Commentary: China’s Great Strides in ESG This Year, and What the Future Holds

By Guo Peiyuan and Zhu Shouqing

With various guidelines from ministries and stock exchanges, China made great progress in environmental, social and governance (ESG) disclosure. This paper reviews the major policy instruments of central and local governments released in 2024, and forecasts policy directions for the coming year.

ESG disclosure catches eyeballs

The most prominent policy progress in 2024 is ESG information disclosure. The ESG reporting guidelines for A-share listed companies, which have been discussed in the market for many years, were released in February 2024. Under the auspices of China Securities Regulatory Commission (CSRC), the three major exchanges issued ESG reporting guidelines (consultation draft) in April, which took effect in May. This means that companies in the SSE 180 Index, STAR 50 Index, SZSE 100 Index, ChiNext Index, and companies listed domestically and overseas must start disclosing their 2025 ESG data in 2026. The CSRC also encourages other companies to publish ESG reports on a voluntary basis. Moreover, the CSRC placed special emphasis on the quality of ESG reports, pointing out that “ESG reports are not advertisements, and guidelines are syllabuses rather than extracurricular reading materials.” To enhance the ability of listed companies to prepare reports, the CSRC also instructed the stock exchanges and the China Association of Listed Companies to organize special training and publish guidance. The Guidelines for Sustainable Development Reporting of Listed Companies compiled by the China Association of Listed Companies was released in September. And the market has responded positively, with more than 2,200 A-share listed companies releasing ESG reports for 2023 fiscal year in 2024, accounting for about 40% of all A-share listed companies.

The Ministry of Finance (MOF) is also actively promoting corporate sustainability disclosure. In May 2024, the Ministry of Finance issued the Basic Guidelines for Corporate Sustainability Disclosure (draft for comments), putting forward general requirements for the disclosure of sustainable information by Chinese enterprises. This is an important step in the systemic construction of disclosure standards in China. The Basic Guidelines follow the International Sustainability Standards Board’s (ISSB) disclosure framework, which requires companies to disclose data related to governance, strategy, risk and opportunity management, and indicators and targets. Unlike the ISSB Standard, which primarily takes a financial perspective, the MOF’s guidelines follow the principle of dual materiality, which assesses ESG factors’ impacts on a firm’s finance as well as on the socioeconomic and ecological environment. In contrast to the exchange’s guidelines, the MOF’s guidelines only set out general requirements for sustainability reporting, not sector specific disclosure requirements. The MOF’s goal is to issue both the general standards for corporate sustainability disclosure and the climate-related disclosure standards by 2027, and set up a national sustainability disclosure system by 2030.

Chinese companies listed on the Hong Kong Stock Exchange should also pay attention to the latest sustainability disclosure requirements in the Hong Kong market. In April 2024, HKEX published the consultation conclusions on enhancing climate disclosure under the ESG framework, announcing that it will require Hong Kong-listed companies to disclose climate-related information in accordance with the ISSB’s Climate-related Disclosure Standard (IFRS S2). Together with the previous ESG reporting guidelines, it is referred to as the ESG Code. The HKSAR Government supports the adoption of ISSB standards. In March 2024, Hong Kong published a vision statement for the development of a sustainable disclosure ecosystem, setting out the vision and approach for building a sustainable disclosure ecosystem in Hong Kong, and making it clear that the Hong Kong Institute of Certified Public Accountants (HKICPA) will be the formulator of the Hong Kong version of the standards. Subsequently, HKICPA published draft versions of the HKFRS S1 and S2 standards in September, fully adopting the ISSB standards. The two guidelines are expected to be published within a year, and take effect on Aug. 1, 2025.

Climate transition remains the priority

Among the many ESG issues, climate and transition remain the most important and therefore a policy priority. Take information disclosure as an example. Climate change is at the top of the list of environmental disclosure topics in the ESG reporting guidelines of the three major exchanges, and climate-related disclosures will also be the first in the MOF’s Corporate Sustainability Disclosure Standards.

