China’s new ESG Disclosure Standards

Are the guidelines a credible basis for ESG evaluation and reporting?

In a great example of public-private collaboration, CERDS (or the China Enterprise Reform and Development Society – a think-tank under mainland China’s State-owned Assets Supervision and Administration Commission) and a pantheon of China’s biggest business players have recently combined to publish the country’s first ESG disclosure standards: the “Guidance for Enterprise ESG Disclosure” (“企业 ESG 披露指南”, the “ESG Disclosure Standards”). Although having the status of “association standards”, such that the ESG Disclosure Standards are not mandatory, their release is an extremely positive development for a market which size naturally put China at the forefront of many ESG issues on the global stage.

The ESG Disclosure Standards have been widely touted as the first set of environmental, social, and governance (ESG) disclosure guidelines issued by China. Experts are reported to say that adherence to the new ESG Disclosure Standards will raise the standard of reporting by local companies and promote sustainable investments in the country.

In this blog we explain what these new ESG Disclosure Standards are and set out some of the implications of the ESG Disclosure Standards for both Chinese businesses and international businesses associated with the world’s second largest economy:

What is the scope of the new ESG Disclosure Standards?

According to an announcement accompanying the ESG Disclosure Standards’ release, the ESG Disclosure Standards seek to fill a gap in corporate ESG disclosure reporting in mainland China and “promote the accuracy and effectiveness of information disclosure by Chinese enterprises...”. They set out a comprehensive indicator system for disclosure of “scientific and measurable” data across each “first-level indicator” of “E”, “S”, and “G”, working down to a fourth tier of no less than 118 more granular indicators. The guidelines also specify disclosure principles, indicators, requirements, applications, responsibilities, and supervision for businesses of different types, industries, and sizes. The aim being to support Chinese enterprises in their ESG governance practices and disclosure.

Given that most mandatory and voluntary reporting requirements in China only focus on the “E” of ESG – including the mandatory environmental information disclosure system due to come online by 2025 for large-scale polluters, listed companies and bond issuers with a poor record in environmental protection – the much broader remit of the ESG Disclosure Standards to also cover “S” and “G” is critical for an economy that continues to diversify away from heavy manufacturing to greater reliance on services and its digital ecosystem. For example, the “S” in ESG has recently been brought to the fore with rules for platforms’ gig workers; as well as the “G” with changes proposed at the end of last year to the concept of “social responsibility” in the corporate governance structures prescribed under the PRC Company Law (the first such proposals since 2005).

To which type of businesses do the ESG Disclosure Standards apply?

The ESG Disclosure Standards are intended to be used as a reference point by enterprises of different types, industries and sizes, for the purpose of self- and third-party evaluation.

On the one hand, the breadth of enterprises covered by the ESG Disclosure Standards takes this set of guidelines beyond those published by the China Securities Regulatory Commission (the “CSRC”). For example – the CSRC’s guidelines cover only listed companies under the securities watchdog’s supervision with respect to disclose information on ecological protection, social responsibility and poverty alleviation, in a specific section in their annual and semi-annual reports.

On the other hand, there may be a note of caution, as to whether the ESG Disclosure Standards can be objectively applied to the “majority” of Chinese firms as proclaimed in the statements made at their release. Firstly, CERDS is a think-tank under the authority managing China’s largest state-owned entities and other assets. Second, the private enterprises that participated alongside CERDS to formulate the ESG Disclosure Standards are billed as sizeable, industry leaders such as Ant Group and China Mobile.

Would a wider group of firms outside these large institutional players in their respective sectors have provided a different index system – possibly with less but broader indictors to make the ESG Disclosure Standards more easily navigated by smaller enterprises with less resources?

Is it time for an international or local approach?

CERDS emphasises that it and its partner drafters have considered China’s ESG goals in its 14th Five-Year Plan and the longer-term objectives announced for the period to 2035. Indeed, the ESG Disclosure Standards are held up as striving to create an ESG ecosystem with “Chinese characteristics”, to use the phrase often recited by Beijing’s legislators. However, is another set of voluntary guidelines with their own evaluative criteria for businesses in the Chinese market actually what is needed?

Standardisation of ESG disclosure metrics is an area which business operators and their stakeholders particularly yearn for. We know that the IFRS’s International Sustainability Standards Board (ISSB) has a working group with representatives from the Chinese Ministry of Finance looking at enhancing compatibility between different sustainability disclosure initiatives in use across the globe. We have also seen the notable development of the “Common Ground Taxonomy” – an effort to identify common ground or areas of convergence between the green / ESG taxonomies in the EU and China. We will need to see how the new ESG Disclosure Standards fit alongside the ISSB’s global sustainability disclosure standards.

Judge, jury, and executioner?

Ping An has been an ESG pioneer in China for many years and, being the largest life insurer worldwide by market capitalisation, has a wealth of experience in social and other ESG metrics. Therefore, lending its weight as a contributor to the ESG Disclosure Standards adds credibility to them.

Ping An has also allowed its patented CN-ESG evaluation system framework to be incorporated into the ESG Disclosure Standards. However, it is not clear from the public announcements whether there is any ongoing licence or other commitment between Ping An and CERDS for maintenance or update of the ESG Disclosure Standards or any underlying system.

Albeit voluntary at this time, if authorities and other stakeholders adopt the ESG Disclosure Standards as their go-to benchmark for this critical market, the perception of the multiple hats of Ping An as drafter, system maintainer, investor and investee could be one to monitor in the context of what should be impartial guidelines for free application across all industries and market players.

Where does that leave us?

To sum up, any initiative to standardise disclosures in China’s fragmented ESG arena must be seen as positive. However, whether any of the above concerns and uncertainties materialise will likely only be known some time after the ESG Disclosure Standards become effective from 1 June 2022.

The ESG Disclosure Standards are a voluntary standard, therefore, the extent of adoption by Chinese enterprises, and the level of active pursuit of that adaption by their stakeholders, will be a good “indicator” in itself. Watch this space!

For further information on key ESG legal themes in China, see our ESG Outlook 2022.