New requirements build on China’s rapid progress in green finance to increase transparency across the market

By Paul Davies, Bridget Reineking and Andrew Westgate

The China Securities Regulatory Commission (CSRC), in collaboration with China’s Ministry of Environmental Protection, has introduced new requirements that, by 2020, will mandate all listed companies and bond issuers to disclose environmental, social and governance (ESG) risks associated with their operations.

In recent years, China has become a global pioneer in policy architecture, local pilot programs, green bonds, green industry funds, environmental stress testing, and green assurance. Concurrently, interest in ESG investment has grown significantly. Major institutional investors have increasingly adopted ESG factors in their decision making and market analysis.

Nonetheless, many Chinese companies have been slow to respond to investors’ growing appetite for green finance. In 2016, less than a third of China’s listed companies voluntarily published information related to their ESG risks and impacts, and that year, the China Forum of Environmental Journalists released a report concluding that only about 27% of the same companies created reports about their ESG performance. As recently as 2015, Shanghai’s Fudan University found that ESG disclosures in the reports of 170 companies across 14 sectors listed on the Shanghai Stock Exchange was unreliable.

The new disclosure mandate could help reverse such trends. In particular, the mandate is likely to fuel the use of China’s other green investment tools, such as the CSI 300 Green Leading Stock Index, which samples from listed companies covered by the blue-chip CSI 300 Index. The CSI 300 Green Leading Stock Index tracks the green performance of listed companies by measuring corporate green development strategies, green supply chains, pollution discharge, energy and resources consumption, and green income, as well as companies’ behaviors that negatively impact the environment. The index is further likely to inform the SynTaoGF–CaiXin ESG 50 Index (SGCX ESG50 Index), the first equity index incorporating ESG performances of listed companies in the mainland Chinese market. That index relies upon publically disclosed information regarding corporate ESG performances.

The new ESG disclosure mandate is poised to build on China’s rapid progress in green finance while helping address remaining barriers. Companies and investors should expect that the measure will contribute to the continued promotion of responsible investment, green finance, and the sustainable development of China’s capital market — with long-term implications for both the Chinese and global economies.