ESG in China: Ongoing challenges and recent developments

Introduction

ESG awareness is growing in China. Companies are increasingly committing to ESG data disclosure and monitoring, spurred by stricter regulatory requirements, growing investor interest and the widespread belief that accounting for ESG contributes significantly to long-term business success. However, there is still some way to go. Chinese firms lag their peers globally in terms of the scope and quality of their ESG data disclosures. The market for ESG ratings and data is also still rather nascent in the country. We delve into the challenges around ESG in China from the perspective of corporates and investors and also take stock of the many positive developments in this space in recent years.

Ongoing challenges around ESG data disclosure in China

Chinese companies generally disclose less ESG data than international peers, with the available data frequently not standardized or comparable. There are several reasons as to why this is the case:

1) Lack of unified disclosure requirements

Currently, various ESG disclosure guidelines have differing requirements, for example, CSI 300 companies already followed a total of nine guidelines as of June 2020.¹ Without a unified set of rules, companies lack clarity on what is the most material information to provide to their shareholders, external rating agencies and data providers. As there is no benchmarking that occurs with industry peers, this further exacerbates this issue as firms have no consensus on which topics stakeholders deem the most important.

2) Data collection processes and personnel challenges

Many companies in China also do not have established processes for collecting high-quality ESG data. Data is typically collected manually across various departments. This can be time-consuming particularly in larger corporations that have many sub-divisions and a complex financial structure. 

A large number of Chinese firms also do not have dedicated personnel for the development of ESG policies and practices. The lack of personnel also often translates to companies having fewer dedicated resources to support ESG initiatives including reporting. As such Chinese corporates often do not have written policies in areas such as equal opportunity, health and safety and diversity and inclusion. While some companies may already have the related processes and protocols in place, they may lack official policies and implementation documents. This makes it difficult for investors to assess companies’ commitment to ESG and their performance.

3) The market for ESG ratings and data is nascent

Another limitation for corporates is the lack of ESG coverage by third party rating agencies. If this coverage increases, it can be a driving force for Chinese companies to improve ESG disclosures and reporting. 

Currently, the coverage of local companies by third-party ESG data providers is also low and these data firms struggle with a lack of comparable historical data for companies they report on. At the same time, international data providers often focus on companies covered by FTSE or MSCI indices. In response to growing policy support and investor interest on this topic, a variety of third-party data providers have emerged in China in recent years. These include traditional index/data providers, fintech companies, asset managers or owners, academic or non-profit institutions and consulting companies, which have helped to provide the market with more data sources and viewpoints.

Positive ESG policy developments in recent years

While several challenges persist, there is light at the end of the tunnel. ESG data disclosure rates have improved significantly in the past decade in view of growing policy support and investor demand.

From a regulatory perspective, in 2016, seven government ministries and commissions including the People’s Bank of China (PBoC) published the Guidelines for Establishing the Green Financial System indicating their intention to make disclosures of environmental information mandatory among listed companies.² As of June 2021, new corporate reporting guidelines have been issued by the China Securities Regulatory Commission (CSRC) which will raise the disclosure standards for listed companies on environmental issues, including mandatory disclosures of any environment-related administrative penalties during the reporting period.³

In Hong Kong, the stock exchange upgraded their environmental disclosure rules among listed corporates to a comply-or-explain basis in 2016. These rules were amended again in 2020 to further tighten disclosure requirements⁴ with the goal to shift the focus from reporting to management and board accountability.⁵ The effectiveness and reception of these new standards is expected to be seen in early 2022 through companies’ ESG reporting.

The Chinese government has also been increasing domestic sustainability targets for the last two decades. In the past five years however, environmental regulations and emissions standards have become stricter and combatting pollution has become a high-level priority. In September 2020, President Xi Jinping announced his target for China to achieve carbon neutrality before 2060.⁶ Government support to combat climate change is expected to lead to increased transparency and improvement in ESG-related disclosures and reporting in the future.

Conclusion

We believe that China’s commitment to ESG will see continuous development and growth in the coming decades, whether in corporate disclosures, data quality or industry adoption. Chinese corporates are at a defining juncture given the pace at which measures have been taken by regulators, investors, and exchanges in championing ESG in recent years. These firms can enhance their ESG disclosures through greater board-level commitment, integration of ESG factors into business strategy formulation and better management of ESG risks and opportunities.⁷ By showcasing their commitment to ESG, corporates in China can ensure their longevity also enhances their long-term value creation.

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance. 

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