With the master environmental, social and governance-related disclosure guidance set by the International Sustainability Standards Board (ISSB) due to be released in Q2 this year, the question for China will be how regulators will apply these standards and whether Chinese companies will be motivated to implement them, sources have told IFLR.
Chinese regulators have been actively engaged in creating internationally recognised ESG standards over the past year as the country moves to build a green economy.
When the ISSB issued a draft guidance last March for comments, China responded with its own concerns, saying the requirement “has not fully considered the differences in economic development levels of different countries and in sustainability disclosure regulatory capabilities”.
Late last year, the IFRS Foundation also signed a memorandum of understanding with the Ministry of Finance of China to establish a Beijing office, aiming to generate more discussions from the emerging market.
Nana Li, head of sustainability & stewardship, Asia-Pacific at Impax Asset Management, said that China will selectively adopt the ISSB standard like other Asian countries. After the ISSB conclusion is out, “China has much more ground to develop it,” she said.
Some of China’s concerns, which experts said factored into account the country’s circumstances, were reflected in its version of voluntary ESG disclosure guidance issued last year by the China Enterprise Reform and Development Association, a government think tank.
With an aim to provide a more uniform approach, the guidance drew experience from existing international standards while accommodating for the local circumstances. For instance, it placed emphasis on rural revitalisation and common prosperity, some of President Xi’s signature policies.
“Chinese regulators and government-related bodies are supportive of businesses' pursuit of ESG goals and these are considered to be aligned with the country's goals of Chinese-style modernisation and high-quality growth,” said Mark Uhrynuk, a partner at Mayer Brown, adding that it is likely that future versions will continue to bear such features to facilitate local implementation.
According to Uhrynuk, the China-specific focus of the standards will appeal more to local companies and less to international companies that are under increasing pressure from investors and other stakeholders to adopt and disclose against internationally accepted standards.
“It remains to be seen whether enterprises in China will adopt the ISSB's standard once it was finalised, or whether they will continue using domestic standards,” he said.
Another roadblock for China’s ESG long march could be nudging companies to comply with related regulations. The government currently does not mandate ESG disclosure for many firms. However, Bloomberg reported in March that Chinese regulators are considering a mandatory ESG disclosure for domestic public companies.
Peiyuan Guo, chairman of SynTao Green Finance, a Chinese ESG rating agency and data provider, said that China has largely followed the pattern of moving from voluntary to mandatory disclosure like some advanced markets and the government will continue to take this approach until a consensus on ESG is reached in the market.
Catching up on disclosure
China, the world’s biggest polluter, is playing catch-up in the ESG space, like many of its Asian peers.
The government has rolled out a barrage of green finance and ESG-related policies in recent years. The China Securities Regulatory Commission (CSRC) incorporated ESG into its investor relation guidelines last April.
Fang Xinhai, vice chairman of the CSRC also added weight to the ESG push in the same month. He said that Chinese companies listed overseas will have to comply with international reporting standards down the road, and mandatory reporting is the “next step”.
Globally, ESG disclosure has grown gradually with firms’ annual reports. A trove of data is needed to compile ESG reports, posing a challenge to many firms.
“It is important to build an efficient internal system to collect and manage ESG-related data for the disclosure report,” Guo said. “Firms can accumulate data for annual reporting easily but many still lack the capacity of preparing an ESG report.”
For firms that are emerging from the Covid-19 closure over the past three years, costs and resource constraints would be particularly acute, according to Wei Na Sim, a litigation & dispute resolution counsel at Mayer Brown.
“Until ESG disclosure standards become mandatory by law, companies in China may not be incentivised to invest time and resources in this area,” she said.
Another problematic area is that the disclosure guidance issued by the China Enterprise Reform and Development Association did not provide specific methodologies other than a general framework, resulting in different interpretations in the market and this could possibly lead to “greenwashing” in the future, according to JunHe’s ESG team, led by partner George Zhu. Regulators are expected to flesh out more details on disclosure and related rules.
“When firms are producing their ESG reports, their references are sometimes messy and they may fail to choose a proper disclosure standard,” said Tianling Ni, partner at JunHe. “There are no specific rules (for which standard to choose) and no special team to oversee whether firms comply with the related disclosure standards.”
The lack of enforcement and the limited accountability for firms slacking at disclosure could hinder the ESG ambition of the country.
“You're asking for an extra layer of disclosure so you need to have formal enforcement,” said Li at Impax Asset Management. “If they don't disclose, what is the consequence?”
Changing attitude
Chinese firms are showing encouraging signs of ESG reporting. In 2022, 89% of the country’s top 100 companies issued ESG reports, increasing from 78% in 2020, according to a KPMG report published in January.
“Some firms used to treat ESG as a “nice to have” thing previously,” said Junhe’s Ni. “Now, policy from the high-ups plays an important role in driving the change in attitude.”
Pressure from peers and shareholders also pushes companies ahead with more accurate disclosure. In some markets, investors have a mature mechanism to engage with firms in their portfolios to address ESG-related issues.
“There is a big difference in the companies’ attitude toward ESG,” said Li. “They are more willing to talk to investors nowadays.”
She continued: “They need a channel to make sure that they address investors’ concerns to keep this long-term stable source of capital. The first step for companies to really improve their ESG disclosure is talking to investors. If you don't talk to them, you don't know what they're looking for.”