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With the recent development of environmental, social, and governance (ESG) standards consolidation internationally, Chinese market regulators, participants, and watchers are all paying increased attention to ESG. Responding to the heightened global attention on ESG information, the China Securities Regulatory Commission (CSRC) sent out two important signals to the market regarding ESG development in the country.
Signal 1: Implications from the Adoption of the International Sustainability Standards Board (ISSB)
At the Boao Forum on April 20, Fang Xinghai, vice chairman of CSRC, commented on the latest draft of ISSB ESG Standards, which will be finalized at the end of this year. The CSRC believes that the new ISSB standards may be adopted globally and have a great impact on Chinese companies. As more and more companies list in overseas markets such as the United States, Switzerland, and Germany, they urgently need to familiarize themselves with international ESG disclosure standards, as these overseas markets are very likely to adopt standards such as the ISSB in the next two years. If Chinese companies listing in these markets fail to disclose ESG information properly, they will not be permitted to go public, hence fail to obtain international capital. Therefore, the ISSB standards have a significant impact on enterprise valuation for Chinese companies as well. In response to the new standard, the CSRC said that the next step is to formulate standards for mandatory disclosure in China.
The ISSB draft standards were issued on March 31 this year. It contains two standards, one of which is a general disclosure on sustainability, and the other specifically relates to climate disclosure. The ISSB standards are currently in the stage of consultation, and the final version is expected to be issued at the end of 2022. As of now, Chinese companies’ comprehension of ESG disclosure is still at a relatively superficial level. ESG information disclosure involves multi-level statistics and calculations based on primary data. Taking carbon emission data as an example, companies not only need to quantify their power usage but also differentiate carbon emission intensities of different power sources. To calculate carbon emissions generated from electricity is a multi-step process of data collection, management, screening, verification, and so on. To successfully conduct carbon accounting and meet international disclosure requirements, Chinese companies still face challenges from the limited capacity of disclosure and lack of technical conditions.
Signal 2: Inclusion of ESG in the Guidance on Investor Relations Management
On April 15, the CSRC issued the guidelines for the management of investor relations (IR) of listed companies, which will come into force on May 15. The guidelines clarify the main responsibilities of IR management of listed companies and stipulate that ESG information should be added to IR communication. This is the first time that the CSRC has introduced ESG information into the IR guidelines. The last version of the guidelines was released in 2005. In 2018, the CSRC revised the guidelines for the corporate governance of listed companies, which emphasized that listed companies should implement the development concept of innovation, coordination, green, openness, and sharing. This revision set up a basic framework for ESG information disclosure. The new IR management guidelines are intended to work with updates in the corporate governance guidelines.
IR is an important channel linking corporates and investors. According to a survey jointly launched by Syntao and the Principal for Responsible Investment (PRI) in 2020, the main obstacle faced by 40 institutional investors and listed companies both domestic and abroad is a lack of ESG awareness from IR staff, leading to difficulties for investors to obtain valuable ESG information. Optimizing IR management by incorporating ESG information will promote the transformation of enterprises to a more sustainable business model and help investors integrate ESG into their investment strategies.
Current Stage of Chinese Companies’ ESG Disclosure
In 2021, 90% of China’s listed companies held annual performance meetings, but only 25% of all listed companies issued ESG or CSR reports. In China’s A-share market, there were 1091 listed A-share companies issuing ESG or CSR reports in 2021, accounting for 24.05% of total companies in this market. While generally, the number of listed companies in China disclosing ESG information has improved, the quality of such disclosure varies greatly. Two issues in ESG disclosure persist: insufficient risk disclosure and a lack of quantitative information.
Remy Briand, global head of MSCI ESG business, expressed in an interview that exchanges in the Chinese Mainland need to launch ESG guidelines, and the sooner the better. As far as emission reduction is concerned, it is still in the initial stage and there is still an inconsistency between regulators and corporates. China’s central bank and other regulatory agencies are very proactive in promoting actions on carbon neutrality, but many enterprises and asset management institutions still feel that they have more time to prepare. At the same time, many investment managers of international asset management institutions also reported difficulties in performing ESG rating, due to the insufficiency of quality ESG information on some Chinese companies. Therefore, strengthening ESG information disclosure will help address such difficulty and attract more international funding towards China’s stock markets.
Two takeaways
While the international standards are forming the benchmark, and domestic mandatory disclosure has not yet been implemented, Chinese companies have sufficient time to develop a more robust understanding of how to manage ESG data. While developing countries may encounter larger gaps in information and data infrastructure than developed countries, both China and other developing countries are consistent in the effort to implement ESG practices. Just like the adoption process of international accounting standards, ESG information disclosure standards will also require an adaptation process. Currently, companies need to enhance the level of information disclosure, master the fundamentals of ESG data management, and set up the necessary infrastructure for ESG management and reporting, including staffing, database, and skills.
The communication between the IR and the investors should not be limited to one report every year, but also establish a mechanism to improve accessibility and consistency. IR is an important channel for enterprises to communicate internally and externally. Investors’ attention to ESG will increase the demand for information from internal business units and functions, such as the human resources department, procurement department, operation team, etc. The IR needs to build a system of rapid response and rapid collection of information. Seneca ESG is committed to providing solutions for ESG data management. Our EPIC platform enables real-time data management and instant alert, which can help IR collect and organize ESG data to provide investors with effective and timely information.
Sources:
http://finance.sina.com.cn/jjxw/2022-04-20/doc-imcwipii5451359.shtml
http://www.csrc.gov.cn/csrc/c101954/c2334702/content.shtml
https://www.thestandard.com.hk/section-news/section/2/240962/Chinese-firms-told-to-step-up-on-ESG
https://www.lexology.com/library/detail.aspx?g=c235bc6c-64f4-425b-af5a-97c26311d25b
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