China sets out principles of corporate sustainability reporting

China is looking to become a global leader in corporate sustainability reporting in the next decade, according to the country’s Ministry of Finance (MOF).

The ministry has launched a public consultation on the Exposure Draft of the Chinese Sustainability Disclosure Standards for Businesses, saying that it intends to create a mandatory International Sustainability Standards Board (ISSB)-aligned sustainability reporting system by 2030. It added it is aiming to introduce sustainability-related and climate-related disclosure standards by 2027.

In a statement the MOF said: “The primary goal of this framework is to guide Chinese companies toward a standardized approach to sustainability reporting, facilitating the comparison of environmental, social, and governance (ESG) reporting, and improving the information available to investors, creditors, regulators, and other stakeholders.”

It said the new draft standards for ESG reporting represent the most authoritative document on this subject in China to date. “These guidelines adopt the principles and framework established by the ISSB, while tailoring them to China’s specific context. The MOF specified that the draft standards will not adopt a one-size-fits-all mandatory approach, but rather gradually phase in voluntary and mandatory reporting for listed and non-listed companies in order to take into account the development stage and disclosure capabilities of Chinese companies,” it said.

The draft standards mandate that Chinese companies disclose significant sustainability-related risks, opportunities, and impacts associated with their operations and value chains. The term “value chain” is defined as the “interactions, resources, and relationships of the company’s business model and the external environment in which it operates, including those utilized and relied upon by the company’s products or services from conception through delivery and consumption to the end of the lifecycle.”

The draft standards comprise six chapters and 33 articles, covering general provisions, disclosure objectives and principles, information quality requirements, disclosure elements, additional disclosure requirements, and supplementary provisions. The framework aims to standardize ESG reporting, ensuring the information provided by companies is reliable, comparable, and useful for stakeholders.

 

Scope of sustainability disclosure

The scope of sustainability disclosures encompasses a range of topics, including:

• Environmental topics such as impacts and exposure to climate change, pollution, water and marine resources, biodiversity and ecosystems, resource use, and circular economy practices.
• Social topics include the rights and protection of employees, consumers, and end-users, relationships with communities, and rural revitalization.
• Governance topics related to business conduct.

The Ministry said disclosures of sustainability information “must adhere to the ‘materiality’ principle, meaning only material information needs to be disclosed”.

Sustainability-related information is considered material if “its omission, misstatement, or ambiguity is reasonably expected to influence decision-making.” The materiality assessment should align with that used for financial statements.

Moreover, sustainability-related information must be presented in a stand-alone sustainability report, written in clear and structured language, and may be disclosed to the public concurrently with the financial statement.

Notably, the sustainability report should be published on the company’s official website or through other means, the MOF stated.

Aligned with the ISSB IFRS S1 and S2 standards, the framework for ESG reporting is structured around four core elements to ensure that enterprises meet the informational needs of primary users. Unless otherwise specified by other guidelines, enterprises must include the following components in their ESG reporting:

• Governance: The governance structure, control measures, and procedures used by the enterprise to manage and supervise sustainable risks and opportunities.
• Strategy: The plans, strategies, and methods employed by the enterprise to handle sustainable risks and opportunities.
• Risk and opportunity management: The processes used by the enterprise to identify, assess, prioritize, and monitor sustainable risks and opportunities.
• Metrics and targets: The indicators used to measure the performance of managing sustainable risks and opportunities, along with the enterprise’s goals and progress towards national laws, regulations, and strategic planning requirements.

The MOF concluded: “These developments highlight China’s proactive approach to promoting sustainable business practices and enhancing the quality of ESG disclosures. As investors and stakeholders increasingly prioritize sustainability, these measures are expected to play a crucial role in shaping corporate governance and environmental responsibility in China.”