Chinese ESG policies summary and interpretation

source:goldencsr date:2022-11-14 09:47:08

In recent years, with the in-depth development of social responsibility in the capital market, ESG rises and develops rapidly in western countries, and also attracts more and more attention in China.

Just like the evolution of social responsibility in China, the development of ESG is inseparable from the policy support and guidance. The Chinese government keeps promoting enterprises to value and constantly improve ESG performance through the regulation on non-financial performance, such as environment and society since it has been formally put forward, in order to achieve the high quality and sustainable corporate development.

At present, clear ESG policies mainly come from financial supervision departments, focusing on mandatory regulations for ESG disclosure and policy guidance for ESG investment. Because ESG includes many issues in different aspects (Environment, Society, Governance), different government departments have their own emphasis on issues related to their regulatory functions.
During the 14th Five-Year Plan period (2021-2025), on the basis of economic development, environmental protection, social governance, a broader space for the in-depth development of ESG will be created by the implementation of the new development philosophy of "innovation, coordination, green, openness and sharing" and the pursuit of more sustainable and safer development goals with higher quality, more efficiency and fairness.

Part.1 Understanding ESG policies with regulatory requirements

The current ESG regulatory measures can be roughly divided into two categories for different objects. Mandatory ones are for listed companies or some specific enterprises, and through regulations and laws, they are requested to disclose ESG-related information that meets the lowest standards; the other has incentive requirements, and companies are encouraged to disclose through market-oriented means such as green investment.

1. ESG regulatory requirements mainly for listed companies
The ESG disclosure of Chinese listed companies mainly relies on the guidance from government, and policies for detailed implementation from exchanges.

The disclosure of environmental information by companies was first proposed by the national environmental supervision department. In 2003, the former State Environmental Protection Administration mentioned in the Notice on Disclosure of Enterprise Environmental Information that those on the provincial list of serious polluting companies should disclose their pollution discharge and environmental protection measures.

As the supervision department of information disclosure of listed companies, China Securities Regulatory Commission (CSRC), according to China's national conditions and market development stage, has continuously studied and improved the ESG disclosure system and standardized the operation of listed companies.

Based on the disclosure rules of listed companies issued by CSRC, Shenzhen Stock Exchange (SZSE) and the Shanghai Stock Exchange (SSE) issued more detailed disclosure guidelines for ESG.

SZSE and SSE issued guidelines in 2006 and 2008 respectively to encourage listed companies to disclose social and environmental information. In 2020, SZSE and SSE continued to strengthen supervision on the disclosure of CSR information of listed companies. SZSE revised measures for reviewing information disclosure of companies listed on the bourse, in an attempt to further boost company quality. Under the new measures, Shenzhen authorities for the first time added ESG performance disclosure into company assessments. So far, whether the listed company discloses ESG information and the quality of disclosure will affect the company's rating, and will have a more direct impact on the development in the capital market.
Compared with the two mainland exchanges, The Stock Exchange of Hong Kong Ltd (SEHK) made earlier mandatory requirements for ESG disclosure of listed companies. In December 2019, the scope of mandatory disclosure was expanded and all ESG matters need to follow "comply or explain" provisions. So far in the new ESG guidelines, all indicators are mandatory disclosure terms except "independent assurance" which is a suggested clause.

2. ESG policy guidance for financial institutions
As for ESG investment, focusing on the green finance and inclusive finance, domestic regulators have issued a set of policy guidance to promote commercial banks, public funds and other financial institutions to develop more financial products based on ESG investment ideas including green loans, green bonds, green funds and carbon financial products, guiding the funds to clean, low-carbon and environmental friendly enterprises and projects. According to the Notice of the State Council on Issuing the Plan for Advancing the Development of Inclusive Finance (2016-2020), inclusive finance is "supplied to all social sectors and groups demanding financial services at affordable cost", so as to promote green and sustainable development of the economy and society.

Thanks to the strong support of policies from top to bottom, China's green finance has seen its accelerating growth in recent years. In August 2016, the People's Bank of China, together with other six ministries, jointly issued the Guiding Opinions on Building a Green Financial System, which is the world’s first guiding document for the comprehensive planning and promotion of green finance at the government level. Since June 2017, the State Council has successively set up pilot zones for green financial reform and innovation in nine areas from six provinces (districts) across the country to explore the "bottom-up" local green finance development path. In November 2018, the Asset Management Association of China issued the Green Investment Guidelines (For Trial Implementation) to comprehensively guide and standardize the green investment activities in fund industry.
The proposal of carbon peak and carbon neutrality goals reveals Chinese government's increasingly clear and firm guidance and promotion on the green finance and responsible investment.

While promoting the ESG of Chinese companies as a governor, financial institutions shall also meet regulators’ ESG disclosure requirements for all listed companies, respond to their higher requirements on the ESG management, and integrate the ESG concept into the enterprise risk management and decision-making process.

Part.2 Policy basis for emerging ESG topics

Since the 18th CPC National Congress, the Party and the government have attached great importance to green and sustainable development and issued a series of policy documents.

The Government Work Reports from 2013 to 2021 revealed that topics related to society, environment and corporate governance have always been the focus of the government, such as innovation, IP protection, employment, targeted poverty alleviation, rural vitalization, food and drug safety, work safety, green development, ecological protection, philanthropy and voluntary services, setting tones for enterprises to promote ESG practices.

