Mainland China

A. ESG Reporting

1. Are there legal or regulatory requirements for companies to make ESG disclosures in your jurisdiction?

Yes.

2. What are the key legislative and regulatory sources for ESG disclosure requirements and to whom do they apply?

In the mainland of China, general ESG disclosure requirements are primarily aimed at listed companies:

(a) Self-regulatory Guidelines of Shenzhen Stock Exchange for Listed Companies No. 1. - Standardized Operation of Main Board Listed Companies, which (1) stipulate that the listed companies included in the “Shenzhen Stock Exchange 100 Index” should disclose their Social Responsibility (SR) reports separately in accordance with the relevant provisions of the Guidelines for Standardized Operation of Listed Companies of the Exchange, and in accordance with Annex 1 - Disclosure Requirements for Social Responsibility Reports of Listed Companies, and (2) encourage other companies listed on the Shenzhen Stock Exchange to disclose their SR reports.

(b) Self-regulatory Guidelines of Shanghai Stock Exchange for Listed Companies No.1 - Standardized Operation, which stipulate that companies listed on the “Shanghai Stock Exchange Corporate Governance Sector”, companies listed on both Shanghai Stock Exchange and other jurisdictions outside the mainland of China, and financial companies shall disclose their SR reports at the same time as their annual reports. The Shanghai Stock Exchange also encourages other companies listed on the Shanghai Stock Exchange to disclose their SR reports at the same time as their annual reports.

(c) Notice on Conducting Disclosure of 2021 Annual Reports of Listed Companies on the Shanghai Stock Exchange's Sci-tech Innovation Board (SSE STAR Market), which stipulates that SSE STAR Market listed companies should disclose ESG-related information in their annual reports, and separately prepare and disclose ESG reports, SR reports, sustainable development reports, environmental responsibility reports, and other documents as appropriate. The companies included in the SSE STAR Market 50 Index should disclose their SR report at the same time as the disclosure of their annual reports; those which have already disclosed ESG reports are exempted from separate disclosure of SR reports. Other companies listed on the SSE STAR Market are also encouraged to disclose ESG reports or SR reports at the same time as their annual report. When preparing their ESG reports or SR reports, the companies should disclose their actions to support the “carbon peak and carbon neutrality” goals and promote sustainable development as a key focus.

(d) Self-regulatory Guidelines of Shenzhen Stock Exchange for Listed Companies No.17 - Sustainable Development Report (Trial) stipulates that the listed companies included in the “Shenzhen Stock Exchange 100 Index, Growth Enterprise Index, and enterprises simultaneously listed in the Exchanges in China and abroad” shall disclose sustainability reports covering environmental, social and governance topics, including typical and more innovative aspects.

(e) Self-regulatory Guidelines of Shanghai Stock Exchange for Listed Companies No. 14 - Sustainable Development Report (Trial) stipulates that the listed companies included in the “Shanghai Stock Exchange 180 Index, STAR 50 Index, and enterprises simultaneously listed in the Exchanges in China and abroad” shall disclose sustainability reports covering environmental, social and governance topics, including typical and more innovative aspects.

(f) Self-regulatory Guidelines of Beijing Stock Exchange for Listed Companies No. 11 - Sustainable Development Report (Trial) stipulate similar rules as items (d) and (e) above for Beijing Stock Exchange listed companies but they are proposed to be non-mandatory at this stage.

The new guidelines mentioned at paragraphs (d) to (e) above are termed the “Sustainable Development Report Guidelines” in this chapter.

In addition, based on the Measures for Administration of Law-based Disclosure of Environmental Information by Enterprises (the MEE Measures) issued by the Ministry of Ecology and Environment (MEE) of China, certain enterprises are subject to mandatary environmental disclosure requirements. They include:

(i) key pollutant-discharging entities;

(ii) enterprises subject to compulsory cleaner production audit;

(iii) listed companies and their subsidiaries at all levels (to the extent consolidated) that are subject to the provisions of Article 8(1) of the Measures (e.g. those that have breached environmental laws);

(iv) enterprises issuing enterprise bonds and corporate bonds, and non-financial enterprises issuing debt financing instruments that are subject to the provisions of Article 8 of the MEE Measures; and

(v) other enterprises that shall disclose environmental information as prescribed by laws and regulations.

3. Are the requirements mandatory or do they apply on a comply-or-explain basis?

The disclosure requirements of the Shenzhen Stock Exchange and Shanghai Stock Exchange discussed in section A.2(a) to (c) are now mandatory for (1) the listed companies included in the “Shenzhen Stock Exchange 100 Index”, (2) the representative companies listed on the “Shanghai Stock Exchange Corporate Governance Sector”, (3) the Shanghai Stock Exchange listed financial companies, (4) the companies listed on both Shanghai Stock Exchange and other jurisdictions outside the mainland of China, and (5) SSE STAR Market listed companies. They are otherwise voluntary for other listed companies on the Shenzhen Stock Exchange or Shanghai Stock Exchange.

