On April 20th, Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC), stated that currently, the CSRC's requirement for disclosing ESG-related information is mainly based on a voluntary principle. Listed companies should actively disclose more ESG information. When the disclosed information is accurate and abundant, it is conducive to investors making an accurate judgment about the company's future development sustainability.
Currently, what is the overall status of ESG information disclosure by listed companies in China? From the perspective of advancing the dual carbon goal, what is the significance of ESG information disclosure by listed companies? Should ESG information be compulsorily disclosed by listed companies? How should the ESG information disclosure system be further improved? Dr. Wang Xin, Global Partner and President of Greater China at Frost & Sullivan (hereinafter referred to as 'Frost & Sullivan'), was interviewed by Securities Daily to discuss these issues together.The current status of ESG information disclosure by listed companies in China and the future development of the ESG disclosure system.
Securities Daily
On April 20th, Fang Xinghai, vice chairman of the China Securities Regulatory Commission (CSRC), stated that currently, the CSRC's requirement for disclosing ESG-related information is mainly based on a voluntary principle. Listed companies should actively disclose more ESG information. When the disclosed information is accurate and abundant, it is conducive to investors making an accurate judgment about the company's future development sustainability.
According to the 'White Paper on ESG Development of Listed Companies in China' jointly released by the China Securities Association and CSI Index Co., Ltd., from 2009 to 2021, the number of A-share listed companies disclosing ESG-related reports increased from 371 to 1112, with the initiative of ESG information disclosure rising year by year.
The interviewed experts believe that in recent years, regulatory authorities have taken multiple measures, highlighting the achievements of listed companies in ESG information disclosure. However, there are also shortcomings such as inconsistent disclosure standards. Strengthening ESG information disclosure is conducive to improving corporate governance levels, enhancing sustainable development capabilities, and further accelerating the achievement of the dual carbon goals.
Leading enterprises have a strong awareness of ESG disclosure
Since the establishment of the basic framework for ESG information disclosure at the end of September 2018, the development of ESG information disclosure has entered a fast track.
In recent years, the awareness of ESG information disclosure among leading listed companies on the A-share market has significantly increased. According to research report data from LeadLeo Research Institute, the disclosure rate of ESG reports by listed companies on the CSI 300 has been rising year by year over the past decade, gradually increasing from 50.7% in 2011 to 83.3% in 2021, far exceeding the overall disclosure rate of 25.3% for all listed companies on the A-share market.
"Advocating ESG is actually about using market mechanisms to address the huge challenges posed by sustainable economic and social development, guiding enterprises to implement corresponding sustainable strategies and plans. At the micro level, while maximizing corporate interests, this will ultimately achieve national industrial and economic goals at the industry and macro levels," said Wang Xin, Global Partner and President of Frost & Sullivan Greater China, to a reporter from Securities Daily.
However, there are also some urgent issues that need to be resolved in the development of ESG information disclosure. 'ESG investment is an important part of green finance. Compared with international mainstream information disclosure standards, China has not yet formed a unified ESG disclosure standard system for its overall ESG development. The main problems are reflected in imperfect legal regulations and non-uniform disclosure standards,' said Chen Li, chief economist and director of the research institute at Sichuan Finance Securities, to the Securities Daily reporter.
In Wang Xin's view, there are mainly three deficiencies in the domestic ESG information disclosure: the information disclosure system is not unified and its quality varies widely. Third-party audits need to be improved, with a low coverage rate of indicators. ESG assessment ratings lack systematicness.
In addition, regarding ESG information disclosure, A-share listed companies mainly disclose voluntarily. Whether mandatory disclosure will become a trend has sparked heated discussions in the market. 'At present, domestic ESG information disclosure mainly follows the principle of voluntariness and has not yet reached the level of synchronizing with international ESG standards or mandatory disclosure,' Chen Li said. Considering that the current domestic ESG information disclosure system is not yet perfect, ESG disclosure should rely more on market forces to encourage enterprises to better comply with sustainable development requirements, thereby enabling society to achieve sustainable development.
"Compulsory ESG information disclosure will become an inevitable trend. The severe climate change situation and the increasing frequency of extreme weather events have promoted mandatory disclosure, with overseas ESG information disclosure already being a common mandatory requirement." Wang Xin cited an example, stating that Germany introduced mandatory ESG reporting regulations for large enterprises in 2016, requiring non-compliant companies to provide explanations. In 2021, the U.S. Securities and Exchange Commission (SEC) proposed mandatory disclosure recommendations for key ESG areas. In the Asia-Pacific region, listed companies in Singapore, Japan, Indonesia, and Hong Kong are all required to disclose ESG information compulsorily.
