Leverage was Invited to Attend the ESG Compliance Risk Seminar
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On the afternoon of March 21, 2024, the ESG Compliance Risk Seminar, organized by the Shanghai Law Society's Lawyers' Law Research Association and hosted by Shanghai Xieli Law Firm, was successfully held at the Huaneng United Building on Lujiazui Ring Road, with a simultaneous live broadcast both online and offline. This conference invited several renowned legal experts, scholars, and industry leaders to share their latest research findings, practical experiences, and insightful perspectives. Their contributions aimed to inspire and support the improvement of China's ESG ecosystem and enhance the sustainable development level of businesses' ESG practices. Our CEO Mr. Qu Weifeng was invited to attend the seminar and participated in the roundtable discussion at the invitation of the organizers. Along with other guests, Mr. Qu shared professional insights and engaged in discussions on ESG compliance and related topics, offering solutions and best practices to provide valuable references and inspiration for the sustainable development of Chinese enterprises.
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President Ma Jingyun of the Shanghai Law Society's Lawyers' Law Research Association and Managing Partner of Shanghai Haihua Yongtai Law Firm delivered the opening speech at the seminar. President Ma emphasized that in recent years, the ESG evaluation system has gradually become a new standard for assessing the development potential and prospects of enterprises, gaining increasing attention in the process of economic construction and legal development. ESG compliance poses certain challenges for enterprises, but it is crucial for their sustainable development, influencing their brand image, ecological culture, and compliance risks. He expressed hope that through professional legal and policy interpretation by legal practitioners, enterprises could establish a complete rule system and strategic planning. President Ma endorsed the seminar's theme and looked forward to the intellectual exchanges among the participants, which would contribute to the development of ESG in China.
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In the keynote speech session, Professor Ni Shoubin, Director of the Green Technology Bank Research Institute, Professor, and Doctoral Supervisor at Tongji University, shared his research findings on ESG: Policies, Standards, and Corporate Governance. During his speech, Professor Ni provided a detailed overview of the background, connotations, and development of ESG, highlighting that China’s ESG market has experienced significant growth in recent years. However, he pointed out that the definition of ESG funds remains unclear. He emphasized the expansion of sustainable fund investments and compared domestic and international ESG policies. Professor Ni also stressed the importance and urgency of ESG information disclosure.
With the advancement of China’s national sustainable development strategy, the growth rate of ESG investments has significantly increased, and the information disclosure system has been continuously improved. There is a clear trend toward mandatory ESG reporting, with stricter climate-related disclosure requirements. In conclusion, he projected the future development of ESG information disclosure in China, including the enhancement of incentive mechanisms, the formation of an ESG indicator system aligned with international standards, the integration of advanced technologies to improve business commercialization, and the creation of a virtuous cycle between the ESG market and China’s high-quality development goals. These viewpoints suggest that ESG information disclosure will increasingly gain attention and become a key factor in a company’s market competitiveness in the future.
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Next, Professor Ye Wenping, a professor, doctoral supervisor, and director of the ESG Law and Policy Research Center at Shanghai University of Finance and Economics, shared insights on The New Company Law from the ESG Perspective. In his speech, Professor Ye began by exploring the requirements and challenges of corporate governance under the ESG framework. He delved into how ESG impacts corporate governance, management structures, and the challenges of transforming for social sustainability.
Professor Ye highlighted how the new Company Law responds to ESG principles, emphasizing the moral and legal responsibilities of companies regarding ESG. He pointed out that mandatory ESG information disclosure has become an inevitable trend. According to him, companies can implement ESG governance through internal paths (such as company purpose, board duties, and governance structure adjustments) and external paths (such as disclosure requirements and ESG ratings). He stressed that the ESG era has arrived, and social responsibility, sustainability, and ESG-related demands have become key issues that companies must address.
Professor Ye’s speech underscored the importance of ESG for companies and provided guidance on how businesses should navigate the new era with effective strategies to meet these emerging challenges.
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The theme of this roundtable discussion was Key Points of the New Regulations on Sustainability Reporting for Listed Companies and How Enterprises Should Respond. ESG is the future global trend in corporate development. It is not only a new business requirement but also an entirely new business model, representing a new paradigm for achieving harmonious development between businesses, society, and nature.
