From CSR to ESG Disclosure: China’s next steps in sustainability
China is moving forward on its regulatory pathway toward more mandatory ESG reporting. Here’s what to know about these ESG disclosure developments.
With the global movement to net-zero and pursuit of sustainability, ESG disclosure (reporting on environmental, social and governance issues) has gone from important to mandatory in many countries. And with it has come challenges. Especially in many developing countries and especially when it comes to obtaining information about companies’ operational activities. In China the strategy has been to cultivate corporate social responsibility (CSR) incrementally through a regulatory pathway. First with voluntary participation then on to mandatory environmental information disclosure. So what do you need to know about this development and its impact on your ESG implementation in China?
First came CSR, then came credits for ESG disclosure
CSR emerged in China about 2 decades ago. Since then, more and more enterprises have actively developed CSR programs. It’s been embedded in various regulatory regimes from pollution reduction to production safety and occupational health. Today, CSR has become part of a company’s liabilities. Even though it’s still primarily voluntary, it’s influential—and now it’s also linked to ESG disclosure.
One example is through the environmental credit evaluation system. China launched Enterprise Environmental Credit Evaluation in 2013 to record and assess compliance among industries generating heavy pollutants and leading to higher environmental hazards. The system determines enterprise environmental credits based on certain criteria, including:
- pollution control
- environmental protection
- environmental management
- social supervision.
Based on those credit criteria, the provincial government then periodically collects compliance status and publishes annual credit scores across 4 levels: high to low as green, blue, yellow, and red. This range of credit results corresponds with different consequences – from financial support to more stringent inspection, as we explore next.
Today, CSR has become part of a company’s liabilities. Even though it’s still primarily voluntary, it’s influential.
Enterprise environmental credits raise the bar for CSR.
Up until recently, the bottom line for CSR has seemed to be simply remaining compliant and investing in corporate responsibilities. However, China’s regulatory scheme has switched to more active requirements on dynamic information disclosure, and the environmental credits are changing the CSR game for companies operating there.
Enterprise environmental credits are a crucial reference for financial institutes and local government. They enable these entities to qualify funding or strengthen law enforcement. The enterprise environment credit system builds up a centralized database to share among government agencies. The credits then substantially influence companies’ rewards and punishment, which indirectly incentivize companies to fulfill their corporate social responsibilities.
Companies with higher credits are entitled to accelerated administrative permission and financial support. Therefore, Chinese enterprises implement CSR programs and issue CSR reports to strengthen their social connection and establish a corporate reputation.
Authorities encourage companies to take active responsibility to raise their credit level, for instance by:
- promoting clean production audits,
- obtaining ISO 14001 certification
- developing corporate environmental reports and ESG disclosures
- participating in community activities to advocate environmental protection awareness.
On the other hand, to benefit from support, those companies also face more stringent inspections on their business activities that could have adverse environmental impacts.
New ESG disclosures now required by law in China
On top of this credit system, ESG disclosure is getting even bigger in China. From 2012 to 2020, the number of companies publishing environmental liability information, including CSR, environmental responsibility, sustainability, and ESG reports, in their financial reports to the Shanghai and Shenzhen Stock Exchange grew rapidly. According to the China Forum of Environmental Journalists, the index in 2020 increased by 11.7% from 2019 – the highest in history at that point. And with more requirements applying to more companies, that number will only continue to grow.
In light of China’s carbon peak and carbon neutrality goals by 2030 and 2060 (“double-carbon strategy“), more companies will have to consider greenhouse gas (GHG) mitigation in their operational plans and allocate appropriate investment to innovative technologies and alternative energy sources.
The strategy majorly impacts companies in oil refinery, chemical manufacturing (vinyl, ethylene xylene, Ammonia), and construction as well as those in the steel, ferroalloy, and non-ferrous metals industries. These companies face the urgent challenge of transiting their energy consumption from fossil fuels to more sustainable sources like non-fossil fuels and adopting energy efficiency in production equipment and technology.
Obligatory disclosures for major pollutant generators
The Ministry of Ecology and Environment (MEE) in China has recently expanded the obligation to disclose environmental information from major pollutant generators to companies that are subject to mandatory clean production audit, publicly listed, and/or issuing corporate bonds. This obligation also extends to companies issuing bonds that were liable for criminal penalties, fines, or suspension due to the violation of environmental law in the previous calendar year. (This follows the Reform on the Environmental Information Disclosure System and Management Measures on Environmental Information Disclosure of Companies.)
From February 8, 2022, regulated companies must submit an annual environment information report of the last year to the MEE before March 15. This report must include information on carbon emissions for companies participating in carbon emission trading. This includes emission amount, emission allowance and payoff, and guidance or methods used to calculate GHG emissions. This is in addition to required information about pollution generation, environmental impact assessment reports, and emergency response plans that were previously required.
Toxic substances and environmental management
EU and US laws require environmental information like toxic substance release and environmental management measures to be published in financial reports or ESG reports. The regulatory reform on ESG disclosure in China places similar obligations. In future, the disclosure of environmental information must be included in the public offering reporting for listed companies and the financial reports under securities and exchange regulations. This information will be shared across government agencies and through the Financial Credit Information Basic Database.
What do these ESG disclosure developments mean for your business?
China’s solid ESG disclosure developments are major milestones among its still relatively limited and voluntarily implemented CSR requirements. Even if you’re not required to disclose this information yet, your company must be proactive. Achieving compliance alone is not enough.
Preparing your CSR reports should be a substantial review process based on general principles and industry-specific needs—and supported by implementation action. It’s also important that you consider how to react to China’s double-carbon strategy and future energy transformation. This should start with ESG disclosures and develop into a sustainable plan as part of CSR and ESG implementation. Taking this action early could win you significantly more opportunities to qualify for government subsidies and related tax benefits for green production and energy transformation.
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