China’s path towards sustainability disclosure standards
In this article, Claudia Melim-McLeod questions "Us x Them" categorizations, and discusses the similarities between European and Chinese non-financial sustainability disclosure standards.
Sometimes I wonder why there is a trend to categorize things into binary opposites like good and bad, friends and foes, etc. China is a case in point. I have had many discussions with friends and colleagues on China, and I often hear a negative picture of all things Chinese. Why is that? In spite of the geopolitical tensions so often touted by the media and real or imagined differences in value systems, there are a lot of positive trends in China. This blog is an effort to make some of them visible, based on topics I follow in my work with the financial sector.
Consider this example: In an interview to the Chatham House podcast “Independent Thinking”, Pulitzer Prize-winning journalist Anne Applebaum talks about what she calls ‘the Autocratic World’ – a ‘network of countries’ including Russia, Iran and China. According to Applebaum, these countries have one common enemy: us. Asked by the interviewer who “us” is supposed to mean, she clarifies: “You and me, the liberal democratic world.” She goes on to say, “Most of us don’t wake up in the morning thinking they are involved in a war of ideas, but I think they do”.
While I am not privy to the thoughts of over one billion people waking up far away from my house here in Norway, I believe things are a bit more nuanced than that.
Applebaum’s words are very vivid testimony about our time, where deep suspicions feed a chasm between the West and the Rest. There is plenty more fare in the interview for those with a bellicose disposition and an inclination to view the world through a Us x Them lens, where anyone who is not Us is likely to expose our societies to a multitude of dangers. That has been part of the script of some of the West’s most unsavory media and politicians for some time, and in a way, it is nothing new. It is a simplistic and potentially dangerous mindset.
But the part that made me frown – and why I decided to write this piece - was where Applebaum claimed that “if you run a pension fund, for example, you are subject to unbelievable amounts of regulation” whereas the ‘Autocratic World’ is “completely unregulated”. Listening to the podcast, you would think that the Western financial sector operates under orderly rules enacted to protect us, while elsewhere there is nothing but chaos and secretive deals.
While it would certainly be naïve to ignore the very real geopolitical tensions of our time, to portray business in large areas of the planet as “completely unregulated” is just absurd – and objectively wrong. Fortunately for our pension funds and other investors who need to understand what companies are doing across geographies, regulations are not a monopoly of the West. And fortunately for everyone, global standards are emerging to improve environmental, social and governance (ESG) standards in business, offering some guardrails for irresponsible company behavior from Western companies and others.
In fact, some of the most powerful guardrails are about corporate ESG disclosure, and they are being adopted in China, with a whole lot of regulations to back them up.
Disclosing Chinese regulations on… disclosure
China is the world’s second largest economy with a GDP of $18.53 trillion, slightly less than the European Union’s $18.7 trillion projected GDP for this year.[1] In spite of what warmongers would have you think, Chinese companies are not “unregulated” - quite the contrary. Some of the new regulations are actually aligned with international standards, encouraging transparency in unprecedented ways.
In April this year, the Beijing (BSE), Shenzhen (SZSE) and Shanghai (SSE) stock exchanges issued ESG disclosure guidelines for listed companies for the first time. According to the Zhong Lun law firm, BSE disclosure is voluntary, possibly because it targets small and medium sized enterprises. However, SZSE introduced mandatory disclosure for companies listed on the SZSE 100 Index and on the ChiNext Index, and SSE did the same for the SSE 180 Index and the STA 50 Index. This is the first time the principle of double materiality is introduced for sustainability reporting in China - meaning that companies not only need to report on how ESG factors affect their financial performance using financial metrics such as cash flow, revenue growth and and profitability, they also have to report on how their activities, operations, and value chain have an impact on society and the environment at large.
This is good news! It means that for the first time, companies are disclosing the impact of their activities on issues like biodiversity, ecosystems, and people affected by their business, which is likely to trigger positive change as they prepare to have their reports scrutinized by investors.
Shortly after, the Chinese government went further. In May 2024, China’s Ministry of Finance launched a public consultation on the Corporate Sustainability Disclosure Standards – Basic Standards, stating that “sustainable development is an inevitable choice for the prosperity and progress of human society” and basically explaining that China will adopt disclosure standards as proposed by the International Sustainability Standards Board (ISSB).[2]
This is a significant development because it represents a step toward convergence with global standards, as the ISSB is backed up by the G7, the G20, the International Organization of Securities Commissions (IOSCO), the Financial Stability Board, African Finance Ministers and Finance Ministers and Central Bank Governors from more than 40 jurisdictions.