ESG Empowers Corporate Business Value
Meanwhile, regulatory authorities continue to urge listed companies to strengthen ESG information disclosure in order to further improve the quality of listed companies and promote the achievement of the dual carbon goals.
On April 15, the China Securities Regulatory Commission (CSRC) issued the 'Guidelines for Investor Relations Management of Listed Companies', which state that 'in accordance with the requirements of implementing new development concepts, ESG information on the environment, society, and governance of listed companies should be included in communication content.'
Chen Li analyzed that strengthening ESG information disclosure is beneficial in two ways. On one hand, it helps to encourage enterprises to pay more attention to environmental protection and internal governance, assisting in optimizing their own business and development strategies, thereby enhancing medium- and long-term sustainable development capabilities. On the other hand, as ESG standards become an essential reference for investment decisions, ESG empowers corporate commercial value. Listed companies with better performance will receive long-term support from the capital market, thus accelerating their pace towards becoming stronger and more efficient.
When discussing the necessity of strengthening ESG information disclosure, Wang Xin believes that first and foremost, it promotes the transformation of listed companies. Regular ESG information disclosure will facilitate the optimization of energy structures in industries such as petroleum and chemicals, drive their efforts towards low-carbon emissions, optimize production processes, improve energy efficiency, and reduce pollutant emissions. Secondly, it enhances the sense of responsibility of listed companies. ESG information disclosure has a two-way promoting effect on enterprises and stakeholders, helping them establish a robust interest ecosystem, boosting high-quality development, and regular information disclosure can force enterprises to strengthen their sense of responsibility and mission, thereby indirectly promoting the achievement of the dual carbon goals.
Regarding how to further optimize the ESG reporting system, Wang Xin stated that listed companies can provide investors with more effective ESG-related information by increasing the release of quantitative information and improving the quality of disclosed information; establishing ESG databases for more efficient collection and management of ESG information and data; when listed companies in related industries participate in carbon trading or engage in green finance, they need to increase the quantity and quality of information disclosure on carbon emission data in their annual and semi-annual reports.
Chen Li suggests that regulatory authorities need to establish and improve the rules and standards for ESG information disclosure by financial institutions, construct an evaluation system for ESG information disclosure, and further strengthen supervision over information disclosure by financial institutions to promote a comprehensive improvement in the quality of information disclosure.
Frost & Sullivan Insight & Extended Readings
Q: Currently, what is the overall status of ESG information disclosure by listed companies in China? What are the deficiencies?
A: Current Situation:1. The disclosure of ESG information by A-share listed companies has increased, with a stable disclosure rate and significant room for improvement.According to statistics from Shenwan Hongyuan, since 2014, the disclosure rate of ESG reports for A-share companies in China has remained stable at about 25%. The number of disclosures increased from around 615 in 2014 to 1,159 in 2021. According to Wind statistics, in 2021, A-share listed companies in China disclosed a total of 1,159 ESG reports, accounting for 24.74% of the total number of A-share listed companies in 2021 (4,684 companies). Among them, the proportion of ESG disclosures by listed companies on the Shanghai Stock Exchange in 2021 was 33.56%, and that by those on the Shenzhen Stock Exchange was 18.56%. According to Zhitong Finance, as of December 31, 2021, the proportion of H-share listed companies that independently published ESG reports was 52.2%; according to Shangdao Zongheng, as of July 31, 2021, the proportion of companies that had disclosed ESG information on the Hong Kong Exchanges and Clearing (HKEX News) was 93.8%.
2. The industry distribution of ESG disclosure is uneven.According to Wind statistics, the top five industries in terms of the number of ESG reports released in 2021 are pharmaceuticals, power and public utilities, basic chemicals, power equipment, and new energy and electronics. The number of disclosed reports is 90, 79, 74, 63, and 62 respectively. The high number of disclosures in the pharmaceutical industry is mainly related to the pandemic, while others are mostly concentrated in high-emission industries. In contrast, industries such as finance, food and beverages, and light industry have fewer disclosures.
