China’s new corporate climate disclosure standards, which are aligned with international sustainability reporting frameworks and incorporate the country’s latest emissions targets, present an opportunity for companies to get a head start on future reporting requirements, experts say.
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The standards titled Chinese Sustainability Disclosure Standards for Business Enterprises – Climate (trial) were published by China’s Ministry of Finance and central bank alongside other ministries and departments on 25 December, are to be be adopted on a voluntary basis while the ministry determines the implementation scope and timeline.
Further guidance is expected on adoption requirements based on company size, listing, and industry. This includes application guidelines for the power, steel, coal, petroleum, fertiliser, aluminium and cement industries, among others, according to the ministry.
Spanning six chapters, China’s latest standards are aligned with the International Financial Reporting Standards’ S2 Climate-related Disclosures (IFRS S2), issued by the International Sustainability Standards Board (ISSB).
They are “intended to produce functionally equivalent results,” said PwC China partner Yvonne Kam and PwC Hong Kong sustainability assurance leader Loretta Fong.
Even in areas that face significant application challenges, such as accounting for indirect emissions, also known as Scope 3, financed emissions and scenario analysis, China’s climate disclosure standard has fully converged with IFRS S2, they said in a note.
“In selected areas, the level of granularity and specificity is beyond what IFRS S2 requires,” PwC’s Kam and Fong. “At the same time, it also exhibits unique Chinese characteristics.”
These characteristics include the prioritisation of the Greenhouse Gas Protocol, unless the reporting company is required to use local emissions measurement methods.
Reporting companies must also disclose their pathway towards meeting internationally or nationally-determined contributions (NDCs), which are 5-year commitments by countries to reduce emissions under the United Nations climate change framework.
China’s latest NDC, announced last September, saw the country committing for the first time to reducing emissions, targeting a 7-10 per cent cut from peak levels by 2035.
Peiyuan Guo, chairman of consulting firm SynTao Green Finance, highlighted that the latest version of China’s climate reporting standard was amended from an earlier draft to incorporate the updated NDC as well as to align with China’s industry-specific decarbonisation roadmaps issued by national authorities.
It also allows companies slightly more flexibility on qualitative requirements related to the reporting of financed emissions while emphasising qualitative requirements related to governance and supervision, he said in a LinkedIn post.
Time for gap analysis
Guo was among the experts who suggested that ahead of Chinese regulators announcing implementation timelines for the new climate disclosure standard, companies should assess whether they are prepared to adopt the framework.
“For enterprises, the pragmatic approach is to conduct a gap analysis against [China’s new] climate standard or other appropriate frameworks,” said Peiyuan Guo, chairman at consultancy SynTao Green Finance.
He expects companies to struggle most with measuring Scope 3 emissions, conducting scenario analyses and setting transition pathways. “Companies are encouraged to prepare for these complexities in advance,” he said.
Companies should also take the announcement of the new standards as an important signal for controls and legal functions, instead of just being another add-on to their sustainability reporting processes, said Jose Hopkins, sustainability consultant at Acclaro Advisory.
The current voluntary phase of the standards give companies time to assess the gaps between their current sustainability reporting processes and China’s latest standard before it becomes a regulatory requirement, he said in a LinkedIn post.
“Expect scrutiny of value-chain boundaries, methods and consistency with group risk assumptions and reporting controls,” said Hopkins. He also recommended that companies plan for future assurance needs, which will grow as the standards become mandatory.
The new standard is among the latest in China’s efforts to embed sustainability considerations into its national development plans, a process which has spanned roughly two decades, said the United Nations Environment Programme’s Finance Initiative (UNEP FI) in a recent policy brief.
“Recently updated corporate sustainability disclosure requirements by the Ministry of Finance and stock exchanges seek to strengthen market transparency and close gaps in data availability, adopting a ‘double materiality’ approach that considers both financial and sustainability impacts,” it said.
UNEP FI expects the country’s regulators to take further measures to strengthen its financial system to support green and low carbon development. It has already progressively integrated sustainability considerations into prudential and supervisory frameworks, most notably through the assessment of banks’ green finance performance, it said.
“Given that many financial institutions of strategic importance are state-owned, regulators are able to influence market behaviour by evaluating and benchmarking institutions’ alignment with national low-carbon and green development objectives,” said UNEP FI.
“In this context, the government’s dual role as regulator and shareholder has facilitated the translation of policy priorities into financial sector practices.”
