DOES CHINA NEED ESG REFORM?

As the acceleration of ESG practices and reporting continues to trend around the world, Chinese ESG Reform is on the rise as the Asian country aims to reach peak carbon by 2030 and become carbon neutral by 2060. Despite the insufficient institutionalization of ESG practices in previous years that have caused them to lag behind their peers, the world’s biggest polluter is ramping up its ESG practices as foreign investors began to demand greater ESG reporting.

ESG progress so far in China

Late last year, the Ministry of Ecology and Environment revealed new regulations on environmental disclosures, which came into effect on 8 February, 2022. The regulations feature rules and guidelines for implementing proposals to reforms announced last year including a 5-year roadmap that makes it compulsory for Chinese companies to disclose environmental information. With the new rules and reforms, companies now have a practical guidance to follow.

China further made advancements towards corporate ESG disclosure standards in May, 2022 when a new set of guidelines for enterprise ESG disclosures were released. Developed by a public-private collaboration between the State’s China Enterprise Reform and Development Society (CERDS) and China’s biggest companies, the ESG disclosure standard provides a glimpse of what mandatory disclosures might eventually look like.

Foreign investors have hailed the released guidance as it puts China in a positive position of many ESG issues on the global stage and also fits the country’s business landscape, allowing for a higher standard of reporting by local companies.

What reforms does China need?

Despite its recent wins, experts are of the opinion that a lot can still be done to catch up to global peers on ESG Reform reporting. One of them is the nature of the guidance, which makes compliance voluntary. Although compliance means businesses can seek international funding, it is still uncertain how widely the guidelines will be adopted by Chinese businesses. Reforms that make ESG requirements mandatory can help speed up the implementation of the standards by companies. Nonetheless, voluntary disclosure is a good move.

According to the China Asset Management Institutions Climate Performance Report (2022) on 15 asset managers reveal that there is low willingness to engage in ESG reporting. Not only were the companies reluctant to disclose their climate impact information, it also revealed that none had any long-term climate goals.

Another challenge facing China is the insufficient resources for companies to report on everything they’re being asked to report on. To report according to existing standards, vast amounts of data must be collected and unlike companies in other Asian countries, data collection is still at an early stage in China. Since China accelerates very fast, this problem can easily be addressed by instituting reforms that support data collection.

Additionally, social issues in China are quite complicated. One of the issues is the policy in the tech sector that forces employees to work extremely long hours. This is known as the 9-9-6 work week, which means from 9 a.m. to 9 p.m., six day a week. The policy was recently contested at the Supreme Court, which ruled against the practice. While the government has been doing more to improve workers’ rights standards, more can still be done.

Wrap-up

China is making efforts to green its economy and tackle the climate crisis through ESG Reform but the nation has a long way to go to achieve its decarbonization target. A number of reforms must be implemented to develop climate action plans and push money towards truly green and low-carbon investments. In the long run, green companies with quality ESG risk management frameworks are better positioned to leverage such opportunities as they emerge.