Beijing is betting on its new disclosure regime to enhance its green credentials – though its success may depend on how high-emitting SOEs are treated
China’s major stock exchanges released a draft rule in February that would mandate more than 500 listed companies to publish sustainability reports by 2026 and align the world’s largest polluter with European and global standards, thereby boosting its green credentials.
“A jurisdiction as significant as China aligning closely with international reporting standards is always a boon for investors, foreign and domestic,” says Christina Ng, managing director at the Energy Shift Institute, an Asia-focused think-tank.
The new disclosure guidelines from the three mainland China stock exchanges of Beijing, Shenzhen and Shanghai will initially incorporate a combination of mandatory and voluntary reporting requirements. Sustainability reporting will be mandatory from 2025 for companies listed in the main stock indices and those dual-listed on onshore and offshore markets. Companies not covered by this scope may issue reports voluntarily on their own timeline.
“Chinese companies have been facing higher pressure to report on ESG factors that align with international standards if they intend to raise capital offshore,” says Jingwei Jia, associate director at Sustainable Fitch.
The move follows a massive sell-off of Chinese stocks in 2023, where foreign investors offloaded about 90 per cent of the $33bn of stocks they had purchased earlier in the year. Major pension funds, such as Norges Bank Investment Management and California State Teachers Retirement System, have also reduced investments in the country.
“Having a robust ESG reporting framework in place is an important factor to boost foreign investors’ confidence,” adds Jia. “Many international investors have integrated ESG analysis throughout their investment processes, which means they demand high quality data on key ESG aspects.”
Under the provisions of the recently agreed EU Net Zero Industrial Act, at least 30 per cent of the volume of renewable energy technologies auctioned every year in every EU member state will have to include non-price criteria, including their contribution to sustainability and resilience, and responsible business conduct.
The public consultation on China’s draft rules ended on February 29, and the stock exchanges are expected to make changes based on the feedback received, under the guidance of the China Securities Regulatory Commission, before publishing the final guidelines. An expert close to the process said the draft was “well written”, and that they did not expect many alterations.
Appealing to and aligning with Europe
China’s new ESG disclosure rules follow the four-pillar framework of the International Sustainability Standards Board, which includes governance, strategy, risk management, and metrics and targets. They also integrate China’s green domestic targets, covering pollution control, climate change and rural development, into its ESG categories.
For example, listed companies are encouraged to disclose information on supporting rural revitalisation and social welfare. Reports will also need to cover ecological system protection, resource utilisation and the circular economy.
“China has not been a leader in adopting international standards in the past,” says Ng at the Energy Shift Institute. “This proposal to align their local requirements with ISSB is a very positive step forward, and suggests that China is thinking and acting strategically.”
The success of the new regime will depend on how it is implemented and whether it will be applied to key entities such as China’s high-emitting state-owned enterprises, which include China Huaneng Group, China Huadian Corporation and State Power Investment Corporation.
Historically, the Chinese authorities have shown more lenient reporting rules for state-owned enterprises, and so the impact of the new regime will also depend on enforcement practices by local regulators
“The new disclosure rules should be seen in the context of wider reforms, such as the recent guidelines for state-owned enterprises on board composition and capital allocation, all of which point in the right direction,” says Jia at Sustainable Fitch.
In July 2023, the State-owned Assets Supervision and Administration Commission of the State Council released a study on the preparation of ESG special reports for listed companies controlled by central enterprises. That report was distributed to all SOEs as a template for understanding how to standardise ESG information disclosure.
“The Chinese regulators have a huge role to play here and to streamline the reporting systems across the different entities,” says Ng.
Initial sustainability reports in 2025-26 will likely focus on qualitative disclosure over quantitative, “as Chinese companies may not immediately be ready to comply with all requirements and the rules provide a certain level of flexibility to prioritise on the most critical ESG topics”, says Jia.
China’s new rules also align with the ISSB on “double materiality”, meaning companies must also disclose their ESG impact on the environment and society.
Electric vehicle exports
The new ESG disclosure regime is also expected to amplify China’s position as a world leader in the electric vehicles and renewable energy sectors. In 2022, China accounted for 59 per cent of global EV sales and was responsible for 64 per cent of the world’s EV production supply, according to World Economic Forum data.
“China’s relentless efforts to drive down unit price for EV technologies has made them increasingly affordable for the rest of the world,” notes Helen Jia, China director at Singapore-based Asia Research & Engagement. “Better transparency and, in time, better performance on ESG will further improve China’s efforts to green its economy.”