At the central government level, the Central Committee of the Communist Party of China and the State Council issued the Opinions on Accelerating the Comprehensive Green Transformation of Economic and Social Development in July, which put forward requirements for improving fiscal and tax policies, enriching financial instruments, and optimizing investment mechanisms for the green transformation. In the same month, the General Office of the State Council issued the Workplan for Accelerating the Construction of a Carbon Emission Dual Control System, proposing to establish a comprehensive evaluation and assessment system for carbon peak and carbon neutrality, and to carry out carbon emission evaluations of fixed-asset investment projects. At the ministerial level, the People’s Bank of China (PBOC) and six other ministries and commissions issued the Guiding Opinions on Further Strengthening Financial Support for Green and Low-Carbon Development in April, proposing requirements for optimizing the green finance standard system, strengthening the constraint mechanism based on information disclosure, promoting the development of green financial products and markets, and strengthening prudential management and risk prevention related to climate change. In the same month, the National Financial Regulation Administration (NFRA) issued the Guiding Opinions on Promoting the High-quality Development of Green Insurance, proposing that green insurance should become an important instrument to help the comprehensive green transformation of the economy and society, and that the level of green insurance and the scale of green investment in insurance funds should be significantly improved. In October, the PBOC and other three departments issued the Opinions on the Role of Green Finance to Serve the Construction of a Beautiful China, calling for the establishment of a unified standard system for green finance and transition finance, urging financial institutions and business entities to explore and carry out ESG evaluations, and encouraging enterprises to formulate transition plans. These policy documents illustrate the importance of the climate transition.

These policies aim to promote two things. The first is risk prevention, which includes both the climate risk of individual projects and the climate risk of asset portfolios. At present, the PBOC is also actively guiding banks and other financial institutions to measure the carbon emissions of their assets and carry out climate stress testing. The second is financial innovation, which includes both financial instruments and financial products that support the green transition. In recent years, emission reduction support tools, transition bonds and transition loans have become common. Commercial banks especially like the carbon emission reduction support tools due to their low-cost. According to statistics from PBOC, as of July 2024, carbon emission reduction support tools have guided financial institutions to issue more than 1.1 trillion yuan of carbon emission reduction loans, covering more than 6,000 market entities. The PBOC plans to extend their use until 2027, and supports the deployment of transition loans and transition bonds. In October 2024, the National Association of Financial Market Institutional Investors (NAFMII) issued the Notice on Further Optimizing the Relevant Mechanisms for Green and Transition Bonds to guide the flow of funds to the transition sectors. To prevent the risk of greenwashing in transition finance activities, the regulatory authorities are actively formulating transition finance standards. The PBOC has taken the lead in this endeavor, and has launched the second batch of standards for seven industries in 2024. At the same time, local governments are encouraged to take the lead in experimentation. Thus, Shanghai, Hebei and other places have already formulated transition finance standards.

China’s carbon market also made a policy breakthrough in 2024. First, the national voluntary greenhouse gas reduction trading market was restarted in January, and the first batch of China’s certified voluntary emission reduction (CCER) projects were officially listed in September. Second, the national carbon emission trading market officially announced an expansion plan in September, which will cover the cement, steel, and electrolytic aluminum industries.

Ministries and municipalities support ESG

In recent years, statements about green finance and ESG have become more and more common in various central government documents. The above-mentioned documents of the Central Committee of the Communist Party of China and the State Council on Accelerating the Comprehensive Green Transformation of Economic and Social Development and the Opinions on Comprehensively Promoting the Construction of a Beautiful China all contain things about green finance and ESG. In July, the Third Plenary Session of the 20th Central Committee of the Communist Party of China adopted the Decision of the Central Committee of the Communist Party of China on Further Comprehensively Deepening Reform and Promoting Chinese-style Modernization, which calls for the active development of science and technology finance, green finance, inclusive finance, pension finance and digital finance — that is, the “five major articles” of financial work. All of this means that green finance and ESG are generally in line with China’s current development direction.

