In 2016, China put in place a foundational framework for green finance, two years before the European Union’s 2018 Sustainable Finance Action Plan. Since then, China has developed its “Green Bond Catalogue” – a sustainable taxonomy for bond issuance, issued ‘Green Credit Guidelines’ and a ‘Statistical System of Green Insurance’. Earlier this year, China’s three main stock exchanges in Shanghai, Shengzen and Beijing (under the auspices of the China Securities Regulatory Commission) individually published draft sustainability disclosure standards for listed companies. When these rules come into force, they will require over 5,000 listed companies to disclose across advanced environmental, social and governance (ESG) topics linked to the company’s financials.
In this context, on 27th May 2024, China’s Ministry of Finance and Accounting Standards Committee put forward arguably the country’s most impactful domestic sustainability disclosure standards entitled ‘Draft Corporate Sustainability Disclosure Standards –Basic Standards’ entering into force from 2027. The draft contains no thresholds or designated size of company in scope, therefore may ultimately apply to approximately 32.8 million registered state companies, estimated from China’s National Bureau of Statistics. Of these, approximately 140,000 enterprises receive foreign direct investment – whereby investors may already be reporting in accordance with International Sustainability Standards Board (ISSB) and European Sustainability Reporting Standards (ESRS). China’s basic sustainability standards, are in principle aligned with the ISSB and ESRS. As such, they set out a framework for advanced ESG disclosure topics, incorporating sustainability-related impacts, risks, and opportunities linked to the company’s business model and financials.
China’s basic standards will be followed by Industry Specific Standards and Guidelines. The plan is to phase-in the standards starting with large non-listed enterprises and then to small and medium-sized enterprises. They introduce the commonly applied four elements framework of: governance, strategy, risk and opportunity management, goals and targets. They are intended to create a regulatory framework for the basic concepts and principles of corporate sustainable information disclosure principles, objectives, methods, and general common requirements. Furthermore, these basic standards will govern the more specific criteria and application guidelines to follow.
Additional noteworthy elements are:
- an impact includes actual impact or foreseeable potential impact, positive impact or negative impact.
- the disclosure takes into consideration upstream and downstream value chains connected to the business model and its external environment.
China’s influence on sustainability reporting is significant on the international front. China was a founding member of the International Platform on Sustainable Finance, and along with the European Union initiated the co-development of the Common Ground Taxonomy (CGT). This project began as a comparative study of the green taxonomies from these two jurisdictions, culminating into a technical guidance on voluntary implementation of the CGT. In June 2023 the Ministry of Finance of China established a Beijing office for the ISSB, thereby furthering relations with the International Financial Reporting Standards Foundation. Regionally throughout Asia, China has collaborated with other jurisdictions, as the continent transitions to a sustainable future. This can be seen with the ASEAN taxonomy, a principle-based taxonomy developed for Asian countries, and bi-lateral cooperation with the Monetary Authority of Singapore creating a joint green finance taskforce. China’s regional and international initiatives deepen cooperation in green and transition finance between them and the international community, which in turn aims to facilitate greater public and private sector collaboration on achieving sustainability targets.
