CCXGF: Policy Review of ESG Reporting and Analysis of ESG Reporting of China's Publicly Listed Companies in 2022

BEIJING, Oct. 5, 2022 /PRNewswire/ -- In 2021, China experienced rapid development in the field of ESG, which entered a stage of policy guidance after the exploration and development of domestic ESG system. At present, it has achieved remarkable results in China. This paper analyzes its disclosure status and characteristics by sorting out ESG disclosure policies at home and abroad. It conducts a multiple-dimensional analysis on ESG disclosure of China's publicly listed companies in China in 2022.

1. Policy Review of ESG Reporting at Home and Abroad

As China's Green Development Strategy and "Dual Carbon" targets were raised, ESG investing has become a hot topic. An increasing number of institutional investors started to apply ESG concepts into their investment activities. The ESG performance has become one of the main factors for these investors to measure their decisions, and awareness of relevant information disclosure has been raised as well. Recently, the government and the capital market regulator have successively issued a series of documents on ESG Reporting Guidance, increasing the requirements for publicly listed companies.

1.1 Review and Trend of ESG Reporting Policy in U.S. and EU

Western countries have rich experience in the field of ESG, and the policy practice has a strong impact on the global development of ESG. The followings reveal the main policies and contents of ESG Reporting in western countries.

In April 2021, EU Commission issued the exposure draft of "Corporate Sustainability Reporting Directive" (CSRD) for comments, which tended to replace "Non-Financial Reporting Directive (NFRD)-Directive 2014/95/EU" in October 2014. CSRD requires companies within the policy scope to adopt the regulation, significantly improving the comparability of ESG information.

From the disclosure content, EU Commission took Governance as the entry point, gradually expanding the requirement for companies to disclose non-financial information. EU emphasized the importance of environmental issues and developed the disclosure scope to three issues of ESG. From the disclosure policy, EU Commission gradually completed the details of the disclosure. EU unified ESG reporting standards with higher requirements for companies, which plays an essential role in improving the disclosure level of the companies.

Different from the development path in EU, U.S. has successively published ESG related legislations and regulations, to expand the reporting scope. Besides the publicly listed companies, the U.S. has introduced ESG reporting requirements for pension funds.

1.2 Review and Trend of ESG Disclosure Policy in China

Recently, ESG concept has been in a rapid development stage in China. To ensure the construction of ESG system, the government and regulatory authorities have successively issued a series of guidelines on corporate ESG practice in the past two years. The following introduces the main policies and contents of ESG reporting in China.

From the perspective of policy trends, although the content of ESG disclosure has not yet been uniformly regulated in China, it can be seen from the above series of guidance documents that ESG reporting is becoming compulsive domestically. At the same time, the regulatory tendency is highly consistent with ESG topics, especially in environmental issues. There is a trend that the guidelines of regulatory policies are gradually developed from CSR reporting to ESG reporting, and the requirements are more explicitly stated. In January 2022, the Shanghai Stock Exchange (SSE) issued the Notice of the Performing Functions for the Disclosure of 2021 Annual Reports of Companies Listed on the STAR Market (the "Notice on Annual Reports"), which for the first time put forward mandatory requirements on the disclosure of CSR/ESG reports of companies listed on the STAR market, outlining the requirements for companies listed on the STAR 50 to disclose the CSR report or the ESG report separately, consequently enhanced the requirements of disclosure content.

From the perspective of topics covered, China's ESG reporting policies that focused on a single field and theme has been developing to multiple dimensions. In 2003, the State Environmental Protection Administration of China (current: The Ministry of Ecology and Environment of the People's Republic of China) issued the Announcement on Environmental Information Disclosure by Enterprise (Promulgated by the Ministry of Envtl. Prot. No.156 [2003]), which firstly incorporated the environmental information of heavy polluting enterprises into the focal point of regulatory priorities. With the proposal of the goal of "peak carbon emissions and carbon neutrality", the scale of information disclosure has gradually expanded from monitoring environmental emission to covering all aspects of climate risks in order to focus on multiple dimensions of sustainability.