At the ministry level, more ministries or their affiliates also introduced ESG policies or engaged in ESG efforts in 2024, though the policy frameworks expressed are not necessarily the same. In general, the PBOC, NFRA and CSRC have recently incorporated ESG into the policy framework of the “five major articles.” For example, the NFRA’s Guiding Opinions on the Banking and Insurance Industry to Deliver on the “five major articles” puts forward the goals and requirements of improving green finance standards and evaluation systems, increasing financial support for the green and low-carbon circular economy, and improving the ESG performance of banking and insurance institutions. The State-owned Assets Supervision and Administration Commission (SASAC) prefers to incorporate ESG into the policy framework for social responsibility and high-quality development. In its May 2022 Work Plan for Improving the Quality of Listed Companies Controlled by Central Enterprises, SASAC put forward the goal of “full coverage of disclosure in relevant special reports in 2023.” In June 2024, in its Guiding Opinions on the High Standard Fulfillment of Social Responsibilities by Central Enterprises in the New Era, SASAC put forward the requirements of strengthening ESG information disclosure and improving ESG governance capabilities and performance levels for the goal of continuously enhancing central enterprises’ competitiveness the in international market. The MOF has taken a similar view, pointing out in its notes on the Basic Guidelines for Corporate Sustainability Disclosure (consultation paper) that promoting sustainability disclosure is “an effective way to better participate in global economic, trade and investment activities, improve international competitiveness and promote high-quality development.” The Ministry of Ecology and Environment (MEE) incorporated ESG into the policy framework of construction of a beautiful China. Working with the PBOC, NFRA and CSRC, it held a working symposium in May, and in October issued the Opinions on Giving Play to the Role of Green Finance to Serve the Construction of a Beautiful China.

At the local level, in March 2024, three local governments issued ESG policies. The Shanghai Municipal Commission of Commerce issued its Three-Year Action Plan for Accelerating the Improvement of Environmental, Social and Governance (ESG) Capabilities of Foreign-related Enterprises in Shanghai (2024-2026), which aims to enhance the ESG capabilities of foreign-related enterprises. The Administrative Committee of Suzhou Industrial Park issued the Action Plan for the Development of the ESG Industry at the Suzhou Industrial Park and Several Measures of Suzhou Industrial Park on Promoting ESG Development, clarifying six major projects: optimizing spatial layout, cultivating business entities, promoting innovation and development, deepening integration and application, expanding open cooperation, and creating a development ecology. It then launched support policies such as financial incentives. The Beijing Municipal Development and Reform Commission issued the Implementation Plan for Promoting the High-Quality Development of the Environmental and Social Governance (ESG) System in Beijing, proposing six key tasks including strengthening ESG information disclosure. These documents had a great impact. For one thing, subordinate jurisdictions followed suit in issuing policies, such as the Implementation Plan for Promoting the High-Quality Development of ESG System in Chaoyang District of Beijing (2024-2027) issued by the Development and Reform Commission of Chaoyang District of Beijing in October. In addition, the issuing department organized several activities, such as the ESG-related activities at the China International Technology Import and Export Fair and the China International Import Expo organized by the Shanghai Municipal Commission of Commerce, and the ESG Industry Development Promotion Conference organized by the Suzhou Industrial Park and the Suzhou ESG Industry Innovation Center.

Trade compliance is the new driver

The three cities have one thing in common: the policy issuers — the Commission of Commerce, the Development and Reform Commission, or an industrial park management committee are all non-financial regulators. This represents a trend that ESG is gradually expanding from the capital market to the real economy, and finally to the operation and management of enterprises. In the capital markets, we see all kinds of numbers, and economic activity translates into valuations, yields and volatility. In the real economy, we see technology, production, factories and workers, which are specific and tangible. This change from the virtual to the real is new in the development of ESG.