ESG compliance requires companies to fully consider environmental protection, social responsibility, and good governance in their operations, aiming to achieve sustainable development and maximize long-term benefits. Through compliance management, companies can reduce risks, enhance their reputation, build investor trust, and positively impact society and the environment.
This new approach places a significant emphasis on the importance of aligning business practices with sustainability goals, positioning companies to thrive in a rapidly evolving market while also contributing to the well-being of the planet and society.
The roundtable discussion was hosted by Fu Chengrui, a partner at Xieli Law Firm and the Secretary-General of the National Enterprise Compliance Committee of Xieli. Mr. Qu, as an expert at the ESG Committee of the China Environmental Protection Federation and one of the drafters of several national and industry standards, also participated in the sharing session. The host raised four key questions during the discussion, and the four guest speakers answered them based on their own practical experiences. Below is a summary of Mr. Qu's sharing:
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In terms of requirements: It is emphasized that the disclosing entity should identify and fully assess the risks and opportunities related to sustainable development that may have significant impacts on the company's business model, business operations, development strategies, financial status, cash flow, financing methods and costs, value chains, etc. in the short, medium and long term.
The analysis and disclosure of proposed topics should be centered around four core elements: governance, strategy, impact, risk and opportunity management, and metrics and targets.
Listed companies that are required to disclose must release their 2025 sustainability report by April 30, 2026.
The principle of double materiality: The reporting entity must consider two levels of materiality in sustainability, including financial materiality and impact materiality, along with the corresponding disclosure requirements.
High-standard disclosure of negative information: Specific disclosure requirements have been set for negative information, such as major environmental events, safety accidents, etc.
Mitigation measures: Considering the challenges of implementation, a transition period and mitigation measures have been set to provide listed companies with time for preparation.
Incorporating China-specific ESG issues: Within the category of social responsibility disclosure, topics with Chinese characteristics, such as rural revitalization and equal treatment of small and medium-sized enterprises, are included.
Encouraging third-party ESG verification: Entities with the necessary conditions are encouraged to hire third-party organizations to verify or validate data such as greenhouse gas emissions.
Topic Selection: Focus on the principle of dual materiality and ensure the inclusion and responsiveness principles are followed when selecting topics. Engage in extensive communication with stakeholders during the process.
Start with ESG Training: Strengthen employees' awareness of ESG across all departments and communicate the concept of sustainable development. Additionally, ensure that the disclosed information adheres to principles of authenticity, accuracy, completeness, balance, comparability, and consistency, avoiding over-packaging and false advertising to prevent ESG from becoming a "greenwashing" tool.
Establish ESG Governance Early: Implement ESG governance within the company as early as possible to build a relatively complete ESG governance system. Develop mechanisms for monitoring ESG performance, internal audits, evaluation, and continuous improvement of internal controls, strengthening the foundation for information disclosure.
Improve ESG Performance Indicator Disclosure: Disclose detailed ESG performance indicators, including Scope 1 and Scope 2 carbon emissions, energy usage, and other related metrics.
Engage Third-Party Verification: Hire third-party professional organizations to verify ESG reports and gradually improve the internal control mechanisms for ESG governance. Work toward transitioning ESG report verification from limited assurance to reasonable assurance.
What challenges might listed companies encounter during the implementation of the guidelines?
Topic Coverage and KPI Disclosure Gaps: The lack of mandatory requirements and detailed guidelines results in companies predominantly exercising discretion in ESG disclosures. As a result, the disclosed content often fails to meet the eight major topics (20 subtopics) outlined in the "Guidelines" and lacks quantitative data support. For instance, among companies listed on the Shanghai Stock Exchange in 2023, only 7.73% disclosed their total greenhouse gas emissions, and 7.62% disclosed waste emissions information.
Lack of Support for Regular Disclosures: A comprehensive system must include governance structures, internal policies, management processes, and digital or informational tools that support ESG-related impact, risk, and opportunity management and oversight. These elements are crucial to facilitating efficient disclosures and cooperation with stakeholders. Without a solid foundation in terms of capabilities and systems, companies will struggle to meet increasingly stringent disclosure requirements and may find themselves in a passive compliance position.
