China unveils ESG reporting guidelines in bid to catch up to global peers

HONG KONG (BLOOMBERG) - A new set of voluntary guidelines for Chinese companies to report environmental, social and governance (ESG) metrics takes effect on Wednesday (June 1), offering a glimpse of what mandatory disclosures might eventually look like in the country.

Developed by China's biggest companies and government-backed think-tanks, the standards list more than 100 metrics that generally align with the global benchmark of draft rules issued by the International Sustainability Standards Board. The differences are they are more simplistic and add "Chinese characteristics" that measure things like corporate charity.

The guidance "encourages companies to consider their responsibility as a corporate citizen" rather than looking at ESG from a pure "compliance or risk management perspective," said ESG analyst Jia Jingwei at Fitch Ratings. "It is a more comprehensive and holistic view of ESG."

The world's biggest polluter is trying to catch up to global peers on reporting standards as part of its push to reduce emissions and meet a net-zero target by 2060. As exchanges around the world, including in Hong Kong and Singapore, make sustainability reporting mandatory for targeted sectors, China's regulators have encouraged listed companies to report ESG information with an eye towards mandatory disclosure down the road.

With so many Chinese companies listed abroad, they will have to meet global reporting standards eventually, so coming up with a mandatory requirement is the "next step", said Mr Fang Xinhai, vice-chairman of the China Securities Regulatory Commission at a conference in April.

"If you don't disclose, you can't go public, and you can't get international capital," he said.

A quarter of publicly traded Chinese companies already makes these disclosures and more are following each year. The number of Shanghai-listed companies issuing ESG reports grew 20 per cent last year, while Shenzhen companies grew 13 per cent, the fastest pace in a decade, according to Bloomberg Intelligence. Yet there have been no standardised guidelines for disclosure, which experts say have hindered sustainability efforts.

The new programme for example does not set out methodologies for measuring the quantifiable metrics, unlike international standards, said Dr Ma Jun, co-chair of the G-20 Sustainable Finance Working Group.

"The big companies in China - most of them have not set up their mechanism and management on the ESG side," Dr Ma said. "There is a big gap, their ratings are not as good as their global counterparts'."

What is more, companies may be loath to incur the additional costs of gathering data and hiring outside experts until Beijing forces them to do so, said Mr Sun Xi, chief ESG officer at fintech consultancy SusallWave Digital Technology (Shenzhen).

"Unless it is government-driven, we don't see many companies adopting it," he said, adding that businesses seeking to attract foreign investment would have done this reporting already using international standards that are more sophisticated.

Ping An Insurance Group, among the more than 40 companies and state-owned enterprises consulted on the new guidelines, said it hoped the guidelines would encourage more companies to do sustainability reporting, especially with government-linked think-tank China Enterprise Reform and Development Society leading the programme.

With other Beijing-backed research institutes, including from the Ministry of Commerce and National Development and Reform Commission, weighing in, "if it is successful, then potentially this guideline will be referenced by the government" for any mandatory requirements, said Mr Zhu Shizhuo at Ping An Technology who helped draft the document.

For now, the group is working on industry-specific guidelines and could develop an ESG scoring framework based off these disclosure standards, Mr Zhu added.

The guidelines reference existing regulations such as local labour and environmental protection laws and take a different approach to reporting standards by adding Chinese priorities that are rarely found elsewhere, these include:

- Response to major and unexpected public crises and disasters, including the feasibility, timeliness and social impact of the company's efforts, and amount of financial and other resources contributed

- Participation in corporate social responsibility activities such as disaster relief, poverty relief, environmental protection, building of public infrastructure, and aid to the disabled and other disadvantaged communities in terms of volunteer hours, donations and other contributions to national strategies such as rural revitalisation and common prosperity.