China is Set to Implement its First Environmental, Social, and Governance (ESG) Disclosure Standard

Published on: 17 June 2022
by KnowESG
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The Guidance for Enterprise ESG Disclosure (the Guidance), produced by Beijing-based think tank China Enterprise Reform and Development Society (CERDS), aims to be the first and definitive China-focused ESG disclosure standard with an effective date of June 1, 2022.

In recent years, voluntary and mandated ESG corporate disclosure requirements have gained traction in the United States and Europe. The SEC's proposed rule on climate-related disclosures and the EU's proposed Corporate Sustainability Reporting Directive are two key ideas for mandatory reporting that are currently being consulted on or considered at a political level (CSRD).

The International Sustainability Standards Board is also developing voluntary worldwide baseline reporting standards (ISSB). Following (and often incorporating) such frameworks as the Task Force on Climate-related Financial Disclosures (TCFD) Recommendations, the Sustainability Accounting Standards Board (SASB) standards, and the Global Reporting Initiative (GRI) Standards, these proposals can be seen as the next step in global developments concerning ESG disclosure.

All of these suggestions and standards, however, had one thing in common: they were all created with the US or European (or worldwide) markets in mind, and as a result, they were regarded less relevant to the Chinese market.

The Guidance was created in partnership with several Chinese businesses and is based on Chinese laws, rules, and policies. The Guidance lays forth the disclosure principles, performance measures, and regulatory frameworks that organisations in various industries should follow.

Primary, secondary, and tertiary indicators, and several particular metrics under each tertiary indication, make up the Guidance. The three primary indicators are environmental, social, and governance, while supplemental indicators, which number ten (three environmental, four social, and three governance), include subjects including resource use, climate change, labour rights, and governance procedures.

There are 35 tertiary indicators (each of which is linked to one of the secondary indicators) and 118 metrics (each of which is linked to a tertiary indicator).

The Guidance demands the submission of quantitative data in many circumstances, such as emissions of a list of greenhouse gases, as well as wastewater and gas pollutants. The Guidance does, however, include a metric for reporting Scope 3 greenhouse gas emissions.

The qualitative and quantitative descriptions of mental health help that a firm offers employees, as well as the ESG credentials and performance of the company's supply chain, are among the indicators of social concerns that stand out. The Guidance emphasises regulatory compliance in terms of governance, including references to national laws such as China's national Data Security Law.

While the Guidance is based on international law, it is written in a Chinese context and refers to current domestic Chinese regulations in several places.

While the Guidance is not legally binding, its Chinese-specific focus is likely to appeal to enterprises that operate only in the Chinese market and believe that the existing, globally-focused ESG standards are inadequate for their reporting needs.

The amount of traction the Guidance obtains will be essential for global corporations operating in China, as they will likely face competing pressures from external investors to report against internationally recognised rules.

Latham & Watkins will continue to monitor the Guidance's implementation and other ESG reporting requirements concerns around the world.


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