ESG reporting in China: new guidelines for more transparency

published on 24 June 2024 I reading time approx. 4 minutes

To improve the sustainability performance of companies, China's stock exchanges in Shanghai, Shenzhen and Beijing published new sustainability reporting guidelines in April 2024. These guidelines are based on international standards and aim to increase the transparency and comparability of corporate information and apply to listed companies and environmentally intensive sectors for the first time for the 2025 financial year. Later, in May 2024, the Ministry of Finance (MOF) published a resolution “Corporate Sustainability Disclosure Guidelines – Basic Guidelines (Exposure Draft for public comment now)” also articulates on the same perspective.

The overall goal of establishing a system of sustainable disclosure standards with Chinese characteristics is clearly stated: by 2027, China aims to introduce basic standards for corporate sustainable disclosure and climate-related disclosure standards. By 2030, a unified national system of sustainable disclosure standards is expected to be fundamentally established. The implementation of these standards will follow a gradual strategy, starting with listed companies and then expanding to non-listed companies, from large enterprises to small and medium-sized enterprises, and from voluntary disclosure to mandatory disclosure.

During the entire cycle of developing the standards system, relevant departments may, based on actual needs, first formulate disclosure guidelines and regulatory systems targeting specific industries or fields.

The published basic guidelines are an important step towards a more sustainable Chinese economy and open up new opportunities for foreign companies through guiding more responsible investment and corporates operation

What needs to be reported? »

Focus on double materiality »

Specific chinese topics »

Opportunities and challenges for audit »

Conclusion »

What needs to be reported?

The published guidelines consist of 33 articles summarized in 6 chapters covering 21 materials environmental, social and corporate governance (ESG) topics.
These include, among others:

(E) Climate protection, resource utilization and circular economy
(S) Labor conditions, human rights
(G) Corporate governance systems, anti-corruption and risk management

Focus on double materiality

The guidelines emphasize the importance of double materiality, which indicated that both financial materiality and impact materiality were considered in the basic guidance. Companies must analyses the short, medium and long-term effects on their business model, cash flow, financial position and impact on operating results, among other things (financial materiality). In the case of non-financial materiality (impact materiality), companies must review and disclose the material impact of the topics on the economy, environment and society. They must also explain how the materiality analysis was carried out.

If a topic to be disclosed is of purely financial significance for the company, the analysis must be disclosed based on the following 4 points: Governance; Strategy; Management of sustainability-related risks and opportunities; and metrics and targets.

Specific chinese topics

The Sustainability Reporting Guidelines integrate some specific topics that are relevant to China's development. There is a particular focus on the social issues of “Rural Revitalization”, “Innovation-driven Development” and “Ethics in Science and Technology”. These points are not entirely new, as they can be found in a modified form in the GRI, for example.

Opportunities and challanges for audit

In Chapter 3 of the basic guidelines, it is explicitly required that companies disclose sustainable information that is reliable and accurately reflects significant sustainability risks, opportunities, and impacts. This ensures that the sustainability information is complete, neutral, and accurate.

Though, it has not yet been determined whether this information should undergo audit verification, while stakeholders may need these disclosures to be assured by an independent third party. This will present new opportunities and challenges for auditing. Auditors will need to timely adjust and enhance their professional capabilities to meet the new auditing requirements, thus helping companies achieve long-term success and sustainable development in a dynamic market and under strict compliance demands.

The guidelines have explicitly required the deadline for sustainability disclosure which should be coincident with the financial statement. Aligning these deadlines can provide stakeholders with a comprehensive view of the company’s overall performance, and align with the international common practices.

Conclusion

The new guidelines mark a turning point towards a more transparent and sustainable economy in China. They offer German companies not only the opportunity to improve their sustainability performance, but also to strengthen their market position. By applying these guidelines, companies can improve their reputation, gain access to sustainability-oriented investors and drive innovation. The transformation to a sustainable business model can help open up new markets and ensure long-term success through responsible business practices. Despite the challenges of a dynamic market and strict compliance requirements, the opportunities for a sustainable positioning in the Chinese market outweigh the risks.

German companies are well advised to capitalize on this development at an early stage to secure a decisive competitive advantage.