The reason behind this is that trade compliance is becoming a new driver of ESG. Over the past 20 years, there has been an increasing number of laws and regulations on ESG around the world. According to the Principles for Responsible Investment, there were about 500 policies related to sustainable investment around the world in 2021, which is a dramatic increase from 20 in 2000. There is no doubt that the EU is the most advanced in the world in this regard. In recent years, the EU has issued many new regulations on climate change and supply chain management, including a new battery law, the Carbon Border Adjustment Mechanism, and the Corporate Sustainability Disclosure Directive (CSRD). In 2024, the EU passed the Empowering Consumers for a Green Transition (effective March 27) and the Corporate Sustainability Due Diligence Directive (effective July 25). The former aims to prevent “greenwashing” in commercial marketing and avoid disseminating misleading product information to consumers. The latter requires companies to prevent actual and potential damage to the environment and labor force along the entire supply chain and to ensure that the company’s business model and strategy are aligned with the Paris Agreement.

The above-mentioned EU regulations often have a requirement to “penetrate” the upstream of the supply chain, that is, companies are required to trace the ESG performance and carbon emissions of their partners higher up in the supply chain. Downstream companies are responsible for this. This is becoming a new challenge for China’s export-oriented enterprises, especially enterprises that export the “new three” (new-energy vehicles, lithium batteries and solar modules), as well as the companies that “go overseas via e-commerce.” From this perspective, the establishment of an ESG management system, the strengthening of ESG information disclosure and the improvement of ESG rating level can enhance the competitiveness of exports to a certain extent. Driven by this, the ESG rating level of the new energy industry is better than the market average. According to SynTao Green Finance’s ESG rating data, 67% of the 30 listed new energy companies with the highest market capitalization are rated A- or above, well above the average of the CSI 800 (25%).

In addition, for those companies that have direct production, operation and financing needs in overseas markets, such as engineering contracting companies and overseas listed companies, ESG performance is also related to risk management, legal compliance, financing costs and other issues. For this reason, in 2024, the China International Contractors Association issued the Guidelines for ESG Management of Foreign Contractors. In the ESG Reporting Guidelines of the three stock exchanges, companies listed both domestically and overseas are required to disclose their ESG data.

Futures prospects

Looking ahead to 2025, the heat will continue to stay with information disclosure and transition finance, and more efforts will be put into export-oriented ESG. From a policy perspective, there are three issues that merit special attention.

First, implementation of ESG reporting guidelines. Although only some listed companies are required to make mandatory disclosures in 2026, it is expected that some leading companies will begin to practice disclosure in 2025. Attention should be paid to the requirements for dual materiality analysis in the stock exchanges’ ESG reporting guidelines, how to implement the requirements for climate risk analysis, as well as the extent of financial impact analysis. The authors expect that the regulatory authorities will gradually release more guidance information at the operational level. In addition, it will be interesting to see how effectively the guidelines of the MOF and the exchanges sync up.

Second, development of a transition finance standard. Policy discussions on transition finance have been going on for several years, and there is a general aspiration to see clear and harmonized transition finance standards. With standards, there can be relevant product definitions, statistical data and evaluation norms. Only then can we support incentive policies linked to transition. The PBOC started working on the first batch of transition finance standards for key industries in 2021, and began work on the second batch in 2024. Promulgation of these standards will have a huge impact on transition finance. In the Guiding Opinions on Further Strengthening Financial Support for Green and Low-Carbon Development, the PBOC stated that it will gradually incorporate climate change-related risks into the macro-prudential policy framework, guide financial institutions to support green and low-carbon development, and push financial institutions to regularly report on the scale, proportion and risk exposure of their high-carbon assets. Policy measures in this regard will also have a positive effect on transition finance.

Third, ESG progress driven by trade compliance. With partial implementation of the EU’s CSRD starting in 2025, this driving force for trade compliance will become significantly stronger. However, whether the implementation of the CSRD will go smoothly remains a question, because some EU countries have put forward a motion to reconsider the CSRD, indicating that there are different opinions within the EU on this issue, which will affect the pace and intensity of the implementation of relevant laws and regulations. In addition, China will inevitably respond to some unreasonable demands in overseas markets through consultations, negotiations and countermeasures. Companies should pay close attention to the attitudes and actions of relevant parties, and respond proactively and prudently.

Guo Peiyuan is the chairman of the board of SynTao Green Finance, a leading consultancy providing professional services in green finance and responsible investment in China.

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