New rulesThe Ministry of Ecology and Environment published late last year information about the environmental disclosures that businesses must make in China. They came into effect on February 8.
These rules update 2015 regulations and implement suggestions. Reforms to the disclosure systemPublished in May of last year. These reforms included a roadmap to mandatory disclosures of environmental data over the next five-years, with a basic mandatory disclosure system in place by 2025.
The reforms proposed and the new rules unify a scattered and lax disclosure system and focus on removing the major obstacles to corporate disclosures. Businesses will now be able to follow clearer and more practical guidance.
Two decades of environmental disclosure in China
When a company shares publicly the environmental impact of its production or operations, it makes an environmental disclosure. Companies make disclosures for a variety reasons. They are often required by law and public demand, but they can also be done out of a sense to social responsibility. Disclosures enable public oversight and can help companies to be environmentally responsible. They are a key way for governments and companies to promote modern environmental governance.
China’s regulations regarding environmental information disclosure are largely set by the Ministry of Ecology and Environment, the China Securities Regulatory Commission and stock exchanges. They include mandatory and voluntary disclosures. The disclosure requirements were previously set by the ministry for local governments, certain businesses (including listed companies), and non-governmental public organizations. The latter two groups were primarily concerned with major polluters. The CSRC, stock exchanges, and the CSRC are focused on listed businesses. They may also require disclosures in reports on environmental, social, and governance (ESG), corporate responsibility (CSR), and sustainability reports. Major polluters are covered by all three the ministry, the CSRC and the stock exchanges.
Recommendation
External factors also play a role in disclosures. Financial institutions have been asked to make sustainability disclosures in response to growing ESG-friendly investment demands. These demands have filtered down through the investment value chain, forcing Chinese financial institutions as well as companies receiving investment to make disclosures. Some NGOs have also developed disclosure standards and frameworks that are more specific and more in line with international practices. These standards and frameworks have been widely accepted and adopted by countries, regions, and companies. They have positively contributed to the development of environmental and sustainable disclosure practices. The Global Reporting Initiative (GRI), Task Force on Climate-related Finance Disclosures (TCFD), Climate Disclosure Standards Boards (CDSB), Climate Disclosure Standards Boards (CDSB), Climate Disclosure Standards Boards (CDSB), Climate Disclosure Standards Boards (CDS), the Climate Disclosure Standards Boards (CDSB), and the CDP (formerly the Carbon Disclosure Project) are some of the key examples. The government is still the largest player in China’s promotion of environmental information disclosure.
China is moving towards an ecological civilisation, and making steady progress towards creating a sustainable society. Modern environmental governance systemIn this context, there is more demand for environmental disclosures to be improved. China’s president, Xi Jinping, demanded a comprehensive and mandatory system to disclose environmental information at the 19th National Congress in 2017. Documents on structural reforms to build an ecological civilisation, establish a green finance system and create a modern environmental governance system provided the basis for these arrangements.
China has been enforcing environmental disclosures for almost 20 years. The State Environmental Protection Agency (the predecessor of the Ministry of Ecology and Environment), issued these guidelines. A noticeIt could be considered China’s first regulation regarding environmental disclosure. The agency expanded its work in 2008 with rulesA trial on environmental disclosures was conducted. Updated 2015 Additional publications were also issued by the agency in 2015. Documentsimproving environmental oversight of listed businesses. Environmental disclosure efforts have not advanced systematically due to the complexity of these rules and the lack of clarity about forms, timings, disclosure forms and channels.
What’s new?
The progress made can be seen by comparing the rules to the 2008 and 2015 versions.
First, the new rules are only for companies. This is because they will be focusing on firms that cause significant environmental damage or public concern.
The 2008 rules applied to both government and companies. The 2015 version applies to companies as well as non-governmental public institutions. The latest update applies only to companies. The updated rules, in addition to the measures for major polluters that were included in the earlier editions, also apply to heavily polluting businesses that are subjected to Mandatory Clean Production Audits and bond-issuing or listed companies that have violated environmental laws during previous years. For the next three years, firms in this latter category will be required to submit annual environmental disclosures. These firms are considered to be an obvious risk, as they have already violated regulations. This can be mitigated by bringing them under the environmental disclosures.
Second, there are new guidelines for when and how information about environmental issues should be published. It is now mandatory to disclose data on the environment, carbon emissions, and other violations of environmental law.
Companies must now disclose information in accordance to a Recently issued formatUpload that information to a portal maintained by local environmental authorities. This helps standardize the process and forms of disclosures and clarifies who’s responsible for oversight.
Information about environmental management will be disclosed including the environmental administrative licenses from the previous editions. It also includes information on environmental taxes. Ratings for environmental credit. This link environmental disclosures and corporate credit ratings, reflecting various aspects about the company’s environmental practices.
