The story of China over the past few years has been one of slowing growth and an increasingly tightening regulatory environment. The onset of Covid-19 was an obvious driver of the slowdown, but a string of unexpected regulatory moves from policymakers has also contributed to the more challenging business environment and impacted overall market optimism.

For this three-part report, S&P Global Market Intelligence and Regulation Asia surveyed awareness and optimism towards the changing regulatory environment, attitudes towards ESG amongst investors and bankers in China, and the outlook for M&A activity.

PART 2

The Green Wave

The core concerns of the modern Environmental, Social and Governance (ESG) wave are factors that have occupied officials’ minds in China for many years. Though ESG may have only been coined as a term fairly recently, China has been wrestling with the environmental fallout of its rapid industrialisation since it began in the 1950s.

Concern over the social impact of the swift but unequal accumulation of wealth has also been central to Chinese policymaking since the market was unleashed in the late seventies. But the crystallising of these concerns into what is now known as ESG has focused minds in China and provided a convenient banner to pursue some of its most elusive goals.

China started to gain real momentum on ESG around 2016 when several key regulators got together and issued recommendations entitled ‘Guiding Opinions on Building a Green Finance System’, which set the stage for mandatory environmental disclosure for listed companies.

The momentum regarding disclosure steadily increased over the next few years as multiple regulators built on top of the original guidelines and continued their pursuit of a robust ESG agenda. ESG regulation has often been highly prescriptive, focused on mandatory strict rules for listed entities, but possibly discouraging wider initiatives from companies.

Earlier this year, the Ministry of Ecology and Environment added the ‘Measures for Enterprises to Disclose Environmental Information by Law’ to the long list of ESG regulations. The law requires five types of organisations to disclose environmental information.

Back in 2020, President Xi Jinping delivered the headline aims of China’s environmental policy, laying out plans to achieve peak carbon emissions by 2030 and complete carbon neutrality by 2060. Strikingly, China accounts for some 30% of the world’s fossil fuel-related carbon dioxide emissions, and 57% of all energy produced in the country is coal-based, making the government’s commitment to carbon neutrality vital for tackling climate change.

These bold goals continue to provide a common vision around which the country’s regulators base policies and action plans, but they also show that the ‘E’ in ESG is something that officials in China are more clear on how to address. The ‘S’ and ‘G’ have traditionally been more ambiguous. The current focus on environmentalism over the other facets suggests they are less of a priority now.

Driven to incentivise change, one way China is pushing to achieve its carbon targets is with the introduction of a programme late last year to provide cheap loans to companies with good green credentials. The People’s Bank of China (PBOC) is providing a facility that allows commercial banks to borrow funds at just 1.75% to support green projects. The support is provided under a one-year term, but can be renewed up to two times.

Progress on ESG in China was made more urgent last year when China experienced a multi-month energy crisis, with prices for coal and natural gas reaching new highs. While the short-term response to the crisis was to increase coal production and restrict demand, the longer-term answer may be more aligned with the country’s ESG goals.

The PBOC is currently looking to create transition finance standards for banks, and to introduce rules that will make disclosures of environmental information and carbon emissions mandatory for financial institutions. In June, the China Banking and Insurance Regulatory Commission (CBIRC) separately issued guidelines to promote the development of green finance in the banking and insurance industries.

The guidelines ask banks and insurers to incorporate ESG requirements into their management processes and risk management systems, strengthen ESG information disclosures and other interactions with stakeholders, reduce the carbon intensity of their asset portfolios, and encourage their customers both domestic and overseas to improve their ESG risk management practices. The required systems and procedures to comply with the guidelines are meant to be in place by 1 June 2023.

Meanwhile, the China Securities Regulatory Commission (CSRC) is working on revised disclosure rules for publicly listed companies, which will include requirements for firms to disclose penalties arising from environmental issues, as well as a framework for the voluntary disclosure of measures they are taking to reduce carbon emissions and fulfil social responsibilities to alleviate poverty and revitalise rural areas.

While the CSRC’s rules have not yet been finalised, voluntary ESG disclosure guidelines developed for local enterprises were implemented on 1 June this year. Chinese enterprises were asked to use the guidelines to disclose ESG information in accordance with government and regulatory requirements, or voluntarily where formal requirements are not yet in place.

The guidelines, which cover 118 different indicators spanning ‘E’, ‘S’, and ‘G’, were developed by the China Enterprise Reform and Development Society, a State Council-backed body, in collaboration with dozens of Chinese corporates – including heavyweights like Ping An, China Mobile, Ant Group, Dagong Credit Rating, and China Post Life Insurance.

A survey of domestic investors and bankers regarding the state of ESG in China, conducted earlier this year, revealed a picture of strong intent on the part of the financial sector to implement government and regulatory policies. However, many respondents were still hindered by a lack of capability and understanding, which was compounded by difficulties in collecting good information.

Over half of respondents indicated that climate and other environmental risks were currently included in their institution’s risk framework, and 35% said not yet. Still, most institutions have plans to implement these changes. In terms of how the risks were integrated, just over half of respondents said it was with respect to credit, and just 17% said it was on an operational level.

The survey showed that 94% of respondents considered climate risk and data part of their institution’s business strategy, and 56% said it was included in decision-making processes related to pricing, granting credit and loans, or investing in certain business areas. Almost a third of respondents considered it in the risk limits and metrics specified for certain business areas.

Domestic policymakers continue to very clearly focus the policy agenda around the environment, but it is corporations that are tasked with collecting reliable information to implement the agenda. The survey showed that when it comes to tackling the availability of data, many firms see staff recruitment (31%) as the best way to respond, along with improving data collection from counterparties (25%) and engaging with data providers (23%).

A key finding that emerged from the survey is that respondents viewed the quality of corporate ESG disclosure as lacking in China. As many as 65% of respondents rated the quality of corporate ESG disclosure as closer to ‘very poor’ than ‘excellent’. Just 18% of respondents viewed it closer to ‘excellent’ than ‘very poor’, with 16% at the mid-point.

Chinese policymakers have issued strong signals that ESG should be a priority for the entire corporate sector, but the survey suggests that a lack of coherent thought exists on how best to achieve that aim. The top-down nature of the policymaking approach means that companies tend to be inclined to take direction from above in certain aspects of decision-making.

Striking a balance between centrally issued directives and allowing a certain amount of autonomy for companies to pursue their own tailored ESG goals may be the key to faster progress.