China’s moves have taken on even more significance given developments in the U.S. Its financial regulator, the Securities and Exchange Commission, is no longer defending American climate disclosure rules, which are being challenged in court. Instead, the acting SEC head now calls them “deeply flawed.”

It is one of many regressive actions taken by the second administration of Donald Trump that have devastated the climate community. While President Trump is busy signing executive orders to once again withdraw from the Paris Agreement, shutter environmental offices across the government, and gut the environmental justice office, Chinese regulators continue to deepen power market reform, accelerate clean energy deployment, and roll out new rules aimed at eventually mandating companies of all sizes to disclose climate-related risks, opportunities, and strategies.

To put the world on track with the Paris Agreement’s 1.5 °C trajectory, China – like all countries – needs to do more. Among other things, the world’s largest current carbon emitter missed the recent deadline to submit the long-anticipated “NDC 3.0” (the third generation of Nationally Determined Contributions), a key document that should outline its commitment to emissions reduction and climate adaptation up to 2035.

Yet, the U.S.’s retreat offers China a near-effortless opportunity to reinforce its position as a global climate leader. It can simply maintain its existing commitments. As Dr. Michal Meidan noted in our previous roundtable, “China stands to gain, while the U.S. and the planet lose out.”

I hope you enjoy this newsletter. Remember to check out other in-depth analyses on climate finance.

Analysis: China’s Push For Sustainability Disclosure Can Boost Green Growth

New government documents seek to align the climate disclosures of Chinese companies with national priorities and global best practices.

By Edmund Downie and Erica Downs

Edited by Hongqiao Liu and Kevin Schoenmakers

Corporate climate disclosures – public reporting by companies about their exposure to and management of climate-related risks and opportunities – have been thin in Chinese capital markets. The quality of climate disclosures by Chinese firms has historically lagged both developed and developing economies in scope and depth.

Mainland regulations require at most minimal climate disclosures, and investors’ ESG awareness, a major driver in other markets, has only just started to emerge in the country.

But conditions are changing as China steadily improves disclosure standards and aligns with international best practices. Over the past year, Chinese regulators have unveiled two important documents aimed at narrowing the disclosure gap between Chinese firms and their global counterparts.

Our analysis of the new documents indicates that these new rules and guidelines align with two major national priorities: promoting a greener economy and boosting international trade and investment. Chinese leaders treat green upgrading as part of a science and technology modernization drive that can break through today’s economic headwinds to deliver durable growth. Better disclosures strengthen regulators’ toolkits to push green upgrading and reinforce China’s position at the heart of the global economy.

International Alignment

Last April, China’s three major stock exchanges in Shanghai, Shenzhen, and Beijing released Guidelines for Self-Discipline and Monitoring of Listed Companies – Sustainable Development Reports (Trial).

The Guidelines introduced the mainland’s first detailed mandates for sustainability disclosures in financial reporting. Hong Kong’s securities markets have had detailed sustainability disclosure mandates in effect since fiscal year 2017.

If fully implemented, the new policy would require companies that represent over half of the Chinese stock market to disclose issues such as greenhouse gas emissions and climate risk management in their annual Sustainable Development Reports – or Sustainability Reports – starting no later than the fiscal year 2025.

In December, the Ministry of Finance (MoF) released Corporate Sustainability Disclosure Standards – Basic Standards (Trial), that outlines high-level principles for a “national unified system of sustainability disclosure standards.” It defines basic concepts like “sustainability disclosure” and “sustainability risks and opportunities” and sets forth general principles around disclosures’ content, scope, and timing.

The accompanying official explainer to the Basic Standards indicates that MoF will lay out specific requirements and implementation details in the forthcoming Specific Standards and Guidance for Application. Altogether, the three documents will form the aforementioned national disclosure standards system. The new system, which China aspires to establish by 2030, is expected to replace the patchwork of inconsistent standards that guides companies who make disclosures today.

International best practices are the foundation of the two documents; the Basic Standards explainer explicitly notes that “most international principles [reviewed] are applicable for China.” Both the Guidelines and Basic Standards adopt a four-pillar disclosure framework – governance, strategy, risks and opportunities, and metrics and targets – that is based on the global baseline standards for sustainability reporting developed by the International Sustainability Standards Board (ISSB), an independent standard-setting body. The specific mandates in the Guidelines and the principles in the Basic Standards align with the concepts and areas of emphasis that the ISSB highlights within its four pillars, on topics from risk identification and management to governance and monitoring frameworks.

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National Booster

While incorporating international best practices, the two policies are also rooted in China’s national strategies for green development, namely “high-quality development” and “Xi Jinping thought on ecological civilization.”

The Basic Standards, in particular, include distinctive adaptations to China’s governing context, so as to reinforce state targets around green upgrading. At least three elements differentiate China from the practices in other regional and global financial hubs. First, the Basic Standards define “government authorities” among the “users” of sustainability disclosures, alongside “investors” and “creditors.” Elsewhere, corporate sustainability disclosures first and foremost serve the financial community (“primary users”), with groups like government and civil society referenced as “other users” (EU) or not at all (ISSB). China’s terminology breaks from this model with a subtle compromise; it calls the financial community “basic users,” a term that implies no primacy over the government.

Second, the Basic Standards require firms to demonstrate that their corporate targets contribute to implementing “national laws, regulations, and strategic plans.” The ISSB and Japanese standards require companies to report on self-imposed and state-imposed targets, while the EU’s European Sustainability Reporting Standards (ESRS) only mention self-imposed targets. The differences in Chinese and EU reporting requirements reflect differences in their climate and policy approaches: Chinese authorities, unlike their EU counterparts, have frequently imposed firm-level energy conservation targets.

