New measures strengthen China ESG requirements by mandating major polluters and companies that finance them to submit annual reports detailing a range of environmental information. The measures seek to improve compliance with environmental regulations and provide another legal tool for authorities to hold companies that violate them to account. We look at who is required to make such disclosures, what type of environmental information is required, cost of incompliance by companies in China, and the impact it will have on the country’s environmental governance.
On December 18, 2021, China’s Ministry of Ecology and Environment (MEE) issued the Measures for the Administration of Legal Disclosure of Enterprise Environmental Information (the “Measures”) (link in Chinese).
The Measures represent China’s latest push to standardize and mandate ESG reporting for companies as it works to reach climate emissions and other environmental targets. They also serve to further strengthen China’s corporate social credit system and offer another tool for the government to hold market entities accountable for violations of environmental laws and standards.
Applicable to a wide range of market entities – including both those that engage in production with a high environmental impact and those who finance such projects – the new Measures require companies to submit an annual report detailing environmental information, such as emissions of carbon and pollutants, pollution control facilities, history of environmental violations, and much more.
The Measures went into effect on February 8, 2022.
Below we provide an overview of what the new Measures say, including who is required to comply with the regulations, what information has to be disclosed, and what penalties companies can be liable for failure to comply.
Which companies are required to disclose environmental information?
The companies affected by the Measures mainly involve those with “a high environmental impact and receive a high level of public attention”, according to an explainer published by the MEE.
These companies include:
- Major dischargers of pollutants
- Companies that are required to undergo mandatory clean production audits under the Clean Production Audit Measures (link in Chinese):
1) Companies that discharge pollutants in excess of national or local standards
2) Companies that exceed prescribed energy consumption limit for unit product and hence constitute “high energy consumption”
3) Companies that use toxic and harmful raw materials for production or discharge toxic and harmful substances during production
Publicly listed companies (and their subsidiaries) and companies that issue bonds may also be required to disclose environmental information if they have been penalized for ecological or environmental violations in any of the following ways in the previous year:
- Have been investigated for criminal liability.
- Have been fined at least RMB 10,000 (US$1,579).
- Have been subject to consecutive penalties on a daily basis according to the law due to environmental violations.
- Have been forced to limit or suspend production.
- Have had their ecological or environmental licenses revoked.
- A legal representative, main responsible person, a person in charge, or other directly responsible people at the company has been sentenced to administrative detention.
Municipal ecology and environment departments are responsible for compiling a list of companies within their jurisdiction that are required to disclose environmental information. Before finalizing the list, the authorities are required to publish it on the government website and solicit feedback from the public for a minimum of 10 working days. The list must be completed by the end of March each year and then made public.
What are companies’ compliance requirements?
Under the Measures, companies are required to disclose environmental information in a timely, truthful, accurate, and complete manner. The disclosed environmental information must be concise, clear, and easy to understand, and must not contain false records, misleading statements, or major omissions.
In order to properly comply with the Measures’ reporting requirements, companies will need to establish or improve upon internal management systems for disclosing environmental information, standardize work procedures, clarify job responsibilities, establish an accurate environmental information management ledger, keep relevant original records, and scientifically collect relevant environmental information.
Terminology and data standardization for information disclosure
The relevant data and expressions that companies use in their disclosure reports must comply with the Format Guidelines for Legal Disclosure of Enterprise Environmental Information, which were released by the MEE on January 4, 2022 and took effect on February 8, 2022 (link in Chinese).
Compliance with data regulations
The Measures outlines provisions for how to handle environmental data, which may overlap with China’s data laws. Specifically, it states that the disclosure of environmental information that involves state secrets, strategic high-tech or core technologies, and business secrets in critical fields must be carried out “in accordance with the provisions of relevant laws and regulations”.
Although not explicitly stated, this is likely in reference to China’s various laws and regulations on data security requirements for the handling of sensitive information or information of national importance, among others. This may include “core national data” as stipulated in the Data Security Law, which is defined as data related to national security, the national economy, people’s livelihoods, and major public interests. This type of data is subject to stricter management and security requirements.
The Network Data Security Management Regulation, which is currently still in draft form, also requires “important data” to be subject to a higher level of security requirements (“level three” security). The definition of “important data” in this legislation includes “National basic data on population and health, natural resources and environment”.
However, these terms are still not clearly defined and no specific security requirements for sensitive environmental data or information have yet been released.
Submitting a yearly environmental report
Companies identified as being required to disclose environmental information must compile a yearly “Legal Disclosure Report of Environmental Information”. The report must then be uploaded onto the “Enterprise Environmental Information Legal Disclosure System”. This system is set up by the MEE and its local counterparts on the official government websites, where the environmental information of the companies is consolidated. This information must be free for members of the public to look up.
Companies may sometimes be required to file ad hoc reports throughout the year. These are usually used to disclose information, such as changes to company details, administrative licenses, updates on administrative penalties, changes to legal representatives, and other ad hoc information that arises throughout the year.
The annual report detailing the information of any given year (from January 1 to December 31) must be submitted by March 15 of the following year.