The disclosure requirements under the Sustainable Development Report Guidelines of the Shenzhen Stock Exchange and Shanghai Stock Exchange (as discussed in section A.2(d) and (e) above) will be mandatory from 2025 for (1) the listed companies included in the “Shenzhen Stock Exchange 100 Index”, (2) the companies listed on “Growth Enterprise Index”, (3) the listed companies included in the “Shanghai Stock Exchange 180 Index”, (4) the companies listed on “STAR 50 Index”, and (5) the companies listed on Shenzhen Stock Exchange or Shanghai Stock Exchange and other jurisdiction outside the mainland of China. 

The Sustainable Development Report Guidelines stipulate similar rules for companies listed on the Beijing Stock Exchange, but they are proposed to be non-mandatory. There is no indication of when they may become mandatory.

The requirements under the MEE Measures on environmental disclosure are mandatory for certain enterprises as discussed in section A.2.

4. Which aspects of ESG do the requirements focus upon?

Based on the requirements of the Shenzhen Stock Exchange and Shanghai Stock Exchange as discussed in section A.2(a) to (c), various environmental, social and governance aspects are covered. Specifically for the companies listed on the SSE STAR Market, the key focus is on their actions to support the “carbon peak and carbon neutrality” goals and promote sustainable development.

For companies subject to the Sustainable Development Report Guidelines of the Shenzhen Stock Exchange and Shanghai Stock Exchange, various environmental, social and governance aspects are covered, including typical and more innovative ESG topics. The environmental aspect mainly includes climate change (including GHG emissions), pollution, biodiversity and ecosystem, resource use and circular economy. The social aspect mainly includes rural revitalization and social contribution, innovation and scientific ethics, supply chain and customer, and worker’s rights. The governance aspect mainly includes corporate sustainable development management system, anti-bribery and anti-unfair competition.

For companies subject to the MEE Measures, the key environmental disclosure aspects include:

(a) basic information of the enterprise (production and environmental protection information);

(b) information of the environmental management of the enterprise;

(c) information of the generation, control and discharge of pollutants;

(d) carbon emission information;

(e) ecological and environmental emergency response information;

(f) information on violation of ecological and environmental laws;

(g) law-based annual disclosure of temporary environmental information; and

(h) other environmental information as prescribed by laws and regulations.

5. Are the disclosure requirements based on international standards? If so, which one(s)?

The regulatory disclosure requirements themselves do not specify any reference to international standards. However, based on a recent analysis by China Association for Public Companies, they share some commonalities with IFRS S1 and IFRS S2 in terms of framework structure, basic concepts, disclosure principles, disclosure framework, and disclosure of climate change issues. This is particularly the case for the Sustainable Development Report Guidelines.

In practice, many companies listed on the Shanghai Stock Exchange or Shenzhen Stock Exchange prepare their ESG/SR reports with reference to the international standards/frameworks such as the GRI standards, ISO26000 and TCFD Recommendations.

6. How do the disclosure requirements approach materiality (e.g. single or double materiality)?

The disclosure requirements of the Shenzhen Stock Exchange and Shanghai Stock Exchange adopt double materiality.

7. Are there requirements for the disclosure of GHG emissions? If so, please specify the scope (e.g. Scope 1, Scope 2 and/or Scope 3), to whom they apply and whether there are requirements on the measurement methodology.

Based on the latest Sustainable Development Report Guidelines of the Shanghai Stock Exchange and Shenzhen Stock Exchange:

(a) The disclosing entity should account for and disclose the total GHG emissions during the reporting period and convert the emissions of different GHGs into MTCO2e. The entity should disclose the emissions categorised into Scope 1 and Scope 2 emissions, and it is encouraged to disclose Scope 3 emissions for those entities that have the conditions to do so.

(b) The disclosing entity should disclose the standards, methods, assumptions, or calculation tools used to account for GHG emissions, and explain the consolidation methods of the emissions (such as equity proportion, financial control, operational control, etc.). If there are changes in the accounting standards, methods and assumptions etc. during the reporting period, the reasons should be explained and the specific impacts should be disclosed.

On 18 October 2023, China’s MEE issued the Notice on the Reporting and Verification of Greenhouse Gas Emissions of Enterprises in Certain Key Industries in 2023-2025, which stipulates that key emission enterprises, including those with annual carbon emissions of or above 26,000 tCO2 in key industries such as petrochemicals, chemicals, building materials, steel, non-ferrous metals, paper, and civil aviation, are required to report GHG emissions on the National Carbon Market Information Network. This notice focused on designated emission factors relating to manufacturing and operation, encompassing only Scope 1 and Scope 2 emissions. The notice outlines the reporting verification methods prescribed by the MEE in the Guidance for Verification of Enterprise Greenhouse Gas Emissions Reporting (Trial).

