On April 12, 2024, China’s three main stock exchanges—the Shenzhen Stock Exchange (SZSE), the Shanghai Stock Exchange (SSE), and the Beijing Stock Exchange (BSE)—each released their respective Guidelines on Self-Regulation of Listed Companies – Sustainability Report (Trial), collectively referred to as the “Sustainability Report Guidelines.” These guidelines, which take effect on May 1, 2024, mark a significant milestone as they introduce the first mandatory disclosure requirements for listed companies concerning environmental, social, and governance (ESG) issues. This development comes two years after the China Securities Regulatory Commission (CSRC) announced in 2022 its intention to establish corporate sustainability disclosure requirements to promote the sustainable development of listed companies.
This article aims to outline the scope of disclosures required by the Sustainability Report Guidelines, highlight key reporting requirements, and discuss their implications for foreign investors.
Scope of Disclosure
As detailed in our previous article, “ESG in China – Opportunities and Challenges for Foreign Investors,” there has been an increasing focus on ESG disclosure in China in recent years. Chinese stock exchanges have been particularly proactive in creating an ESG disclosure framework. Prior to the release of the Sustainability Report Guidelines, mandatory ESG disclosure obligations in China were typically limited to certain companies, particularly those in polluting industries or those with prior environmental or labor violations. For other companies, ESG disclosure was generally voluntary.
The Sustainability Report Guidelines now establish mandatory disclosure requirements for specific listed companies. The scope of these mandatory disclosures varies across different stock exchanges and is detailed in the table below:-
China’s Major Stock Markets Mandate First-Ever ESG Disclosures for Listed Companies
On April 12, 2024, the Shenzhen Stock Exchange (SZSE), the Shanghai Stock Exchange (SSE), and the Beijing Stock Exchange (BSE) each released their respective Guidelines on Self-Regulation of Listed Companies – Sustainability Report (Trial), collectively known as the “Sustainability Report Guidelines.” Effective from May 1, 2024, these guidelines mark a historic milestone by introducing the first mandatory disclosure requirements related to environmental, social, and governance (ESG) issues for listed companies. This follows the China Securities Regulatory Commission’s (CSRC) 2022 announcement of plans to establish corporate sustainability disclosure requirements to foster sustainable development among listed companies.
This article aims to detail the scope of disclosures required by the Sustainability Report Guidelines, highlight key reporting requirements, and discuss their implications for foreign investors.
Scope of Disclosure
As highlighted in our previous article, “ESG in China – Opportunities and Challenges for Foreign Investors,” China has increasingly focused on ESG disclosures in recent years, with stock exchanges playing a significant role in developing an ESG disclosure framework. Before the Sustainability Report Guidelines, mandatory ESG disclosures in China were limited to certain companies, particularly those in polluting industries or with prior environmental or labor violations. For other companies, ESG disclosure was generally voluntary.
However, the new Sustainability Report Guidelines impose mandatory disclosure requirements for specific listed companies. Notably, unlike the SZSE and SSE, the BSE will only require voluntary disclosure, likely because it primarily serves small and medium-sized enterprises with limited disclosure capabilities.
Despite only approximately 500 companies falling under the mandatory disclosure scope of these guidelines, the new requirements aim to standardize ESG reporting practices among Chinese companies. This standardization is expected to provide better information to foreign investors regarding companies’ efforts to address and manage impacts, risks, and opportunities related to sustainable development.
Highlights of Reporting Requirements
A key principle of the Sustainability Report Guidelines is the double materiality approach (Double Materiality Principle) for sustainability disclosure topics. This principle requires companies to identify whether each topic significantly impacts their business model, operations, strategy, financial position, results, cash flows, financing methods, and costs over the short, medium, and long term (financial materiality). It also considers whether a company’s performance on related issues has a significant impact on the economy, society, and environment (impact materiality).
Specifically, the Sustainability Report Guidelines mandate disclosures on various ESG-related issues, including climate change (Articles 21-28), environmental compliance management (Article 33), data security and customer privacy protection (Article 48), anti-commercial bribery and anti-corruption (Article 55), and anti-unfair competition (Article 56). Below, we highlight some of these issues.
Climate Change
China has made significant strides in addressing climate change, aligning with its “Dual Carbon” goals of peaking carbon emissions before 2030 and achieving carbon neutrality by 2060. Regulatory attention on carbon trading has increased, exemplified by the Interim Regulations on Administration of Carbon Emissions Trading, effective this May, which establishes a regulatory framework for carbon emissions trading in China.
Local governments, such as Guangdong Province, have also introduced policies to support carbon trading. For example, Guangdong’s 2023-2030 Implementation Plan for Emissions Trading aims to leverage the carbon trading market to achieve carbon neutrality.
The Sustainability Report Guidelines require listed companies involved in carbon trading to disclose their greenhouse gas (GHG) emissions data, verified by third-party agencies if possible, and detail any participation in carbon trading and related regulatory investigations.
Data Security and Customer Privacy Protection
China has enacted comprehensive data protection laws in recent years, establishing a regulatory framework for data security and privacy. The Sustainability Report Guidelines underscore the importance of these issues, requiring entities to disclose their data security management systems, incidents, and measures taken, as well as details on customer privacy protection systems and any privacy breaches.
Anti-Unfair Competition
To prevent “greenwashing” and ensure truthful ESG disclosures, the Sustainability Report Guidelines mandate companies to disclose their anti-unfair competition efforts, including measures against false advertising, monopolies, and trade secret infringements.
Concluding Remarks
China’s introduction of mandatory sustainability reporting for listed companies signifies a move towards greater transparency in ESG practices. The new guidelines are expected to enhance corporate governance, address social issues, and strengthen environmental regulations. As the revised Company Law, effective from July, emphasizes companies’ social responsibilities, further implementation rules are anticipated to provide additional guidance.
Foreign investors should stay informed about China’s evolving ESG disclosure requirements and international standards, such as IFRS and ISSB’s Sustainability Disclosure Standards, which influence the adopted measures and methodologies.