From the perspective of coverage, the Chinese government departments focus more on listed companies controlled by state-owned enterprises. The scope of enterprises requiring ESG reports disclosure has gradually expanded from conditional coverage to full coverage. The requirements of reporting form have also changed from CSR reports to ESG reports, further broadening the scope and content of disclosure, reflecting enterprise sustainability performance more comprehensively. Domestic regulators, on the other hand, take focus on financial institutions as the vitality. A series of guidance documents such as the Guidelines for Environmental Information Disclosure of Financial Institutions and the Guidelines for Green Finance in the Banking and Insurance Industry have been issued in the past few years, aiming to gradually improve the ESG management ability of enterprises by improving the environmental information disclosure of financial institutions.

Due to the guidance of supervision policy, the willingness and quality of ESG disclosure of listed companies have been gradually increasing. The quantity and proportion of listed companies that actively disclose ESG information has increased year by year, and some listed companies have implemented the concept of ESG development into all aspects of their business operations, aiming to improve the enterprise performance management through ESG management.

It can be noticed that ESG disclosure is gradually becoming compulsory from the regulatory guidance documents at home and abroad. In the future, the disclosure form will be more normative, while the content will become more effective and comparable. The following is an analysis of the effectiveness of ESG-related information disclosure based on the disclosure of listed companies in 2022.

2. The Overall Profile Analysis of ESG Reporting

Affected by differences in regulatory policies, this paper conducts a statistical analysis on the disclosure of ESG reports, CSR reports, sustainability reports and environmental reports (hereinafter referred to as "reports") of A-share^[1] and H-share^[2] companies in 2022.

2.1 There are huge differences in the form of report disclosure between exchanges, with the A-share disclosure rate exceeding 30% for the first time.

Up to the 10th of June 2022, there were a total of 5,797 A-share and H-share companies (The companies which issued both A share and H share are not included, the same hereinafter), including 4,732 A-share listed companies and 1,065 H-share listed companies.

According to the statistics of China Chengxin Green Finance Technology (Beijing) Ltd., a total of 2,344 A-share and H-share companies disclosed their 2021 reports in 2022, among which were 1,428 A-share companies and 916 H-share companies, with an average disclosure ratio of 40.43%.

In 2022, the reports disclosed in A-share listed companies mainly in the form of CSR reports, accounting for 81.09%. while the reports disclosed in H-share listed companies are mainly in the form of ESG reports, accounting for as high as 94.98%. The huge gap between the two is mainly caused by the differences in regulatory policies and listed companies' own understanding of ESG.

In terms of disclosure rate, the reports disclosure ratio of A-share in 2022 is 30.18%, showing an increase of 2.31 percent compared with 2021. The reports disclosure ratio of H-share is 86.01%. Affected by the time of report disclosure, the ratio of H-share has decreased by 10.78% compared with 2021. It is expected that the adjusted proportion^[3] of H-share will be basically the same as that of the previous year, which is at a relatively high level.

2.2 Disclosure of reports in different industries: The overall reports disclosure ratio of A-share and H-share is not high and vary greatly by industries. A-share non-financial industries have the highest disclosure ratio, nearly 60%; H-share have the lowest disclosure ratio in the agriculture, forestry, animal husbandry and fishery industry, but still over 50%.

According to Shenwan industry classification^[4], listed companies are divided into 31 first-class industries. In 2022, only listed companies in the banking industry have achieved 100% disclosure. In addition, the disclosure ratios of 11 industries, including non-bank finance, steel, real estate, public utilities, petroleum and petrochemical, coal, transportation, media, food and beverage, beauty care, and comprehensive public industries, are higher than 50%, while the disclosure ratios of those industries that consist of a larger number of listed companies, such as the basic chemistry, power equipment, computer, electronics, and mechanical equipment industries are less than 30%. Among them, the disclosure ratio of basic chemical industry is 21.30%, which is the lowest disclosure level in all industries.