But it will not happen all at once. According to the Corporate Sustainability Disclosure Standards – Basic Standards, China will have a gradual introduction of mandatory disclosure, starting with listed companies to non-listed, from large enterprises to medium and small enterprises, and from qualitative to quantitative requirements. The goal is to start in 2027 and have a full disclosure system established by 2030. Yet it is an important move in the right direction, showing that China is taking sustainability seriously.
Then on September 4, China’s Ministry of Finance appointed an Advisory Committee for Sustainability Disclosure Standards, including academics, government officials, and business leaders like Peiyuan Guo, Chairman of Syntao Green Finance, who represents the United Nations Environment Programme Finance Initiative in China.
Similarities between European and Chinese standards
If applied as the draft for consultation envisages, the Chinese Basic Standards will mandate Chinese companies to report on ESG non-financial disclosures along similar lines as European firms using the European Sustainability Reporting Standards. (ESRS).
Both sets of standards are comparable and include environmental, social and governance standards. On the environment side, both the ESRS and the Chinese Basic Standards cover climate, pollution, water and marine resources, biodiversity and ecosystems, resource utilization and circular economy. On climate, the ESRS go a bit further to include emissions that are direct (from sources controlled by the company), indirect emissions (emissions released from the purchase of energy), and all emissions across the value chain, transportation of employees, etc.- also known as Scope 1, Scope 2 and Scope 3 emissions.
When it comes to social standards, the Chinese Basic Standards have a wider scope than the ESRS: They include the protection of rights and interests of employees, consumers and end users, community resources and relationship management, customer relationship management, supplier relationship management, rural revitalization, and social contributions. The ESRS on the other hand include the company’s own workforce, workers in the value chain, affected communities, consumers and end users.
It is interesting to see the focus on social contributions and rural revitalization in the Chinese standards, which is not something that European companies are expected to deal with.
If viewed separately, the lack of mention of communities in the Chinese standards might be a cause of concern to those who, like me, support Global South communities. However, there is a section on value chains that offers some positive news. It states that businesses should consider their value chain in sustainability reporting, including risks, opportunities, and impacts tied to their direct and indirect relationships. The value chain is defined as referring to the interactions, resources, and relationships connected to the company’s business model and environment, from product development to delivery, use, and end of life.
On governance, the Chinese standards are a bit more nebulous. They mention “business conduct” without giving too many details, while the European standards provide examples of relevant business conduct: transparency within the organization, corruption, bribery.
… and why all this is good news.
There are some differences in the Chinese Basic Standards and the ESRS, reflecting values and political decisions that are beyond the scope of this piece. The final version of the Chinese standards are not yet available, and may look different from the draft that was out for consultations. But there is a clear trend towards convergence in disclosure, and that is good news for many reasons.
From a business perspective, convergence on ESG disclosure is not only good for investors. Chinese companies that are ready to include ESG disclosure data on their reports will be first movers and will be able to comply with European norms such as the Corporate Sustainability Reporting Directive and the Corporate Sustainability Due Diligence Directive, avoiding the disruption of supply chains to global markets.
From a consumer perspective, these regulations will encourage companies to offer products that are made according to better standards, with less emissions and less pollution, in companies with decent working conditions, which have suppliers that respect their workers. But this will depend on actual enforcement of standards and third party verification.
As an old school international development professional educated in the 20th century, I like many others, recycled myself into an ESG advocate and from that perspective, I hope to see progress in the way companies value nature as natural capital; I hope to see communities thriving as part of local economies, with their rights respected; And well managed businesses contributing to the society they are part of - and beyond.
Our world is complex, and polarization fanned by the media does not help. We need to move past the noise to find common ground and try and forge a future where societies thrive on a common path of prosperity.
We need to resist seeing the world through the easy but deceptive "Us xThem" lens, tempting as it may be, or we may well find ourselves waking up to a war, and not only of ideas.
[2] Corporate Sustainability Disclosure Guidelines—Basic Guidelines (Draft for comments). Available at P020240527389900277139.pdf (mof.gov.cn). A summary in English is provided here.
The views and opinions expressed in this blog are those of the author and do not necessarily reflect the opinion or position of Future Horizons.