The move follows a number of similar standards that regulators and governments across the globe have proposed.
By Paul A. Davies, Michael D. Green, and James Bee
With effect from 1 June 2022, the Guidance for Enterprise ESG Disclosure (the Guidance), published by Beijing-based think tank China Enterprise Reform and Development Society (CERDS), is seeking to become the first, and definitive, China-focused ESG disclosure standard.
Voluntary and mandatory ESG corporate disclosure standards have continued to gain a firm foothold in the US and Europe in recent years. Key proposals for mandatory reporting that are currently either being consulted on or discussed at a political level include the SEC’s proposed rule on climate-related disclosures and the EU’s proposed Corporate Sustainability Reporting Directive (CSRD). Voluntary global baseline reporting standards are also being developed by the International Sustainability Standards Board (ISSB). These proposals can be viewed as forming the next step in global developments with respect to ESG disclosure, 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.
However, all of these proposals and standards have something in common: they were each developed from the perspective of the US or European (or global) markets, and on that basis were deemed less relevant to the domestic Chinese market.
The Guidance was developed in collaboration with a number of Chinese companies and focused around relevant Chinese laws, regulations and policies. The Guidance details disclosure principles, key performance indicators, and regulatory frameworks that would be applicable to companies in different sectors.
Content of the Guidance
The Guidance is split into primary, secondary, and tertiary indicators, and a number of individual metrics under each tertiary indicator. Primary indicators are the three topics of environmental, social, and governance, and secondary indicators — of which there are 10 (three environmental, four social, and three governance) — include topics such as resource consumption, climate change, labour rights, and governance mechanisms. There are 35 tertiary indicators (each aligned to one of the secondary indicators) and a total of 118 metrics, which are each aligned to a tertiary indicator.
In many cases, the Guidance requires the disclosure of specific quantitative data, including emissions of a list of greenhouse gases and wastewater and gas pollutants. Notably, the Guidance does include a metric for the disclosure of Scope 3 greenhouse gas emissions.
In relation to metrics on social issues, highlights include qualitative and quantitative descriptions of mental health assistance that a company offers employees, and the ESG credentials and performance of the company’s supply chain. For governance, the Guidance places heavy emphasis on regulatory compliance with references to national laws, such as the Chinese national Data Security Law.
While drawing on international law, the Guidance is formed in a specifically Chinese context and references compliance with existing domestic Chinese regulation in a number of locations. While the Guidance is non-binding, its Chinese-specific focus is likely to prove appealing to companies that operate solely within the Chinese market and consider the existing, globally-focused ESG standards as inappropriate for their reporting purposes. For multinational companies operating in China, the level of traction the Guidance gains will be important, as such multinational companies will likely face competing pressures from external investors to disclose against internationally recognised frameworks.
Latham & Watkins will continue to monitor the implementation of the Guidance and other issues in relation to ESG reporting standards throughout the world.