According to the classification of national strategic emerging industries^[5], there are a total of 744 listed companies in 9 strategic emerging industries, of which only 126 have disclosed reports, with a disclosure ratio of 16.93%.

2.2.1 The disclosure ratio of A-share financial industries tops the list, and the disclosure ratio of high-carbon industries is less than 35%.

In 2022, among the A-share listed companies, only four industries, including banking, non-bank finance, steel and public utilities, have disclosure ratios of more than 50%. Specifically, the disclosure ratios of banks industry and non-banking financial industry are highest, as it complies the regulatory requirements for financial institutions' environmental information disclosure. The top five industries in terms of the number of listed companies, including pharmaceutical and biological, machinery and equipment, computer, basic chemistry, and electronics industries, have lower disclosure rates of less than 30%, which below the industry average disclosure level. The disclosure ratio of the machinery & equipment industry that consists of the largest number of listed companies is only 18%, which is the lowest in industries.

In addition, the average reports disclosure ratio of high-carbon industries^[6] is 34.19%, slightly higher than the average disclosure level of A-share listed companies. Among them, only steel industry and public utilities industry (including thermal power) have the disclosure rate exceeding 50%, while the disclosure rates of building materials industry and basic chemical industry are less than 30%, and the disclosure rate of basic chemical industry is less than 22%, which is far lower than the average of high-carbon industries.

2.2.2 For H-share, more than half of the industries achieved a report disclosure ratio of more than 90%.

Among H-share listed companies, a total of 16 industries have achieved report disclosure rates of more than 90%. Among them, listed companies in the banking, beauty care, and national defense and military industries achieve 100% report disclosure rate, and the report disclosure ratios of machinery and equipment, building decoration, social services, comprehensive, commercial retail, agriculture, forestry, animal husbandry and fishery industry are less than 80%. The average disclosure ratio of agriculture, forestry, animal husbandry and fishery industries is 55.56%, which is the lowest level in various industries. With the continuous disclosure of reports of H-share listed companies, the proportion of report disclosure will further increase.

The overall disclosure ratio of industries with high carbon emissions is 90.68%, which is nearly 57 percentage points higher than that of A shares. Among them, public utilities (including thermal power), coal, petroleum and petrochemicals, and non-ferrous metals have disclosure ratios of higher than 85%, but lower than the average disclosure level of high-carbon industries in H shares.

2.3 Reporting and disclosure by listed companies with different ownership types: the disclosure rate of central state-owned enterprises is far ahead, doubling the disclosure rate of private enterprises.

As of June 10, 2022, private enterprises accounted for 62.05% and were the most abundant among A-share and H-share listed companies. Following this were local state-owned enterprises, which accounted for 16.73%; central state-owned enterprises accounted for 9.28%, and other enterprises accounted for less than 12%.

In terms of the disclosure rate of listed companies with different ownership types, the disclosure rate of central state-owned enterprises is 69.33%, 50% for local state-owned enterprises, and 32.25% for private enterprises - which was far lower than that of central state-owned enterprises and local state-owned enterprises.

2.3.1 The report disclosure rate of A-share central state-owned enterprises was three times that of private enterprises, with the CSR report still being the mainstream report disclosure form. The ESG report disclosure rate was less than 17%.

As of June 10, 2022, private enterprises in A-share listed companies with different ownership types are still the main entity.

When looking at the report disclosure rate of listed companies with different ownership types, the disclosure rate of central state-owned enterprises was 61.82%, local state-owned enterprises was 43.55%; and only 20.76% for private enterprises - which was lower than the average disclosure level of A-shares. This is mainly due to the series of guidance documents issued by the SASAC on central state-owned enterprises to fulfill their social responsibilities in recent years. As early as 2008, the SASAC issued the Guiding Opinions on the Performance of Social Responsibility by Central Corporate (State-owned Assets Res. Dev. No.1 [2008] ) (hereinafter referred to as Opinions) is proposed to establish a CSR report system, companies with sufficient resources are to regularly publish a CSR report or sustainability report, Opinions to a certain extent, helped the state-owned enterprises practice better social responsibility and disclose CSR report.

