China has introduced its first set of environmental, social, and governance (ESG) disclosure guidelines - with inputs from two local insurers Ping An Group and China Post Life Insurance among others - that experts say will raise the standard of reporting by local companies and promote sustainable investments in the country.
The Guidance for Enterprise ESG Disclosure - which becomes effective on June 1, 2022 - is published by the China Enterprise Reform and Development Society (CERDS) and includes inputs from private and state-owned Chinese companies, financial institutions, universities, government entities, and non-governmental organisations.
CERDS is a think tank of the State Council's Assets Supervision and Administration Commission (SASAC), which is responsible for managing state-owned enterprises in China.
A BOOST FOR ESG DISCLOSURE
“Although it is not a mandatory disclosure requirement, the guidance provides a reference for companies to understand ESG disclosure, thus promoting the development of ESG disclosure by Chinese companies and domestic ESG investment,” said Yixi Wei, head of ESG research and equity at E Fund Management, a leading Chinese investment house with 2.6 trillion yuan ($390 billion) of assets under management as of March 31.
“Judging from the content of the guideline, it not only refers to international ESG standards but also combines the requirements of domestic laws and regulations and the actual situation of Chinese enterprises, so as to better meet the needs of the country’s ESG development,” he told AsianInvestor.
The 36-page guideline includes an ESG disclosure indicator system for companies, with separate E, S, and G factors that form the basic framework for disclosure. It also specifies disclosure principles, indicators, requirements, applications, responsibilities, and supervision for enterprises of different industry types and sizes.
“The guidance can support Chinese enterprises in their ESG governance practices and disclosure, serving as a reference for self-evaluation and third-party evaluation,” Ping An Group said in a press release on May 11.
The company contributed inputs from its proprietary CN-ESG evaluation system and experience in sustainable investing to the guidelines that helped to reflect the current status of ESG developments among Chinese companies and the rising demand from investors for accurate risk identification.
Ping An - China's largest life insurer by market capitalisation with 4.1 trillion yuan ($615 billion) of investment assets as of March 31 - had developed the CN-ESG data system in 2020 that is equipped with rating, scoring, and analytical capabilities.
The Chinese life insurer also contributed inputs on the coverage of international standards, the setting of indicators with Chinese characteristics, applicability to different industries, and the setting of scoring standards.
“We believe this standard will play a milestone role in the ESG information disclosure of Chinese companies, mainly because it can provide a reference for more regulators to launch China's ESG standards,” said the company's ESG office spokesperson.
The company believes the guidelines will have a significant impact on ESG developments as the publisher CERDS is very influential and professionally recognised for policy research.
In addition, the other organisations that contributed inputs to the guidelines are major players in their respective fields and their inputs will provide the regulators with a "representative reference" of ESG practices among Chinese companies, the spokesperson told AsianInvestor.
ROOM FOR ESG IMPROVEMENTS
However, the spokesperson said more time and closer collaboration among the various parties, including businesses and the authorities, would be required to speed up ESG improvements in China.
This includes greater awareness and understanding of ESG standards by Chinese companies and the standardised disclosure of quality data to enable institutional investors to develop investing models and data validation capability.
There is currently no mandatory ESG disclosure standards in China, which has led to many asset management companies turning to third-party ESG ratings, such as MSCI ESG Rating or S&P Global ESG Scores.
But E Fund's Wei said these companies will ultimately make investment decisions based on their internal ESG evaluation. “According to our research, we found that each institution has its own characteristics in terms of index setting, underlying data reference, evaluation methods, etc. So, it is difficult to say that there is a guideline or standard that is of the most reference value in the market,” he said.
Although he believes that there is scope for integration and standardisation of different types of ESG standards locally and overseas, he does not see the need for a fully integrated standard.
“ESG disclosure standards should be flexible in adapting to the actual situation of local companies, rather than requiring all companies to have a fully unified ESG standard.”