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The Basic Standards’ distinctive features allow authorities to use the disclosure framework to reinforce state-imposed targets and goals.

Changes to the Basic Standards draft released for public comment in May appear to underscore this aim. The final version broadens the basic principle of “materiality” – whether companies should include a given piece of information in their sustainability reporting. The draft used a financial definition of materiality: whether the information would have a “financial effect” on the reporting entity. The final version instead references users’ decision-making needs: “information on sustainability risks and opportunities whose omission, erroneous reporting, or unclear treatment would influence users in making decisions based upon it” counts as material. This adjustment better matches the Basic Standards’ user base and treatment of state targets.

The Basic Standards’ distinctive features also allow investors and other non-governmental actors to monitor companies’ performance on state-imposed targets alongside government authorities. Doing so provides an extra set of eyes to help regulators secure compliance with broader environmental and energy policies.

Chinese policymakers have used corporate disclosures in this manner before. ​​As documented by legal scholar Alex Wang, the environmental disclosure requirements on air and water pollution introduced in the early 2010s empowered non-governmental actors to monitor corporate behavior. Corporate disclosures allowed NGOs and citizens to launch public campaigns and file official complaints, leading to increased scrutiny of firms’ environmental compliance.

To be clear, the Basic Standards do not impose new sustainability targets on firms, nor have authorities introduced any firm-level targets for decarbonization. But policymakers have confirmed that, during the 15th Five-Year Plan period (2026-2030), China’s “dual control” target-setting system will shift from its focus on energy savings to carbon emission reductions. The Basic Standards propose a disclosure regime that could reinforce future firm-level target-setting policies on sustainability goals like carbon emissions.

Business Benefits

The creation of a unified national disclosure system aligned with international standards is partly aimed at supporting Beijing’s broader goal of boosting foreign capital inflows and increasing the global competitiveness of Chinese companies.

The official explainer for the Basic Standards makes this priority explicit:

Establishing [...] national unified sustainability standards is an effective route towards encouraging firms to put into practice sustainable development concepts, better participating in global trade and investment activities, raising international competitiveness, and advancing high-quality development.

The alignment reflects an effort to attract more capital from international investors, who prioritize ESG disclosures more than domestic ones.

International inflows to Chinese public capital markets have been weak amid the country’s faltering economy and increasing hostility to international business. Foreign purchases of Chinese stocks fell in 2023 to their lowest level since 2015 and showed no stable recovery before this fall’s major stimulus package.

Good ESG disclosures won’t reverse the fundamentals dragging down international inflows. But regulators know that disclosures matter to global investors, as reflected in spring 2022 comments by Chinese Securities Regulatory Commission vice chairman Fang Xinghai: “If you don’t disclose, you can’t go public, and you won’t get the support of international capital.”

On a practical level, aligning with international standards will prepare Chinese firms for more stringent regulations and allow them to better manage competitive pressure in export markets. There is growing consensus among financial media and opinion leaders that adhering to international standards will improve the transparency and credibility of Chinese firms in overseas markets and reduce their compliance costs.

As Fang Xinghai observed, EU countries “may examine the ESG information disclosed by Chinese firms in levying taxes.” The Carbon Border Adjustment Mechanism (CBAM) – an import tariff based on products’ carbon footprint – is an example of such a tax. Other heated policy debates around “climate clubs” and sustainable sourcing in critical minerals suggest that sustainability-linked trade instruments may become more widespread, at least in Western markets.

Such trade-based tools will rely on granular product-level sustainability disclosures, not firm-wide disclosures, which are the subject of the Guidelines and Basic Standards. But the data-gathering apparatuses overlap, and investors will rely on firm-wide disclosures to assess firms’ competitive positions in sectors affected by climate/ESG-linked tariffs.

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Challenging Implementation

While the Guidelines and Basic Standards are noteworthy advances, full implementation will require substantial effort. Some of this effort is regulatory, as authorities flesh out the national disclosure standards system targeted for the end of the 15FYP in 2030. Major steps include the aforementioned Specific Standards and Guidance for Application, as well as “climate-related disclosure standards,” currently scheduled for release “by 2027.”

Yet mainstreaming these standards demands extensive capacity-building. Progress in this area will dictate the speed at which disclosure requirements are rolled out across various sectors.

Companies need to acquire knowledge about sustainability disclosures and the market needs to establish a pipeline of ESG talent to guide reporting. Demand for such talent is surging. As of early 2024, though, less than 10% of ESG professionals had relevant qualifications or certifications. The capacity gap will only widen as China transitions from voluntary disclosures for major public companies to mandatory disclosures for companies of all sizes, as proposed by the Basic Standards.

To address the talent shortage, authorities could establish a national ESG certification program similar to the one recently introduced in Hong Kong, and accompany it with training programs implemented by universities and industry associations such as the China Finance Society’s Green Finance Committee.

Additionally, Beijing could establish partnerships with regions that have extensive experience and long-standing practices in this area. An ideal model is the multi-faceted EU-China capacity-building program on the carbon market, in which government officials have engaged in comprehensive technical dialogues complemented by in-country training for Chinese companies. Such programs can also aid China’s international climate diplomacy, deepening partnerships with like-minded countries that ground its claims to climate leadership in a post-U.S. Paris context.

Finally, investor groups and civil society organizations can also play a crucial role by supporting capacity-building efforts and pushing for more effective and ambitious disclosure standards. Potential improvements include requiring third-party verification of emissions data to ensure integrity and accelerating the introduction of the “climate-related disclosure standards.”

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Until next week,

Hongqiao

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