ESG topics and requirements are also emerging in the Government Work Report, such as promoting entrepreneurship and craftsmanship, combating gender and identity discrimination in employment, promoting waste classification, and protecting biodiversity. In particular, the protection of workers' rights and interests brought about by the rapid development of digital economy under new employment models, the digital divide for the elderly, science and technology ethics and other issues, have become the focus of attention of relevant government departments and the public, and have also become the material topics in the ESG management of enterprises in relevant industries.

1. Protecting labor rights and interests under new employment models
In recent years, the CPC Central Committee has attached great importance to safeguarding the labor rights and interests under new employment models. The platform economy has developed rapidly, breeding the increasing number of workers employed on the Internet platform.

In July 2021, the State Administration for Market Regulation and other six ministries jointly issued a guideline that called for better protection of food delivery workers' rights in areas including salaries, workplace safety, food safety, social security, working environment, organization construction and dispute settlement. Then, the Ministry of Labor and Social Security and other seven ministries issued a guideline to protect labor rights and interests under new models of employment.

The introduction of these policies will standardize the platform enterprises’ employment. It will supervise the labor dispatch service providers, implement the fair employment system, improve the minimum wage and payment guarantee system and the work break system. Assessment indicators harmful to the safety and health of workers are not allowed to be developed. The platforms should formulate and revise institutional rules and platform algorithms directly related to the rights and interests of workers, such as the entry and exit of the platform, order distribution, piece rate, percentage of fees taken from workers, remuneration composition and the payment, working hours, rewards and punishments.

2. The digital divide for the elderly
With the rapid growth of China's aging population, many elderly people have difficulty in using Internet or smart phones, and encounter a lot of inconvenience in traveling, seeing doctors, or paying bills. They cannot fully enjoy the convenience brought by intelligent services, and the "digital divide" faced by the elderly is becoming increasingly prominent.

In 2020, the General Office of the State Council issued the Implementation Plan on Effectively Solving the Difficulties of the Elderly in Using Intelligent Technologies, proposing clear solutions to various problems encountered by the elderly when using smart devices. In 2020, the Ministry of Industry and Information Technology also issued the Guiding Opinions on Promoting Information Accessibility, focusing on key groups such as the disabled, the elderly, residents in remote areas, and culturally different groups, improving the top-level design of information barrier-free environment, and focusing on eliminating obstacles in aspects of information consumption fees, terminal equipment, services and applications for the elderly and the disabled.

The digital divide is an unavoidable problem since the development of Internet information technology. Enterprises solving the problem faced by the elderly should examine whether they are doing their jobs right or take the initiative to seek new business opportunities. They should keep and improve the traditional service scenarios for high-frequency daily affairs such as travelling, medical treatment, banking, etc., pay more attention to their special needs, develop Internet products and services adapting to the elderly, and systematically and scientifically strengthen the digital guidance for the elderly group.

3. Ethics of science and technology
At present, people are enjoying unprecedented dividends of scientific and technological development, but they are also facing risks in scientific and technological ethics. The rapid development of cutting-edge technologies such as gene editing, artificial intelligence, and assisted reproductive techniques has brought great benefits to mankind, while constantly breaking through the ethical bottom line and the measure of value of human beings. There have been scientific and technological ethical incidents such as gene-edited babies, takeaway riders who are "trapped in the system", profiteer on big data, "brake failure" of self-driving cars, and privacy leakage of face recognition. It has become the common call of the whole society to strengthen the institutionalization and the global governance of science and technology ethics.

At the regulatory level, the Internet regulations focus on the application of AI algorithms, and the governance of algorithm abuse and recommendation is on the agenda. The Data Security Law requires that data activities and new data technologies "shall conform to social morals and ethics".

On September 25, 2021, the National Governance Committee for the New Generation Artificial Intelligence officially released the Ethical Norms for the New Generation Artificial Intelligence, requiring the integration of ethics into the entire life cycle of artificial intelligence. On November 1, China's first comprehensive law specifically for the protection of personal information, the Personal Information Protection Law, was officially implemented, which explicitly prohibited "profiteer on big data" and excessive collection of personal information, and set special obligations for large Internet platforms, such as establishing and improving the personal information protection compliance system, setting up an independent body composed of external members to supervise the protection of personal information, and regularly issuing CSR reports on it.

For technological businesses, science and technology ethics are the guidelines that must be observed. In May 2021, during the IPO of Megvii, the SSE conducted the first inquiry on the ethics of science and technology, requiring Megvii to disclose the company's organizational structure, core principles, internal controls and implementation of AI ethics.

In the future, technological businesses should further explore mechanisms, methods and tools for translating ethical principles into actions, including conducting self-examination, establishing an ethics review committee, organizing ethics training, formulating ethical standards and certifications, etc., to integrate scientific and technological ethics into corporate governance and the whole life cycle of products and services.

Scientific and technological ethics is also an important aspect of international competition. Businesses in the world's leading high-tech fields such as UHV transmission, high-speed rail, nuclear power generation, hydropower station construction, bridge-building tunnels, 5G, and digital finance should formulate and improve their own governance mechanisms for scientific and technological ethics as soon as possible, and participate in the formulation of related international rules to help China become a responsible scientific and technological power.