Another new addition is data on carbon emissions. This demonstrates a trend towards disclosing more climate information. In October 2013, the Party Central Committee (and the State Council) issued Guidanceon the goal of reaching peak carbon and carbon neutrality. This proposal explicitly calls for the establishment of a system that allows financial institutions and companies alike to report and disclose data about carbon emissions. ESG investment is encouraged when companies and financial institutions disclose climate and corporate environmental data. As carbon markets and trading develop, it is likely that key greenhouse gas emitters are required to make these disclosures.
Companies are required to make provisional disclosures under the new rules of important market and time-sensitive data such as breaches of environmental laws or compensation payments.
Third, the new rules have a tougher oversight, connect multiple platforms and encourage better data sharing.
Companies had to disclose information on their websites, local media, or in the press. Even if companies followed the rules, the information was not easily tracked or monitored. The new rules will allow companies to share environmental information via a dedicated platform created by local environmental authorities. The public can view the platform free of charge. Both the government and the public can exercise oversight. The new rules also require that this system be connected with other environmental information platforms like www.ecologist.org. This is for pollutant release permits, and databases such the ones for financial credit. This should make monitoring companies’ environmental performance more transparent, efficient, and connected. Cross-verification is also possible, making greenwashing harder.
The new rules are still conservative in their application. There are already policies that require disclosures from major polluters, and companies subject to Mandatory Clean Production Audits. Although this is not yet mandatory for all listed companies, it does provide some guidance for the creation of long-term strategic environmental management programs. This may be addressed by the CSRC and stock exchanges in future. However, the rules are suited to the environmental management capabilities of Chinese firms today. The major advance is in formalizing disclosures and bringing oversight/supervision into a more transparent place. This will allow government and other stakeholders to track corporate environmental performance, and aid decision-making.
It is worth noting that the updated rules allow future linking of environmental data across financial institutions and companies. There are high hopes that corporate financial information will be used to help finance green financial instruments like green credit, green bonds, and carbon-reduction loan. The integration of information from different areas will increase green funds and encourage companies to become greener. Only truly green, low-carbon, and sustainable businesses will be able to borrow and raise funds easily in the future.
What should companies do?
If any listed companies are subject to the new rules, they should prepare to make environmental or climate disclosures. This is in line with ever-sharper market and policy requirements. These preparations can be compared to international disclosure frameworks like TVFD, GRI, and CDP. This will ensure that listed companies are able to keep up with policy requirements. Companies that are already making disclosures should improve their environmental performance, ESG policies, and climate governance practices. They should also do their best to shift to low carbon and environmentally friendly business models. This will reduce future regulatory risks, create long-term value, and boost overall company value.
Unlisted companies will not be affected by the changes. Companies that already make environmental disclosures will not be surprised by them and they will not have to pay more. They will need to use this opportunity to establish effective systems for managing environmental disclosures. This includes putting in place proactive controls, rather than passive ones, and data management. It will also help them improve their environmental performance in all aspects of their operations. For firms making disclosures, it is important to build capacity, increase awareness, and put in place systems and processes for managing and disclosing environment information.
Companies that are still not covered under the new rules have some breathing space but should remember that disclosures of this nature are becoming the norm. Prepare now to avoid panic later. Companies should be prepared for the future, with mandatory disclosure policies and work to reduce emissions, save energy, reach peak carbon, and achieve carbon neutrality.
Suggestions to improve environmental disclosure systems
The new rules that incorporate the May 2012 disclosure system reform proposals indicate that this field is being rapidly developed. To achieve sustainable development and reach carbon neutrality and peak carbon as quickly as possible, we need to make disclosures that are more specific and broadening. The CDP believes the following actions would improve disclosures of corporate environmental information.
First, expand mandatory information to cover more polluting firms and industries, and then move to mandatory disclosures for all listed companies.
Second, the Ministry of Ecology and Environment may work with other regulatory bodies in order to gradually increase environmental disclosure and performance standards for listed firms. This could include improving the comparability and quality of information, encouraging environmental considerations in mission statements, strategic planning, as well as the adoption of environmental risk management methods.
Third, it is important to encourage deep integration and mutual encouragement between companies and financial institutions. Different government agencies should collaborate to encourage companies to be transparent about their environmental practices and provide reliable data for sustainable finance and investment.
Fourth, encourage industry organizations to produce and emit sector-specific disclosure guidelines, providing evidence of categorised, graded, and detailed disclosure indexes.
Fifth, take part in the creation of international standards. After taking into account China’s requirements and circumstances, compare the most popular international disclosure frameworks, and then adopt appropriate approaches to create a disclosure system that is both localised and international.
