Why ESG disclosure policy matters in China

PRI-led research^[1] has identified lack of ESG disclosures as a key barrier to responsible investment in China. Our latest briefing^[2] and investor survey, carried out in May, provide new evidence on what investors expect on the future policy direction on ESG disclosure in China. In this article, we summarise the main results of our investor survey on this topic. The survey results are also in line with the key regulatory trends in China we have been observing over recent years.

Policy trends on ESG disclosure in China

1) Voluntary to mandatory reporting

In 2016, only heavily polluting companies were asked to report environmental data related to their pollutant emissions, while other companies were asked to report on a “comply or explain” basis. The environmental disclosure requirements are expected to become mandatory for all listed companies by the end of 2020.

In Hong Kong, the stock exchange already requires mandatory reporting of climate and governance related indicators for Hong Kong listed companies, and social disclosures on a “comply or explain” basis.

2) Broader scope and new markets

The existing guidelines on ESG disclosure at the Shanghai and Shenzhen Stock Exchanges have influenced the newly established Sci-Tech innovation board (SSE STAR Market^[3]). STAR Market requires listed companies to disclose in their annual report how they fulfil social responsibilities in their operations and management and how they incorporate environmental protection into company strategies. The securities regulator, China Securities Regulatory Commission (CSRC), has also integrated environmental factors into the process of public offerings^[4], requiring issuers to disclose the main pollutants emitted during production processes, the facilities handling those pollutants and any other potential environmental issues and corresponding measures in use of raised funds.

3) International alignment

Chinese policymakers are also looking to close the gap between local and global standards. The central bank, for example, recently dropped clean coal from its definition of green projects in the 2020 Green Bond Catalogue, to better align with international standards and address climate change risks.

4) From E to ESG?

In addition to the expected environmental disclosure regulation for 2020, the CSRC started working on a comprehensive ESG information disclosure framework, as well as a quality evaluation system for ESG information disclosure in 2018.^[5] The stock exchanges already look at ESG disclosures more broadly: the Shenzhen stock exchange, for example, introduced ESG disclosure in its 2020 assessment of the overall disclosure quality of listed companies. Chinese companies are preparing for this: a quarter of all listed companies already publish some ESG information as part of their annual reporting.^[6]

Investor needs and market opening

Despite updated guidelines and evolving market practice, ESG data published by Chinese companies is not yet standardised and comparable across markets. While the market opening process continues, and the weight for Chinese companies is increasing in global indices, regulators need to further lower the barriers to global investors for investing in China, including by improving ESG disclosures by Chinese companies.

The investor survey led by the PRI in May 2020 confirmed that standardised, comparable ESG disclosures are needed by both local and global investors to make informed investment decisions, and invest more in sustainable, green assets in China. The survey also found that international alignment is paramount: 98% of respondents indicated it is important to align with international frameworks and metrics. The results also showed that a standardised ESG disclosure policy framework will contribute to increasing investment in China by global investors, contributing to the success of the ‘two-way opening’ policy of China’s capital market.

Lack of standardised, comparable ESG data has been identified as a major barrier for responsible investors in China for several years. The positive finding is that a standardised ESG disclosure policy framework appears as an effective solution to this challenge. Transparency on ESG issues in China will not only resolve the ESG data issue; it will also contribute to the long-term goal of greening the financial system, and building a green, sustainable economy.

This blog is written by PRI staff members and guest contributors. Our goal is to contribute to the broader debate around topical issues and to help showcase some of our research and other work that we undertake in support of our signatories.

Please note that although you can expect to find some posts here that broadly accord with the PRI’s official views, the blog authors write in their individual capacity and there is no “house view”. Nor do the views and opinions expressed on this blog constitute financial or other professional advice.

If you have any questions, please contact us at [email protected].