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China Seeks Public Comments on Draft Sustainability Disclosure Standards for Chinese Companies

This blog was originally posted on 4th June, 2024. Further regulatory developments may have occurred after publication. To keep up-to-date with the latest compliance news, sign up to our newsletter.

AUTHORED BY CELIA LE LIEVRE, SENIOR REGULATORY COMPLIANCE SPECIALIST, COMPLIANCE & RISKS

Introduction

On 27 May 2024, the Chinese Ministry of Finance launched a public consultation on the Exposure Draft of Chinese Sustainability Disclosure Standards for Business Enterprises— Basic Standards.

In this blog, we outline the objectives and scope of the framework.

Overview

In the accompanying explanatory document, the Ministry announced that China aims to establish a ISSB-aligned and unified mandatory sustainability reporting system by 2030. Basic sustainability-related and climate-related disclosure standards should be introduced by 2027.

The objective of the framework is to guide Chinese companies towards a uniformed approach to sustainability reporting with a view to facilitating comparison of environmental, social and climate-related disclosures and improving information to investors, creditors, regulators and other stakeholders.

In essence, the draft standards would require Chinese companies to disclose information on material sustainability-related risks, opportunities and impacts relating to their own operations and their value chains. According to the Exposure Draft, “value chain” should be understood as the “interactions, resources and relationships of the company’ business model and the external environment in which it operates, including those used and relied upon by the company’s products or services from conception through delivery and consumption to the end of the life cycle”.

In line with the ISSB IFRS S1 and S2 standards, the framework is structured around four elements, namely: governance, strategy, risks management, metrics and targets. The scope of information under each pillar is defined in Chapter 4.

The scope of sustainability disclosures cover a range of topics, including:

Environmental topics such as impacts and exposure to climate change, pollution, water and marine resources, biodiversity and ecosystems, uses of resource and circular economy;
Social topics including: rights and protection of employees, consumers, end-users, relationships with community and rural revitalization;
Governance topic which mainly relates to business conduct.

Disclosures of sustainability information shall comply with the so-called “materiality” principle (i.e. only material information must be disclosed).

Sustainability-related information must be considered as material if “it is reasonably expected that the omission, misstatement or ambiguity of the information will affect the decision-making on which it is based”. The materiality assessment should be consistent with the materiality assessment carried out for financial statements. In this regard, the Exposure draft specifies that disclosures shall be linked and coincide with the reporting timelines for financial statements. Cross-references and correlations with financial statements should be facilitated by an index or textual explanation.

Sustainability-related information must be disclosed in a stand-alone sustainability report. The report must be drafted in a clear and structured language and may be disclosed to the public at the same time as the financial statement. Moreover, the sustainability report must be published on the official website of the company.

What’s Next?

If approved, the Chinese Sustainability Disclosure Standards for Businesses will apply in parallel with the Sustainability Reporting Guidelines for Listed Companies (introduced in April 2024 by the Stock Exchanges of Shanghai, Shenzhen and Beijing).

It is not clear how these respective reporting frameworks will interact with each other. Further guidance may be released in due course by the Chinese government bodies.

The deadline for submitting comments is 24 June 2024. Interested parties can send their feedback to czbkjsmof@163.co

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