Looking at the disclosure types, over 70% of A-share listed companies with different ownership types are mainly disclosed in the form of the CSR reports, while ESG reports accounted for less than 17%. On the one hand, ESG investments are still at the early stage of development in China, so listed companies have limited awareness and understanding of ESG, and their subjective disclosure willingness needs to be strengthened; On the other hand, a standardized and unified ESG disclosure framework has not been established in China so that listed companies lack effective ESG disclosure reference standards, and are still disclosed in the form of the relatively common social responsibility report.

2.3.2 The disclosure rate of H-share state-owned enterprises is nearly 100%. The ESG report is the main form of disclosure, with the proportion being higher than 80%.

As of June 10,2022, private enterprises are still the main listed entities among H-share listed companies, with the number of those enterprises accounting for 60.47%. Looking at the disclosure rate, that of listed companies with different ownership types was more than 50%, among which, the disclosure rate of central state-owned enterprises and local state-owned enterprises was nearly 100%. The disclosure rate of private enterprises was nearly 85%, which is significantly higher than the average disclosure level of A-share enterprises with the same ownership types.

Looking at the disclosure forms, the ESG report was the main form of disclosure by companies with different ownership types. Over 80% were of the ESG disclosure form, while the CSR report accounted for less than 6% - which is directly related to the mandatory requirements of the HKEX on ESG disclosure and the development trends of international ESG investments.

As early as 2011, the HKEX issued ESG Reporting Guide, advocating listed companies to disclose ESG information, and revised the guidelines in 2019, proposing the principle of comply and explain to further strengthen ESG disclosure. At the same time, HKEX as an international Stock Exchange has absorbed listed companies from different regions around the world and attracted close attention from global investor. Listed companies have gained a deeper understanding of ESG concepts. It is inevitable that ESG reports will become a mainstream disclosure form.

2.4 Disclosure of A-share listed companies in different registered regions^[7]: the highest disclosure rate in all regions has not exceed 50%, and the disclosure rate in top three regions with the highest number of registered listed companies was less than 30%.

The five provinces (municipalities directly under the Central Government) with the highest number of registered listed companies were Guangdong, Zhejiang, Jiangsu, Beijing and Shanghai, with 776, 618, 583, 422 and 391 companies respectively, while the other provinces (municipalities directly under the Central Government) were less than 300.

Looking at the report disclosure rate, the provinces (municipalities directly under the Central Government) did not exceed 50%. Among them, the disclosure rate of Guangdong, Zhejiang and Jiangsu - with the largest number of registered listed companies - were all less than 30%, while Jiangsu was only 18.87%, which was the lowest of all provinces (municipalities directly under the Central Government); Beijing and Shanghai are nearly 40%, above the middle level of all provinces (municipalities directly under the Central Government).

2.5 Disclosure of listed companies with different indexes: With the increase of the number of companies covered by the index, the disclosure rate gradually declined, but the disclosure rate of mainstream indexes was still more than 2 times higher than the average disclosure level of A-shares.

2.5.1 The overall disclosure rate of the STAR Market was less than 30%, and the disclosure rate of STAR 50 was nearly 100%.

As of June 10,2021, there were 428 STAR Market companies, among which 95 listed companies disclosed ESG reports, sustainability reports and CSR reports, with an overall disclosure rate of 22.2%, which was not high. The specific disclosure situation is as follows:

On January 18,2022, the Shanghai Stock Exchange internally issued Notice on Annual Report Disclosure by STAR Market companies in 2021 (hereinafter referred to as the Notice), clear that STAR Market companies shall disclose ESG information in annual reports, and separately disclose ESG reports, CSR reports, sustainability reports and environmental disclosure reports. Among them, the STAR 50 companies are required to play a leading role in disclosing CSR reports separately. If companies have disclosed ESG reports, they do not need to disclose CSR reports.