Deficiencies: 1. Third-party audits need improvement, and the metric coverage rate is low.According to China's ESG research, as of May 2020, only 12% of the ESG reports released within the CSI 300 had undergone third-party auditing. Additionally, the coverage rate at the indicator level in disclosed reports is low; in 2020, the disclosure rates for social indicators and environmental indicators were 35.4% and 49.2%, respectively, with most social disclosures being qualitative descriptions.
2. The ESG information disclosure system is not unified, and its quality varies widely.The naming conventions for various enterprises are not unified, such as corporate social responsibility reports, corporate sustainable development reports, corporate impact reports, etc. The disclosure forms are published separately in some cases and integrated into annual or quarterly reports in others. There is no clear ESG information disclosure system or framework.
3. The ESG assessment and rating lacks systematicness.Currently, many foreign institutions are researching and developing ESG indicator systems, such as the MSCI ESG series indices, FTSE4Good series indices, The Dow Jones Sustainability series indices, etc. However, most of the research results in China focus only on individual factors within environmental, social, and corporate governance, lacking integration with national conditions. At the same time, the indicators and weight settings of different institutions vary.
Q: In recent years, regulatory authorities have promoted listed companies to strengthen ESG information disclosure. What is the positive significance of this for improving the quality of listed companies?
A:The rise of ESG has profound socio-political reasons. It encourages enterprises to assume more social responsibilities on the premise of minimizing government intervention, and demonstrates that enterprises have complete and adequate response measures in the face of increasingly severe challenges such as climate change, environmental pollution, and wealth disparity. The purpose of the ESG evaluation system is to internalize the 'externalities' caused by enterprises during their pursuit of profit maximization into the costs of the enterprises as much as possible. Essentially, it is redefining the boundary between enterprises and the market. Advocating for ESG is actually about using market mechanisms to address the huge challenges brought about by the sustainable development of the economy and society, guiding enterprises to implement corresponding sustainable strategies and plans. At the micro level, while enterprises maximize their interests, they achieve the industrial and economic goals set by the state at the industry and macro levels.
The positive impact of a company's ESG information on the value of listed companies is reflected in reduced systematic risk (such as the relative decline in the β coefficient in the CAPM model) and improved non-systematic risk conditions (such as enhanced profitability). Although the ESG framework emphasizes creating sustainable financial performance to a large extent, it also drives investors and businesses to focus on clear predictive adjustments or scenario analysis. By identifying or quantifying potential financial and non-financial factors, it mitigates various risks in the future.
Q: From the perspective of advancing the realization of the dual carbon goal, should listed companies be required to disclose ESG information compulsorily?
A:At present, the China Securities Regulatory Commission (CSRC) requires ESG disclosure on a voluntary basis and has not yet implemented mandatory disclosure. However, mandatory disclosure is an inevitable trend in the future.
1. Overseas ESG disclosure has become a mandatory requirement.Germany introduced mandatory ESG reporting regulations for large enterprises in 2016, requiring non-compliant companies to provide explanations. The US Securities and Exchange Commission (SEC) proposed mandatory disclosure recommendations on key ESG areas in 2021. The UK has stipulated that starting from April 2022, more than 1,300 large companies and financial institutions registered in the country must disclose climate-related financial information, becoming the first G20 group country to mandate large corporations to make climate disclosures according to TCFD. In the Asia-Pacific region, listed companies in Singapore, Japan, Indonesia, and Hong Kong are required to disclose ESG information compulsorily. The Hong Kong Exchanges require listed companies to compulsorily disclose ESG-related reports after July 2020. In 2021, the Hong Kong Exchanges revised the 'Corporate Governance Code' and related 'Listing Rules', focusing on the corporate governance section, which includes aspects such as board independence, diversity, and anti-corruption within the company.
2. The severe climate change situation and the increasing frequency of extreme climate events have promoted mandatory disclosure.According to the conclusions of the IPCC's sixth assessment report, climate warming is caused by human activities, and the global climate system is undergoing rapid and widespread changes, some of which are irreversible. Under all emission scenarios, global temperatures will rise by at least 1.5°C. This forces countries around the world to take global climate change more seriously and mandates companies to conduct ESG climate disclosures.
*This article is reprinted from 'Securities Daily', with reporter Xing Meng. The original article was titled 'The initiative of listed companies to disclose ESG information is increasing year by year, and experts believe mandatory disclosure is an inevitable trend'. We would like to thank Lou Lei, Executive Director for Greater China at Frost & Sullivan, and Jiang Yu, Analyst, for their support in this interview.
