Could the Shanghai or Shenzhen stock exchanges introduce mandatory ESG disclosure?

The number of related initiatives and announcements in China suggests legal reporting is not far away.

Last month, the Chinese Securities Regulatory Committee (CSRC), which regulates the Shanghai and Shenzhen Stock Exchanges, presented a report on mandatory environmental information disclosure at stock exchanges at the first annual conference of the Green Finance Committee (GFC).
The GFC is the high-level group set up by the People’s Bank of China (PBOC), the country’s central bank and one of its financial regulators, to support the development of green finance.
At the event, the CSRC said it was doing research into environmental disclosure following interest in the Industrial and Commercial Bank of China (ICBC), the world’s largest bank, publishing the results of its ‘environmental stress test’ of its lending to energy intensive companies earlier this year.
There are two reasons the CSRC may also soon introduce some sort of ESG disclosure in Shanghai and Shenzhen. First, China’s Hong Kong Stock Exchange, regulated by the Securities & Futures Commission of Hong Kong, this year strengthened its ESG reporting guidance to require companies to disclose more, on a “comply or explain” basis, about a range of ESG factors, including environmental-related data, and labour standards, including preventing child and forced labour.
Second, when the market talks about China’s activity around green finance, the speed and urgency of transition is clear. This month at the International Financial Services Forum, H.E. Liu Xiaoming, Chinese Ambassador to the United Kingdom said that though green finance was still a relatively recent concept in China, in the past year the country had made an enormous effort to develop its capacity, including it in its recent Five-Year Plan through to 2020.
The targets in the Plan are ambitious. Bruce Jenkyn-Jones, co-head of listed equities at Impax Asset Management, says last year China generated 12% of its electricity from non-fossil fuel sources.The target for 2020 is 15% and for 2030 this increases to 30%.
Also speaking at the Forum, Sean Kidney, CEO of the Climate Bonds Initiative painted a vivid picture of the reasons for the rapid transition: “China is interesting. It’s elevated 1 billion people out of poverty since 1970s. But this has had an environmental cost to the Chinese people. They can’t drink water in most cities. The air in Beijing is bad. People are scared to eat food because of pesticides. Some decisions have proven to be bad.”
While Kidney noted the potential for green investment in the country, he said it was still in a “wild west stage”. “There are five financial regulators in China and they don’t always talk,” he said. “Making sure there is a harmonized approach is a challenge, and we need it globally too for a large liquid market.”
The PBoC and the industry’s self-regulatory organisation – the National Association of Financial Market Institutional Investors – look after bonds issued by financial institutions; the National Development and Reform Commission are in charge of enterprise and municipality bonds; and the CSRC covers bond issuance by listed companies; explains the International Institute for Sustainable Development. Another issue Kidney highlighted was confidence in green credentials and green definitions. “There is a lack of understanding. The Green Finance Committee definitions need a bit more work.”
At the end of 2015, the PBoC released its Green Financial Bond Guidelines—making China the first country in the world to publish official rules for the issuance of green bonds. Simultaneously, the NDRC issued guidelines on green bonds, linked to infrastructure investment.
Both guidelines include “clean coal utilization”. Speaking to RI, Dr. Guo Peiyuan, founder of SynTao, the China-based CSR consultancy and a member of the Green Finance Committee said the
debate on the inclusion of coal in green bond guidelines had come up at a high-level investor meeting on climate risk organized by sustainability advocacy group Ceres at the United Nations in New York this January. “Coal still represents a considerable part of China’s energy structure. It would be too difficult to remove it overnight. It makes sense to use the fossil fuel and try to decrease its percentage. This is the roadmap that government has announced for the next 10-15 years. This idea is reflected in green bond categories/guidelines. We won’t simply get rid of coal.”
Peiyuan said he recognized that the Climate Bond Initiative did not include coal: “The situation in China is different,” he said. “There has been a lot of discussions. The use of ‘green coal’ can meet certain types of requirement and be counted as a green bond.”
Richard Mattison, CEO at environmental consultancy Trucost, also attended the Green Finance Committee conference and told RI that while personally he wasn’t a fan of green coal, he appreciated that if China was going to meet the targets set out in its INDCs (Intended Nationally Determined Contributions agreed on at COP21) there had to be a place for such a product.
“Every country is not at the same starting point,” he said. “Around the world we are at different points of economic and technological development. It might be wrong for Europe. But there is a conflict between the perception of what’s perfect in the West and what is practically achievable in China from the perspective of its INDC. China feels it has to stick with green coal.”
He also highlighted parallel efforts in China to scale back on coal. “The People’s Bank of China, the Banking Regulatory Commission, the Insurance Regulatory Commission and the Securities Regulatory Commissionhave collectively asked banks to curb loans to coal and steel firms. And China has frozen new coal power plants,” he said. He also noted that China was developing a national carbon emissions trading scheme. “China’s government has made clear that coal is not its preferred power but from a practical perspective it has to have a role.”
He did however appreciate this approach created other risks. “Washing coal might make it less polluting. But the run off pollutes water. It’s cleaner from a climate change perspective, but dirty from a water perspective.”
For this reason he said green credit ratings were essential. Trucost is launching a green bond assessment framework in September in partnership with China-based Golden Credit Ratings. That follows the launch, unveiled at the event, of a product where financial institutions can account for their natural capital costs. Other announcements at the conference included research into Chinese green finance development by the Green Finance Committee, which has also launched an online tool that calculates the environmental impacts of a green project. In turn, the Climate Bonds Initiative launched three China Roadmap Policy Reports setting out a plan for China’s green bond market development in the years ahead. China has 759 ‘climate aligned bonds’ according to the China Green Bond Index, which was launched last month by the China Central Depository & Clearing Co.
And the Green Finance Committee is growing. It currently has about 100 members. It recently agreed to admit more, notably Ant Financial Services, the finance arm of online marketplace Alibaba Group, and auditors KPMG and Deloitte, and the Cambridge Institute for Sustainable Leadership.