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June 24, 2022

China’s new ESG disclosure standard “of limited use” to investors

The proposed voluntary framework is an early step towards standardised sustainability reporting but is seen as unlikely to have much impact until it is endorsed by regulators. It also omits any mention of human rights.

By Elizabeth Meager

Waiting for the data: Investors hope Chinese regulators will eventually mandate ESG disclosure. (Photo by CreativaImages via iStock / Getty Images Plus)
  • China’s new proposed ESG disclosure standard for corporates has not yet been endorsed by regulators and does not mention the issue of human rights.
  • The framework’s voluntary nature makes it of limited use, says one investor, though experts say similar standards should eventually be made mandatory.
  • There is little consistency to the ESG information reported by Chinese companies, and that is unlikely to change without mandatory disclosure.

China’s new standard for corporate ESG disclosure has made international headlines, but its impact is expected to be minimal as it has not yet been endorsed by any regulator and remains voluntary. The hope among investors is that such a framework will eventually become mandatory because, until it does, it is seen as unlikely to drive change among companies in China.

Published last month, the proposal has been drafted by a little-known Beijing-based think tank, the China Enterprise Reform and Development Society (CERDS), which is affiliated with regulator the State-owned Assets Supervision and Administration Commission of the State Council (Sasac).

After encountering delays, the document appears to be the most comprehensive and collaborative effort at standardising ESG reporting in the country to date. It cites 80 institutions as co-authors, including universities, trade associations, fund managers and companies. In this sense, investors and lawyers say it is a significant step forward from the previously fragmented approach to sustainability disclosure in the country.

However, it remains entirely voluntary and, despite the think tank’s affiliation, has not yet been formally endorsed by any of the suitable regulators, such as Sasac, the China Securities Regulatory Commission (CSRC) or the central bank (the People’s Bank of China). That is in contrast to the moves to mandate such reporting in Europe and the US.

China’s ESG standard lacks teeth

“It may take some time for [the Chinese framework] to be nationally adopted and eventually become mandatory,” says Tang Zhengyu, Shanghai-based chief representative and partner at US law firm Sidley Austin. “Given the lack of official endorsement, these will remain more a reference standard for consideration by listed companies.”

The current framework is therefore of limited use to investors, says Karine Hirn, Hong Kong-based chief sustainability officer of Swedish asset manager East Capital. “If it’s voluntary, the best-in-class companies will get it done, but what you really need is the information from companies that usually do not disclose.”

East Capital's Karine Hirn
Karine Hirn of East Capital says investors really need the information from companies that do not usually report. (Photo courtesy of East Capital)

Achieving that will take some time, she tells Capital Monitor, as it will require companies to build up their reporting capabilities, as well as more investor education. After all, the guidelines do not specify a methodology for calculating the information, nor do they suggest a tiered or threshold approach for different sizes of business.

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“There are a lot of good aspects about this proposal in terms of encouraging discussion in the industry… but I think it’s a bit of a PR exercise,” says Jason Tu, co-founder and chief executive of Hong Kong-based ESG data platform Miotech. “These standards are likely to influence the eventual standard, but everyone’s waiting for the actual regulator [to act].”

The CERDS paper’s most notable co-author, Chinese insurer Ping An, says in a press release that the guidance is based on its own standard. It is an “important milestone for Ping An to promote the development of an ESG system with Chinese characteristics”, the firm adds.

Ping An, which has around 4trn yuan ($600bn) in its insurance investment portfolio, could not provide comment in time for inclusion in this article.

ESG disclosure lagging behind in China

Ultimately, Chinese companies already lag behind their Western counterparts when it comes to financial reporting practice. So given that even corporates in Europe – the region furthest ahead in mandating ESG disclosure – are struggling to get to grips with planned sustainability reporting requirements, it is little surprise that expectations are relatively low for what the new guidelines will achieve.

Chinese companies have a lot of catching up to do on ESG disclosure, according to data from Ping An and Miotech.

Ping An research from 2020 shows that the firms listed on the China’s benchmark CSI 300 index lag behind their peers listed on equivalent indices in Australia, Hong Kong, South Korea, the US and the UK. The report found that Chinese companies had the lowest average ESG disclosure scores and were least likely to have these reports audited (12% of the 85% of the CSI 300).

Ping An concluded that this was, in part, down to a plethora of guidelines in the country making it unclear what ESG information needed to be disclosed. That said, this issue is hardly unique to China, as ESG disclosures are mandatory in very few markets.

Similarly, Miotech analysis of CSI 300 companies shows that last year their rates of disclosure on Scope 1, 2 and 3 greenhouse gas emissions were very low (see chart below).

The situation is improving though. The number of CSI 300 companies producing ESG/CSR (corporate social responsibility) reports increased to 1,412 last year from 1,157 in 2020, according to Miotech.

“Companies are paying more attention [to ESG reporting]. Though while the top tiers have improved a lot, overall, a large number of them are still quiet,” says Tu. Obtaining this kind of information from small and medium-sized businesses will remain difficult until these rules are mandatory, he adds.

The proposed data coverage is, after all, fairly broad. The standard contains at least 100 data points across a wide range of ESG issues, such as waste and water management, greenhouse gas emissions, employee protection and health and safety, product liability, and supply chain management.

However, the framework does not address human rights, a topic of concern to many ESG investors given the reports of forced labour among Uighur muslims in China's Xinjiang province.

Consolidating ESG frameworks

The CERDS proposal builds on and consolidates existing frameworks, says Tang. The CSRC had introduced ESG-related amendments to disclosure rules for listed companies in February 2021. In addition, stock exchanges in Hong Kong, Shanghai and Shenzhen have all had their own ESG-specific frameworks for listed companies for many years.

The new standard seeks to align these frameworks more closely with standards drafted by the Frankfurt-headquartered International Sustainability Standards Board (ISSB).

Indeed, on 8 June the ISSB announced the appointment of four new board members including Bing Leng, a director in the accounting regulatory department of the Chinese ministry of finance. Hirn notes that China opting to appoint a government official rather than an academic or market participant sends a positive signal to the market of how seriously it takes the ISSB’s work.

“The CERDS guidelines help the industry to adopt ESG disclosure," says Tang. “Otherwise they would have to look to many resources to come up with their own.

“Eventually, I think this will make it easier for regulators to monitor,” he adds, “and I do think they will eventually give more weight to these standards and will probably escalate them to official standards.”

When that will happen is anyone’s guess, though, given there have already been repeated delays in getting to this stage, likely in part because of the Covid pandemic. Chinese regulators had originally said they would develop ESG disclosure rules when the country began to open its stock market to foreign investors in 2019.

The new framework is at least a first step, but one that will need official backing if China is to show it is serious about driving improvements in corporate sustainability.

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