At the international community level, Environmental, Social and Governance (ESG) is part of the investment and corporate evaluation to assess the sustainability of an enterprise’s operations and its impact on society. At the domestic level, major stock exchanges have imposed disclosure requirements on the ESG information of listed companies.
Notwithstanding China’s late start to ESG legislation and information disclosure for listed companies, the recent developments are notable. In January 2022, the 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”) for companies listed on the STAR market, outlining the requirements for the disclosure of ESG information in annual reports. Below are some of the key points.
I. Why are stock exchanges concerned with ESG information disclosure rules on the STAR Market?
ESG has become increasingly important in recent years as extreme weather, the epidemic, regional conflicts and human rights are in the spotlight . To learn more about the origins of ESG, please refer to our previous newsletters (such as “Origin: From EHS to ESG”). Under the macro policy of green finance, the Shanghai Stock Exchange (SSE) and the Shenzhen Stock Exchange (SZSE) have made it clear that companies in certain industries have mandatory ESG disclosure obligations. According to an announcement published by the Shanghai Securities News on January 20, 2022, about a quarter of all A-share listed companies released social responsibility, ESG, sustainable development, environmental and other relevant reports in 2021. Before the issuance of the Notice on Annual Reports by the SSE, disclosure of ESG information was recommended but not mandatory; since the issuance of the Notice on Annual Reports, all companies listed on the SSE STAR Market must disclose ESG information in their annual reports.
II. How should a STAR Market listed issuer disclose their ESG information?
The Notice on Annual Reports emphasized that the disclosure of ESG or social responsibility reports by a company listed on the STAR Market shall be deliberated by its board of directors and disclosed separately on the SSE’s website. The SSE has further raised the requirements for the disclosure of ESG information by listed companies included in the Sci-Tech Innovation Index; that is, they must disclose their social responsibility or ESG reports along with the disclosure of their annual reports; if they have already disclosed their ESG reports, they may be exempted from the separate disclosure requirements of their social responsibility reports. A STAR market listed issuer that discloses their ESG report, or their social responsibility report, shall highlight its actions to support the common goal of “peak carbon emissions and carbon neutrality” and its actions to promote sustainable development. The SSE has not yet issued detailed guidelines on the format of the annual ESG reports of companies listed on the STAR Market or the specific disclosure rules. The detailed requirements on the disclosure of actions to reduce carbon emissions and promote sustainable development remain to be seen.
III. What are the actions that a listed or proposed issuer take?
Given the regulators’ emphasis on ESG information disclosure both overseas and in China, we believe that for listed or proposed issuers, ESG information disclosure is not only a report for the purpose of publicity, but it should play a role in the risk identification and risk management for enterprises. In connection with ESG information disclosure, we suggest that a listed or proposed issuer should take the following actions:
1．Monitor any development of the ESG disclosure requirements of the stock exchanges for listed issuers and the environmental information disclosure requirements under the existing environmental laws and regulations. Companies should review their current corporate environmental management system, draft and optimize their corporate ESG information disclosure systems, and implement systems and maintain the effective operation of these at the corporate level. Please contact your counsel of environment law for assistance, if needed.
2．Research international standards regarding voluntary standards for ESG information disclosure. While there have been no international precedents whereby voluntary standards are included in regulatory frameworks and legislation, we cannot rule out the possibility that such voluntary standards may be incorporated as part of the legislation in the future.
3．Structure an ESG system and establish an underlying data monitoring and collection system. Since the Notice on Annual Reports focuses on carbon emission reduction information, some environmental consulting firms (including our partners for technical cooperation) have started to provide services for companies in terms of real-time carbon emissions and energy monitoring system development, carbon neutrality pathways and solution design, etc.
If you need assistance regarding the ESG information disclosure requirements (either voluntary or mandatory), please contact us by email: email@example.com. We can also assist in the management of environmental rules and regulations, conduct ESG due diligence and strategy enhancement, design carbon emission reduction pathways and solutions, develop carbon emission and energy monitoring related systems and carry out ESG training.
About JunHe’s EHS and ESG Team:
JunHe is among the largest internationally recognized law firms in China providing a full spectrum of quality legal services, and we have a team of more than 900 professionals. We are pioneers in the field of ESG practice in China and have one of the largest teams of EHS lawyers in the country, advising clients in the areas of EHS and ESG. With a view to sustainability, JunHe provides EHS compliance review for corporations in various sectors, either alone or in cooperation with third-party agencies, subject to the particular needs of the client. In addition, JunHe provides EHS due diligence services for supply chain management and M&A transactions in various practices including ESG, EHS, labor and personnel, intellectual property, trade and data, finance and taxation, commercial and criminal compliance, and other EHS-related practices. JunHe provides ESG due diligence services either alone or in cooperation with third-party agencies, assisting enterprises and third-party agencies in drafting ESG reports. Based on our vast experience in advising clients in various sectors, we can provide targeted legal and compliance relating to ESG in the daily operations of enterprises, draft and review ESG clauses in contracts with business partners, structure and improve ESG systems for investors and enterprises, and provide comprehensive ESG training.
For further information, please contact:
Catherine MIAO, Partner, JunHe