Driving Changes
In recent years, China has seen the ongoing evolution of its ESG-related policies, which were catalyzed by several factors.
Firstly, China is proactively addressing its local environmental issues. Most notable is China’s Transition to a Low-Carbon Economy with 2030 carbon peak and 2060 carbon neutrality goals. Secondly, the Common Prosperity program announced in 2021 by the President Xi Jinping which includes environmental considerations, such as development of recycling and waste management, investment into sustainable energy and green technology.
Overseas pressures driving ESG development in China include EU policies that will greatly influence the supply chain, such as Corporate Sustainability Due Diligence Directive (CSDDD), upcoming Carbon Border Adjustment Mechanism (CBAM), as well as the Sustainable Development Goals proposed by the United Nations.
ESG for China Companies
Is ESG relevant for the SMEs in China?
In the context of State-Owned Enterprises (SOEs), the Social Responsibility Bureau, overseen by the State Council’s Assets Supervision and Administration Commission (SASAC), has introduced a comprehensive work plan. This plan sets forth the mandate for SOEs to achieve ESG (Environmental, Social, and Governance) disclosure by the year 2023. Furthermore, it underscores the necessity of enhancing statistical accounting and information disclosure concerning carbon emissions, along with the implementation of effective measures to curb carbon emissions within state-owned enterprises. This directive, articulated during a meeting in September 2022, highlights the pivotal role of SOEs in the economic landscape, serving as a central focal point for the government’s concerted efforts to expedite progress in carbon reduction, ESG disclosure, and the advancement of green finance initiatives.
In 2021, the Ministry of Ecology and Environment (MEE) issued two significant documents: the “Reform Plan for Mandatory Environmental Disclosure System” and the “Administrative Measures for Enterprise Environmental Disclosure”. The Plan outlines a comprehensive plan, providing a systematic roadmap for the development of China’s obligatory environmental disclosure system over the next five years. The Measures clarify the specific content to be disclosed, the format, and the disclosure procedures.
In 2022, Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) updated guidelines for listed companies, recommending for certain companies (i.e., SZSE: Shenzhen 100) to publish environmental and social responsibility report together with the annual report.
In addition, Science and Technology 50 sample companies are now obligated by SSE to publish ESG reports along with their annual reports focusing on their efforts related to the country’s 2030 carbon peak and 2060 carbon neutrality goals.
While ESG adoption and awareness among publicly listed Chinese companies are substantial, they still trail behind their Western peers. 53% of surveyed companies report the implementation of ESG, sustainability, or corporate social responsibility (CSR) strategies, with 71% employing dedicated staff to drive ESG objectives.
ESG priorities for Chinese companies diverge from those of their Western counterparts. In the Chinese context, issues like product and workplace safety hold greater prominence compared to concerns like climate change and diversity.
How to Mitigate ESG Related Risks in China?
ESG for MNCs in China
For the majority of MNCs in China, ESG reporting is becoming more and more relevant through a growing pressure from the overseas HQs. For some, it is a requirement to adhere to the global sustainability strategy or a tool for internal risk assessment, for most – a need to comply with the EU regulations related to the supply chain.
However, a significant challenge lies in the ambiguity and occasional conflicts within ESG standards and frameworks. Moreover, many enterprises do not yet view ESG as an imperative, signaling the need for greater clarity and consensus in this domain.
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S.J. Grand is a full-service accounting firm focused on serving foreign-invested enterprises in Greater China since 2003. We help our clients improve performance, value creation and long-term growth.
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