INSIGHTS | China’s First ESG Disclosure Guidance

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  • INSIGHTS | China’s First ESG Disclosure Guidance

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    As more enterprises around the world adopt ESG standards for non-financial information disclosure, Chinese enterprises face a pressing need to catch up as they compete in markets with rising demand for quality ESG data. Many globally recognized and most prevalent standards, such as the GRI and SASB, had been developed under a Western context. As more Chinese companies take part in ESG disclosures, the need for a ESG standard that is more compatible with China’s business and regulatory environment becomes apparent. To enhance China’s ESG ecosystem and offer a locally adapted framework for domestic companies, the China Enterprise Reform and Development Society (CERDS) initiated the project along with experts from China’s leading research institutions and corporations to create the Guidance for Enterprise ESG Disclosure (“企业ESG披露指南”, hereinafter referred to as “the Guidance”). The Guidance was officially published on April 16, 2022, and will take effect on June 1, 2022.

    The launch of the Guidance is a landmark in China’s ESG development, as it is the first locally developed corporate ESG disclosure standard. This report will look at the content of the Guidance and understand its interpretation of ESG in the Chinese context.

    ESG metrics in the Guidance

    The Guidance listed a total of 118 metrics, spanning 35 tertiary indicators and 10 secondary indicators under the 3 primary indicators of environmental, social, and governance. An overview of metrics in the Guidance is presented below.

    Source: Compiled by Seneca ESG from the Guidance

    In terms of environmental metrics, the Guidance requests the disclosure of specific quantitative data, such as emission of a list of greenhouse gases and emission of a list of wastewater and waste gas pollutants. This may prove challenging for companies with no previous engagement in environmental reporting and will require assistance from professional environmental monitoring and data tracking agencies. The Guidance also requests the disclosure of scope 1, 2, and 3 greenhouse gas emissions, meaning it requires companies to not only assess their emissions from operations and power consumption, but also those resulting from the entire corporate value chain, such as the use of products, upstream and downstream transportation and distribution, and supply chain emissions. For social metrics, notable highlights in the Guidance include qualitative and quantitative descriptions of mental health assistance for employees, promotion evaluation system, and the ESG performance of suppliers. For governance, the Guidance places heavy emphasis on regulatory compliance with references to national laws, such as the Personal Information Protection Law and Data Security Law. It also includes both physical and transitional risks from climate change as well as digital transformation risks in its metric on risk management.

    The Guidance is meant to be a general framework for all industries in China, with no specification on the reporting enterprise’s characteristics. Enterprises can disclose on a yearly basis, or whatever cycle they deem fit. The final deliverable should be an official ESG report available for the reference of regulatory bodies, investors, third-party rating agencies, media, the general public, and the reporting company itself.

    Adaptations to the Chinese Context

    While the Guidance draws inspiration from international best practices, it heavily references the latest existing Chinese standards, laws, and regulations related ESG issues, such as the country’s labor law, environmental protection law, and production safety law. In addition, definitions within the Guidance are also adopted from official Chinese national standards, namely a set of GB and GB/T standards which stand for mandatory standards and recommended standards, respectively. ISO standards are referenced to fill the remaining gaps in Chinese standards, namely the ISO 14090:2019 on adaptation to climate change, and ISO 37301:2021 on compliance management systems. As a result, the final product is a set of ESG metrics coherent with the country’s existing regulatory framework.

    Compared to globally applied ESG frameworks, the Guidance notably offers additions and adjustments to ESG issues within the Chinese context. For example, the social metric of “Employee Protection” assesses employees’ opportunity to participate in workers’ conference (职工代表大会), a form of labor organization in China’s public enterprises, as well as entitlement to social security (社保) and housing provident fund (公积金), unique features in China’s social welfare system. Another local attribute in the Guidance is the inclusion of “Civil Duty” under the “Social” primary indicator, which assesses the reporting company’s charitable activities, responses to national directives, and action under public crisis. More specifically, the Civil Duty metric evaluates a company’s response to Chinese national strategies such as rural revitalization, innovation development, and common prosperity. Therefore, the Guidance differs from other global standards by recognizing the integral roles of Chinese enterprises as part of China’s social fabric and their responsibilities and motivations in response to China’s national development needs.

    In essence, while ESG disclosure is commonly conducted to assess the potential financial impacts and values of companies regarding ESG issues, it should also serve as a beneficial exercise for companies to understand the gap between their current performance and the public’s expectation of an environmentally positive, socially responsible, and well-governed enterprise. The Guidance offers Chinese enterprises an opportunity to explore this gap in a language with which they are familiar. As Chinese companies begin to experiment with both international ESG standards and the locally developed Guidance in their ESG disclosure and provide feedback, their feedback will continue to foster the connection between China’s ESG development and that of the rest of the world, opening more opportunities for alignment between Chinese enterprises and the global market.

    Sources:

    Guidance for Enterprise ESG Disclosure (T/CERDS 2-2022)

    https://www.cerds.cn/site/content/8237.html

    http://www.eeo.com.cn/2022/0419/530790.shtml

    https://finance.sina.com.cn/esg/investment/2021-11-19/doc-iktzscyy6357991.shtml?cre=tianyi&mod=pcpager_news&loc=36&r=0&rfunc=17&tj=cxvertical_pc_pager_news&tr=174&wm=2226_0129

    https://ghgprotocol.org/standards/scope-3-standard

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