What environmental information are companies required to disclose?
At the very least, the yearly report must contain the following information:
- Basic company information, including information on company production and environmental protection.
- Environmental management, including ecological and environmental administrative licenses, environmental protection tax, environmental pollution liability insurance, and environmental protection credit evaluation.
- Production, management, and discharge of pollutants, including pollution prevention facilities, pollutant emissions, discharge of toxic and hazardous matter, and the production, storage, flow, utilization, handling, and self-monitoring of industrial solid waste and hazardous waste.
- Carbon emissions, including on the volume of emissions and emissions facilities.
- Ecological and environmental emergency response mechanisms, including information on emergency plans for environmental crises or disasters and emergency responses to heavily polluted weather.
- Environmental violations.
- Any other ad hoc environmental information legally required to be disclosed from the current year.
- Any other environmental information stipulated by laws and regulations.
Companies that are required to undergo mandatory clean production audits must also disclose the following information:
- The reason for having to undergo mandatory clean production audits.
- The implementation, evaluation, and inspection results of mandatory clean production audits.
Both publicly listed companies and companies that issue bonds that have raised funds through the issuance of stocks, bonds, depositary receipts, medium-term notes, short-term bonds, ultra short-term bonds, asset securitization, and bank loans must disclose additional information, including:
- The annual financing format amount and investment targets.
- Information on climate change and ecological and environmental protection of the projects invested by the financing.
Companies can make changes to the annual report they have submitted by filing an ad hoc report, which must also explain the reasons for the amendments.
Oversight and liabilities
The MEE and its local counterparts are responsible for the organization, guidance, supervision and management of the environmental information disclosure system and ensuring the reports are filed correctly and on time.
However, the Measures also grant members of the public, the media, and any other organization the right to report any violations of the requirements to disclose environmental information by companies to the local authorities. The authorities are required to provide a channel through which people and organizations can submit reports and complaints of violations and must also keep information of the person or organization who submits the complaint confidential.
The environmental information disclosed by companies will also be incorporated into the corporate credit management system and can be used as a key indicator for evaluating a company’s corporate credit.
Companies that breach the requirements outlined in the Measures by failing to disclose environmental information or disclosing incorrect or inaccurate information could be liable for penalties of RMB 10,000 (US$1,580) to RMB 100,000 (US$15,805). Penalties issued for violating environmental information disclosure requirements will also be included in the company’s credit record.
Companies that engage in any of the following behavior may be liable for fines of up to RMB 50,000 (US$7,903):
- Failing to meet requirements of the guidelines for disclosing environmental information
- Disclosing environmental information beyond the prescribed time limit
- Failing to upload environmental information to the Enterprise Environmental Information Legal Disclosure System
Impact of the Measures on companies and investors
Despite increasingly robust environmental laws in China, proper implementation and compliance have often stood in the way of progress. China has meted out hundreds of millions of dollars in fines over environmental violations in recent years and continued to strengthen its legal tools to hold companies criminally liable for violations.
The fines proposed in the Measures are relatively small for the many large corporations and are likely kept that way in order to ensure smaller companies can afford to pay them. Much more damaging for a large company would be the impact the Measures could have on their corporate credit score, which could lead to further punishments and consequences, such as reputational damage, mandated suspension of production, or missing out on bids for government contracts.
The requirements outlined in the Measures will require significant effort and input from companies, and some may be required to invest more resources into staff and facilities to collect and manage the required information. As is often the case, this is likely to have a higher impact on smaller companies that don’t already have robust systems for monitoring and recording accurate and comprehensive environmental information.
On the other hand, the Measures can be seen as an inevitable step forward toward a future where full ESG reporting is the norm. This change is already well underway. For example, companies listed on the Hong Kong Stock Exchange have been required to issue ESG reports since 2016, and increasingly, investors, shareholders, and other stakeholders are demanding companies to release sustainability reports.
In addition, as we have noted in a previous article on the subject, voluntary ESG reporting has increased significantly in China over the past decade. According to JPMorgan, 86 percent of companies listed on the CSI 300 Index – the top 300 stocks traded on the Shanghai and Shenzhen stock exchanges, produced ESG reports in 2020, up from just 49 percent in 2010, despite not being required to do so.
Despite this, Chinese companies still fall behind those in many other regions when it comes to sustainability and environmental reporting, which has turned some environmentally conscious investors away from China. According to MSCI, a US financial investment research firm with a focus on ESG, the majority of Chinese companies scored significantly lower than the global average for ESG reporting, despite seeing improvements over the last two years.
The new Measures may help to improve and standardize sustainability reporting in China and improve overseas investors’ confidence in the data. But regardless of the impact of these specific Measures, it is clear that a proactive stance on sustainability reporting can help future-proof businesses, not only against further regulation but also against changing attitudes of investors and stakeholders, and facilitate funding easier in a climate-conscious world.
As pointed out by MSCI, “Chinese companies with better ESG performance tended to exhibit lower systematic risk than low ESG-rated Chinese companies, implying potentially lower funding costs.”
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