8. Are there requirements to obtain independent assurance of any ESG disclosures? If so, what is the scope of such requirements?

No mandatory requirements. However, the Sustainable Development Report Guidelines encourage disclosing entities to engage third-party institutions to provide assurance/audit for their greenhouse gas emissions and other disclosed data.

The disclosed information should include the independence of the institution, the relationship with the disclosing entity, experience and qualifications, and the assurance or audit report. The content of the report should include but is not limited to the scope of assurance or audit, the standards used, main procedures, methods and limitations, opinions or conclusions, etc.

9. For companies not subject to mandatory or comply-or-explain ESG reporting, are voluntary ESG disclosures customary?

Many listed companies make reference to international standards (such as the GRI standards and ISO26000) and/or local group standards (such as the Guidelines on Sustainability Reporting for Chinese Enterprises (CASS-ESG 6.0) and Guidance for Enterprise ESG Disclosure (T/CERDS 2-2022)) in their ESG reports even though they are not mandatory.

10. Has your jurisdiction issued or adopted a taxonomy on sustainable activities? Is it mandatory and what is its scope of application?

The International Platform on Sustainable Finance, which was jointly launched by economies including China and the EU, released the Common Ground Taxonomy (CGT). The CGT has been adopted by some financial institutions in China and the EU as reference for determining whether projects satisfy the purpose of sustainable finance when issuing financial products, but it is not mandatory.

The guidance on “green investment” and the Green Bond Endorsed Projects Catalogue mentioned in section C.2 below apply in the sustainable finance context.

11. Are there plans to adopt or incorporate the ISSB’s IFRS S1 and/or S2 standards? If so, please indicate the extent of alignment, to what extent the standards will be mandatory, to whom they will apply and the timeline.

On 27 May 2024, China's Ministry of Finance released the “Corporate Sustainability Disclosure Standards - Basic Standards (Exposure Draft)” (the Basic Standards), marking the gradual establishment of a unified sustainability disclosure standards system for China. The Basic Standards is based on IFRS S1 and is generally consistent with IFRS S1 in terms of information quality characteristics, disclosure elements, and related disclosure requirements, but fully considers China's national conditions in terms of purpose, scope of application, disclosure objectives, and materiality standards, for example, (1) a “double materiality” perspective is adopted, and (2) “rural revitalization”, a distinctive Chinese topic has been recognised for disclosure. The Basic Standards have many similarities with IFRS S1, such as the four-pillar framework of “governance, strategy, risk and opportunity management, metrics and targets”, and the content of the fourth chapter on disclosure elements corresponds broadly with the content of IFRS S1. The Basic Standards also adopts the information quality requirements from IFRS S1, that is, reliability, relevance, comparability, verifiability, understandability, and timeliness, which are consistent with Appendix IV of IFRS S1.

Compared with the Sustainable Development Report Guidelines issued by the three major stock exchanges, the impact of the Basic Standards seems to be greater. On the one hand, it is intended that the Basic Standards are not only required to be followed by listed companies but also by non-listed small and medium-sized enterprises; on the other hand, the Basic Standards draw on the international standards of the ISSB, demonstrating China's efforts to align with international practices in sustainable information disclosure, while including topics with Chinese characteristics.

The consultation period for the Basic Standards ended on 24 June 2024.

Article 3 of the Basic Standards indicates that the corporate sustainable disclosure standards will eventually consist of: basic standards, specific standards, and application guidelines. The blueprint of China's corporate sustainable disclosure standards system is structurally similar to that of the ISSB: for example, the basic standards correspond to IFRS S1 (General Requirements), the specific standards correspond to IFRS S2 (Climate-related Disclosures), and the application guidelines correspond to technical support documents like the SASB standards. Drafts of the specific standards have not yet been issued.

See section A.12 below for the intended scope of application of the nationwide standards.

12. Other upcoming developments / direction of travel

The establishment of a nationwide unified sustainable disclosure standards system is an ambitious goal that will be implemented in stages.

The overall objective of China's Ministry of Finance is to successively introduce the basic standards for corporate sustainable disclosure and climate-related disclosure standards by 2027. By 2030, a basic national unified sustainable disclosure standards system will be essentially established. The requirements for enterprises will also be implemented gradually, with the general approach being to expand from listed companies to non-listed companies, from large enterprises to small and medium-sized enterprises, from qualitative requirements to quantitative requirements, and from voluntary disclosure to mandatory disclosure.