On March 1, the Shanghai Stock Exchange published an official document titled the Programme of Action on Carbon Neutrality and Action during the “14th Five-Year Plan” (the Programme of Action). To align with China’s “30-60” Decarbonization Goals, the Programme of Action proposed six main initiatives as implementation guidance to establish China’s low-carbon capital market:
- Initiative 1: To optimize equity financing services, enhance environmental disclosure by listed companies, and promote the development of low-carbon enterprises;
- Initiative 2: To scale up green bond issuance, improve the green bond system, and enhance the quality of green investment products;
- Initiative 3: To improve the green index system, promote green investment product development, and deepen ESG awareness;
- Initiative 4: To enhance engagement with international organizations on green finance;
- Initiative 5: To strengthen and promote green finance research and provide guidance and education for green investment;
- Initiative 6: To establish energy use and carbon emission accounting systems, optimize energy-saving facilities, and create a low-carbon culture in the workplace.
Background of the Programme of Action
China has pledged to peak its carbon emissions before 2030 and reach net-zero emissions by 2060, a national ambition known as the “30-60” Goals. The country is under heavy pressure to attain such goals because its emissions will need to decline from a peak to net-zero within no more than 30 years. It is an ambitious target given that many countries are seeking to achieve carbon neutrality over 40 years after their emissions peaked.
China’s 14th Five-Year Plan (FYP), the overarching national development plan for the period of 2021–25, presents a real opportunity for China to accelerate its green transition to meet its carbon peaking goal. It is estimated that if China meets its carbon peak target by the end of the 14th FYP period at around 10 gigatonnes, it would be in a better position to establish a fully low-carbon economic system and a safe and efficient energy system by 2060.
Implications of the Programme of Action
1. Better Financing Environment for Low-Carbon Entities
According to the CITIC Securities’ report, Kweichow Moutai Co Ltd [600519: CH] is still ranked as the fourth largest ESG-related fund, but the entity makes no contributions to sustainability transition. To deal with this kind of problem, Initiative 1 calls for developing a greener market by vetting listed and pre-listed entities. The stock exchange promises to put stricter requirements for energy-intensive firms or divest from them entirely. As for eligible environmental-friendly or low-carbon companies, the stock exchange will provide financial support for their listing, such as lowering their listing costs. Moreover, strictly following the national strategies, the stock exchange will offer more benefits to companies with core technologies in decarbonization if they seek listing on the Science and Technology Innovation Board (STAR)
2. Normalize the Disclosure of ESG and Climate-related Information
The CITIC Securities reported that during 2020, only 41% of entities listed in Shanghai Stock Exchange Main Board published a standalone CSR report. In response, Initiative 1 highlighted the normalization of ESG reporting and enhancement of the quality and comparability of ESG data. It encourages Shanghai-listed companies to disclose results on carbon reduction and other climate-related information in their quarter and/or annual reports. The stock exchange will also help listed companies actively adapt to the requirements of green and low-carbon development, and include ESG as an important part of investor relationship management and communication with stakeholders.
The trend of Chinese stock exchanges introducing ESG disclosure to their reporting requirements can be traced back to the past few decades. In 2006, the Shenzhen Stock Exchange introduced guidelines on ESG disclosure, though it did not specify the disclosure scope. The Shanghai Stock Exchange required its listed companies to disclose environment-related data in their CSR reports in 2008, with a stricter requirement by CSRC on all state-owned enterprises (SOEs) to publish annual CSR reports since 2012. In addition, in January 2022, the Shanghai Stock Exchange announced that all Science and Technology Innovation Board (STAR) companies should disclose ESG information in annual reports beginning in 2022. In February 2022, the China Enterprise Reform and Development Society released a consultation on Guidance for Enterprises ESG Disclosure, a document that proposes a uniform ESG framework for all Chinese companies.
3. Scale up the issuance of green bonds and other green instruments
Green securities generally refer to securities that support green industry projects, including green bonds, green indices, and green funds. Initiative 2 and 3 emphasized the development of a green financial instrument of the Shanghai Stock Exchange as well as the entire Chinese market. The Shanghai Stock Exchange provides four types of green financial products: Green Bonds, Green ABS, Green ETFs and Green Indices, with total asset under management (AUM) of CNY 305.1bn (USD48.29bn). Among these products, green bonds are the mainstream products in the market, with over CNY290.3bn (USD45.95bn) of AUM. However, green indices and green ETFs are still in minority, with only 92 products in total. In China, until the end of January 2022, 112 out of 933 ESG-related products can be classified as sustainability-themed funds.
4. Work with international leaders in ESG disclosure and enhance cross-border cooperation
Singapore and Hong Kong are two leading players in ESG disclosure requirements in the APAC market. The Singapore Exchange (SGX) introduced sustainability reporting on a ‘comply-or-explain’ basis to its listing rules in June 2016. SGX later announced that starting from 2022, all SGX-listed companies should publish the climate report prepared on a comply-or-explain basis as well. As for Hong Kong, the Hong Kong Stock Exchange (HKEX) issued the Code of Corporate Governance Practices in early 2005, then published new guidelines around mandatory disclosure on ESG reporting in December 2019.
The Programme of Action also demonstrated Shanghai Stock Exchange’s ambition to be in line with ESG leaders worldwide. In June 2017, the Shanghai Stock Exchange and the Luxembourg Stock Exchange (LGX) jointly launched the Green Bond Index. By displaying information about Chinese domestic green bonds, LGX is bridging the information gap between Chinese issuers and international investors. Green bonds listed on the Shanghai Stock Exchange can be traded via existing channels. Also, in later 2017, the Shanghai Stock Exchange officially joined the United Nations Sustainable Stock Exchange initiative and became the first stock exchange in the country to join the initiative.
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