This report aims to provide recommendations for China’s future, mandatory environmental, social and governance (ESG) disclosure framework, prepared by its financial regulators.
These recommendations, supported by discussions with Chinese and international stakeholders, intend to inform the China Securities Regulatory Commission (CSRC), the China Institute of Finance and Capital Markets (CIFCM) and its domestic stock exchanges on the following questions:
- What are international investors’ expectations on China’s ESG disclosure framework?
- Are international ESG disclosure standards compatible with China’s corporate and investment landscape?
- What indicators should be part of China’s ESG disclosure framework?
To answer these questions, the research team has analysed investors’ needs regarding ESG data on Chinese domestic- listed companies and carried out a mapping exercise on existing disclosure practices in China and overseas.
Our research shows that both international and Chinese corporate ESG data disclosure practices lead to reporting based on a similar set of ESG indicators. However, the ESG data disclosed by companies is not standardised and not readily comparable across markets, industries and portfolios.
Work being undertaken by the CSRC is seeking to resolve this challenge.
Our main conclusions are
In order to provide usable and comparable ESG data to investors, companies should be required to report on a standardised set of primary ESG disclosure indicators.
Primary ESG indicators correspond to key data points illustrating performance on the most common ESG topics. Making disclosure of basic ESG indicators mandatory for all listed companies will support:
- building a reliable ESG data series, which can be supplemented by other indicators over time;
- the provision of useful information to both Chinese and international investors to make investment decisions by integrating standard ESG data;
- enhanced management and board oversight of performance on key ESG issues within listed companies;
- and increasing investment in green and sustainable assets.
Setting a mandatory ESG data disclosure framework will contribute positively to the ongoing ESG disclosure standardisation process on an international level, including through the Corporate Reporting Dialogue. China can play a key role in terms of bringing ESG data standardisation to the global stage.
Our key recommendation is that the CSRC should introduce regulation, clarifying that ESG factors are financially material. Moreover, making it mandatory for all Chinese listed companies to disclose information on a standardised set of ESG indicators, could give the Chinese market long-term motivation for enhanced and high quality reporting on key ESG issues.
This regulation should include the following features:
- a set of primary standardised indicators that are reported both in China and in international/national disclosure frameworks, that allow for comparability across industry sectors, portfolios and time-series;2
- a reporting methodology that specifies the scope, methods of calculation, minimum reporting thresholds, board oversight, monitoring and enforcement mechanisms, as well as guidance on how to assure the quality of reporting by third party auditors;
- publication of ESG data alongside financial indicators, based on the same reporting scope. Such data should be published in corporate annual reports, under the supervision of the board and should be linked to companies’ business models, their corporate strategy (including financial and sustainability objectives and thresholds) and risk factors. Finally, ESG data should be analysed and explained in comparison to sectoral averages and historical performance;
- publication of all reported ESG data is made accessible to all investors (available free of charge, accessible online and available in a timely manner).
This research focuses on primary ESG indicators as the basic building blocks for the processes of ESG reporting and ESG integration.
We recommend a set of ESG indicators, which are widely reported by both international companies and Chinese companies, based on analysis of the most commonly reported ESG indicators by CSI300 companies. We also recommend that these quantitative metrics are complemented by related information on governance, strategy and risk management to explain quantitative performance, in order to make these metrics useful to investors.