry, iron and steel industry, etc.
- On 29 December 2021, the MIIT, the Ministry of Science and Technology and the Ministry of Natural Resources released the "14th Five-Year Plan" for the Development of Raw Materials Industry - this, among others, requires the green development of the raw materials industry to be significantly improved with further goals around energy consumption, carbon emissions and integrated utilisation of solid waste.
- On 27 December 2021, the MEE, NDRC and MIIT released the Notice on the Strict Control of the First Batch of Hydrofluorocarbons Chemical Production Construction Projects - this prohibits the construction of new, or expansion of, production capacities of some hydrofluorocarbons.
In the past few months, and following COP 26 in November 2021, we have continued to see the ESG landscape in China develop with a series of newly published policies around achieving their goals of peaking carbon emissions by 2030 and carbon neutrality by 2060, while there is also emphasis on corporate social responsibility and corporate governance (for example, with the release of the Draft Amendment to Company Law).
Going forward, companies will need to pay greater attention to the latest trends of the fast-growing ESG regulations in China and make early preparation when necessary.