Photo by SeanPavonePhoto on iStock
June 5, 2024
Authors
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Director, Transformation, BSR
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Olivia Li
Former Manager, Transformation, BSR
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Associate, Shared Services, BSR
Key Points
- Recently, China introduced national ESG reporting guidelines that require large companies to disclose their sustainability performance by 2026.
- The guidelines require businesses to balance global ESG integration with China’s priorities, improve data accuracy, foster collaborative approaches, and anticipate growing consumer expectations.
- Adhering to the new guidelines across the value chain is crucial for companies to mitigate risks, build trust, remain competitive, and drive sustainable growth.
This year, China released its national ESG reporting guidelines to promote sustainable development and meet global standards. This coordinated effort, in line with China's economic goals, has significant implications for businesses operating in the country.
The national ESG disclosure guidelines mandate large companies included in domestic stock indexes as well as those listed overseas (including Hong Kong), to issue sustainability reports by 2026, representing 59% of China's stock market value. The guidelines attempt to align with international reporting standards such as the Global Reporting Initiative (GRI), the International Sustainability Standards Board (ISSB) and the Task Force on Climate-Related Financial Disclosures (TCFD). This facilitates clearer and more transparent communication of a company's ESG impacts, risks, and opportunities in a standardized manner that can be easily compared and benchmarked. They emphasize double materiality, and reporting across key areas such as governance, strategy, risk management, metrics and targets for disclosure. Additionally, they suggest reporting on China-specific topics, such as pollution and climate change, along with social issues like rural development to encourage sustainable growth.
In parallel, Beijing, Shanghai, and Suzhou have issued action plans focusing on ESG transparency and developing supporting infrastructure and governance to enable sustainable business practices. While Shanghai aims to ensure that all export-oriented state-owned enterprises listed on stock exchanges publish ESG reports by 2027, Beijing is emphasizing policy frameworks and establishing ESG rating systems. We anticipate more cities to follow.
Business Implications
The new ESG guidelines spur urgency among businesses to strengthen their ESG practices and governance, as failure to do so could result in heightened operational risks, loss of investor confidence, and diminished competitiveness in the Chinese market. By embracing these guidelines, businesses can enhance transparency while strategically aligning with China's sustainable development priorities.
We have identified four key steps to maximize your company's potential in this evolving landscape:
- Balance Global ESG Integration with China Priorities: Rather than purely aligning with international norms, the new ESG guidelines anchor distinct national issues. On the one hand, companies need to align with global ESG benchmarks, particularly climate action and human rights, to facilitate seamless compliance and credibility. Given that their operations leave a significant impact on the local market and supply chain, companies will have to consider China's specific material issues such as environmental protection and common prosperity. Many multinationals are now engaging in initiatives to tackle income inequality, a key aspect of China's common prosperity agenda. As we anticipate more policy changes in these areas, companies need to adjust their strategies accordingly to remain compliant and contribute positively to local priorities.
- Enhance Data Accuracy and Due Diligence: As the new guidelines mandate sustainability reporting for numerous firms, company ESG data will become more accessible via increased disclosures. There's a potential for heightened investor enthusiasm and engagement with business opportunities across various sectors within the country, due to more performance regulation and increased global investment within the country. However, robust due diligence is necessary to verify data quality and accuracy, especially for financial institutions evaluating investment opportunities. It will be necessary to implement advanced data verification technologies to ensure the accuracy and reliability of ESG data, such as blockchain-based systems or AI-powered data analytics tools.
- Foster a Collaborative ESG Approach: As the new ESG guidelines take effect, China's overall ESG landscape will continue maturing. Amid this context, awareness among business partners like suppliers and industry partners will rise rapidly. By adopting a common regulatory approach to ESG, it could open China up to global cooperation regarding ESG issue areas like sourcing and value chains. Engaging local suppliers to collaboratively address scope 3 emissions, and working with local partners to ensure ESG data accuracy, alongside understanding and adapting to local regulations and market trends, will be increasingly crucial.
- Anticipate Growing Sustainability Awareness and Expectations: As the ESG landscape develops further under the new guidelines, public understanding of ESG and sustainability issues will increase, especially in frontrunner cities like Beijing and Shanghai. Numerous innovations in business models and technology are already underway, focusing on areas such as carbon reduction and the circular economy. Companies should prepare for heightened consumer awareness, employee expectations regarding sustainability efforts, and scrutiny of their ESG commitments. This dynamic presents both challenges and opportunities, prompting companies to develop robust ESG strategies, governance structures, and reporting mechanisms to effectively engage with and meet market and internal expectations.
In summary, China's new ESG reporting guidelines and municipal-level guidance aim to advance sustainable business practices while aligning with international norms. For companies operating in China, adhering to these regulations is essential for mitigating risks, enhancing transparency, building stakeholder trust, and driving sustainable growth opportunities. By proactively integrating ESG across operations based on global and local ESG priorities, businesses can navigate this landscape more effectively.
For more insights into China’s evolving regulations landscape, please reach out to BSR’s local team.
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