Affected by this regulatory policy, the report disclosure rate of STAR 50 companies was as high as 98%, and only Suzhou Nanomicro Technology CO.,LTD. (688690) has not yet released an ESG report or CSR report. However, the report disclosure rate of STAR Market companies other than non-STAR 50 companies was only 12.17%, which was relatively lower.

2.5.2 The report disclosure rate of SSE-listed companies exceeded 40%, about 10 percentage points higher than the overall A-shares, and the disclosure rate of SSE 50 had reached 94%.

As of June 10, 2021, the number of SSE-listed companies totaled 2,094, among which 848 has disclosed reports, with a disclosure rate of 40.50%, higher than the average disclosure level of A-shares. The overall disclosure is as follows:

According to CCXGF, there are 47 SSE-listed companies disclosing reports with a high overall disclosure rate; there are 801 Non-SSE 50 companies disclosing reports and the disclosure rate did not reach 40%, but higher than the average level of A-shares.

2.5.3 The report disclosure rate for CSI 300 companies exceeded 90%, and the report disclosure rate of CSI 800 companies was less than 80%.

According to CCXGF, as of June 10,2022, the disclosure rate of CSI 300 companies was higher than that if CSI 800, exceeding the overall average level of A shares.

The overall disclosure is as follows:

2.6 Report disclosure of listed companies in different market value ranges: the higher the total market value range that listed companies in, the higher the report disclosure rate.

According to the total market value range on June 10, 2022 of A-share and H-share listed companies, all nine companies which had a total market value within [10,000, 50,000) has disclosed reports. There were 159 listed companies with the total market value within [1000, 10,000), with the disclosure rate of 94.34%; There were 1468 listed companies with the total market value within [100, 1000), with the disclosure rate of 59.13%, about 35 percentage points lower than listed companies with market value of more than 100 billion yuan. There were 4161 listed companies with the total market value within [0, 100), with the disclosure rate of 31.65%, lower than the overall average disclosure level of A-share and H-share listed companies.

3. Future Development Trends and Suggestions for ESG Reporting

By taking analysis of A-shares and H-shares, ESG disclosure has become an inevitable trend for listed companies in the long run. Globalization has made ESG reporting a mainstream form，it is imperative for listed companies to establish an effective ESG disclosure system. Therefore, on the basis of a full understanding of the current development status, proposals for the development of ESG disclosure are presented below.

3.1 Policy guidance to provide basic support and guarantee for the standardization of ESG reporting

ESG reporting is driven by regulatory policies. It is important to establish a sound ESG system and formulate specific policies to create a good institutional environment for listed companies. At the same time, clarifying the content and requirements of ESG information disclosure could help improve the quality of information disclosure.

3.2 Cultivating Market, which is a consciously curated, to force/induce enterprises improve ESG awareness and the quality of information disclosure

As the vigor and wind vane of financial markets, investment institutions play an important role in promoting the sustainable development of listed companies. Strengthening the guidance and incentives and raising the ESG investment awareness of investment institutions could encourage listed companies to take the initiative to improve their understanding and awareness of ESG, and eventually improve the quality and quantity of useful information in ESG reporting.

3.3 Demonstration effect to stimulate the potential of listed companies to achieve internal optimization and prosperous development

Forming a demonstration effect, by showing cases of enterprises with excellent ESG performance of different types, scales and industries, could drive the ESG development and stimulate endogenous power of other enterprises to establish a better ESG management structure, meanwhile realize the optimization and improvement of internal management, further achieve the benign and sustainable development.

Media contact:

Zixiao Cui
cuizixiao@ccxr.com.cn