China finalises the mandatory sustainability reporting requirements for listed companies

Around two months after the issuance of the draft guidelines for public consultation (the Drafts), each of the Shanghai Stock Exchange (SSE), Shenzhen Stock Exchange (SZSE) and Beijing Stock Exchange (BSE) finalised the guidelines on corporate sustainability reporting (the Guidelines) on 12 April 2024. These Guidelines came into effect from 1 May 2024.

The Guidelines lay out China’s first set of mandatory sustainability reporting requirements for public companies listed on SSE and SZSE and are regarded by the market as a milestone for China.

What is new in the finalised Guidelines?

Compared to the Drafts, the reporting regime under each Guideline remains largely unchanged, whereas the Guidelines have introduced several changes in response to the public comments collected during the consultation period and to facilitate the implementation of the reporting requirements. 

Double materiality principle 

In addition to adopting the “double materiality” principle as set out in the Drafts, the Guidelines now provide further guidance on the scope and elements of “financial materiality” and “impact materiality”. Disclosure of issues meeting the “financial materiality” threshold will need to cover the four core pillars (i.e. “governance”, “strategy”, “impact, risk and opportunity management” and “indicators and objectives”), whereas disclosure of issues meeting the “impact materiality” do not have to follow this format and only need to be in line with the requirements for specific topics set out in the Guidelines as applicable.

In particular, the scope of “financial materiality” is further clarified under the Guidelines as those expected to have a material impact on the listed company’s business model, business operations, development strategy, financial status, operating results, cash flow, financing methods and costs in the short, medium and long term.

Relaxation of certain reporting requirements

In response to the market’s concerns over the potential reporting burdens, including the tight reporting schedule and the broad scope of mandatory reporting information, the Guidelines have relaxed certain requirements, including, for example:

• Timeline: Under the Drafts, a sustainability report is to be submitted together with the listed company’s annual reports. The Guidelines now only require the submission to be “no earlier than the publication of the annual report”.
• Contents: One example is that the required disclosure for the adaptability of the strategy and business model of a listed company to the sustainability development risks has been softened to a voluntary “encouraged” disclosure. 
• Corporate social responsibility report: The listed companies which have published a sustainable development report pursuant to the Guidelines are exempted from publishing the corporate social responsibility report.

New reporting items

In light of China’s increasing regulatory attention on carbon trade (see here and here), the Guidelines specify the required disclosure items for listed companies who participate in carbon trading. The Guidelines also expand the scope of reporting for corporate governance related matters to include, e.g. communications between the listed companies with their stakeholders.

What is next?

Going forward, each of China’s three major exchanges is expected to issue more detailed implementation rules under the guidance of the China Securities Regulatory Commission, China’s major regulator on listed companies. Stay tunned and watch this space.