China's Evolving ESG Landscape

Current State of ESG in China

While China has made strides in addressing environmental and social issues, its ESG reporting framework remains underdeveloped. Key challenges include:

• Lack of Unified Standards: ESG reporting is largely voluntary and lacks a standardized approach.
• No Alignment with International Standards: This divergence hinders cross-border comparison.
• Limited Disclosure and Audit Capabilities: Insufficient disclosure capabilities and a lack of robust auditing mechanisms.

China's Path to ESG Reporting Standards

To address these challenges, the Chinese government issued draft regulations in May 2024 to unify corporate sustainability disclosures, with a phased implementation plan. By 2027, China aims to implement basic and climate-related disclosure standards, and by 2030, full implementation of the unified national system. The authorities will aim for gradual implementation for companies, instead of a one-size-fits-all approach, starting with larger and listed companies and then expanding to medium and smaller companies.

The implemented standards will aim for convergence with international standards but will slightly differ in certain aspects to reflect Chinese characteristics. This is similar to the Chinese accounting standards that are largely aligned with IFRS but maintain some differences.

Key Elements of China’s ESG Framework

The new framework will incorporate the concept of double materiality and four core elements:

Double Materiality

This concept considers both financial materiality (impact on the company's financial performance) and impact materiality (the company's impact on the environment and society). This differs from the IFRS S1 standards, which focus only on financial materiality, but aligns with European standards.

Four core elements

The core elements include:

• Governance: the governance structure to manage and monitor sustainable risks and opportunities.
• Strategy: strategies to manage sustainable risks and opportunities.
• Risk & Opportunity Management: processes to identify, assess, prioritize, and monitor sustainable risks and opportunities.
• Metrics & Targets: indicators to measure performance in sustainable risk and opportunity management and targets to achieve.

Conclusion

China's ESG journey is still in its early stages, but its ambitious goals and growing awareness of environmental and social issues signal a promising future. However, several challenges remain, such as unclear regulations, potential local implementation differences, and data accuracy. By understanding the evolving regulatory landscape and adopting robust ESG practices, businesses can navigate these challenges and capitalize on the opportunities ahead.