Board Involvement: The board must possess the skills and competencies necessary to manage sustainability-related risks and opportunities and establish appropriate governance processes, controls, and procedures. Board participation is vital for improving ESG disclosures and ensuring that the board is sufficiently informed and engaged on ESG issues.
Scenario Analysis: Companies should conduct comprehensive scenario analysis, especially concerning climate change risk management. Through such analysis, companies can better assess the financial impacts of climate-related risks, identify potential opportunities, and make informed decisions for future development.
Financial Impact: Companies must actively seek appropriate evaluation tools to assess the financial impact of climate risks. This includes developing and adopting financial models and metrics to accurately disclose the effects of climate-related risks and opportunities on current and future financial conditions.
Risk Management: Companies need to establish dedicated systems and processes to effectively manage climate change risks. This requires integration with existing risk management frameworks to ensure comprehensive and systematic management of climate-related risks, along with the implementation of necessary control measures.
Scope 3 Data: Addressing the challenges related to Scope 3 emissions data, including the variety of data types, difficulties in data collection, and incomplete accounting, is one of the key obstacles in ESG disclosures. Companies must strengthen their data collection and accounting systems to ensure the accuracy and completeness of Scope 3 emissions data.
What are some feasible solutions or best practices?
Utilizing Importance Assessment to Identify Key Issues for Maximizing Input-Output
Importance assessment provides a tool for companies to understand stakeholders' views on ESG, set directions, and define future investment priorities. This marks the beginning of the ESG transformation, focusing on the most important issues to maximize financial, economic, social, and environmental impacts. Currently, the "Guidance" lacks specific evaluation methods, but leading companies can refer to the "Double Materiality" framework from the European Corporate Sustainability Reporting Directive for a comprehensive, structured, and systematic evaluation of each issue's impact.
Gap Analysis and Developing an Improvement Path
For the selected key issues, leading companies should align with global best practices and international standards, aiming to build a competitive advantage rather than just meeting compliance requirements. This is particularly crucial for enhancing the recognition of products and services in international markets and expanding the global market. At the same time, companies should develop an ESG improvement plan that clearly defines goals for indicators, policies, products, and operations, establishing matching governance structures and key capabilities such as process management and data quality control systems.
Collaborating with Business Units to Identify Growth Opportunities
CEOs and management teams should prioritize ESG, selecting influential flagship ESG projects and clarifying their impact on market and product expansion, operational optimization, and other dimensions. A clear timeline, responsibility assignments, and Key Performance Indicators (KPIs) should be established. While meeting ESG disclosure requirements, companies should also align with green growth, promoting innovation and high-quality, efficient development.
At the same time, what new opportunities does the implementation of the new guidelines bring to listed companies?
The guidelines make the scope and requirements for sustainable development information disclosure by listed companies more standardized and clear.
Currently, listed companies typically choose international disclosure standards to highlight their outstanding ESG performance, in addition to meeting compliance disclosure requirements. The sustainable disclosure guidelines consolidate input from five major international standard-setting organizations in the field of sustainable development, which will help listed companies enhance the quality of their ESG information disclosures.
Industry-based disclosure requirements allow listed companies to better understand the level of their respective industries
Listed companies from different regions and with different characteristics adopt varying disclosure standards, resulting in inconsistent information that cannot be compared. The sustainable disclosure guidelines provide industry-specific disclosure requirements, which further standardize the process and make the sustainable development performance of companies within the same industry more comparable.
A comprehensive, thorough, and systematic approach to organizing and building a company's sustainable development system
The release of the sustainable disclosure guidelines presents a valuable opportunity for listed companies to enhance internal management. It encourages the establishment of effective governance structures, the refinement of risk management systems, and the scientific, efficient, and high-quality thinking, design, and formulation of verifiable, traceable, and auditable "indicators and targets" related information.
The disclosure of financial impact data helps listed companies better interact with the capital markets
The sustainable disclosure guidelines' requirements for financial impact indicators, such as financial status, financial performance, cash flow, the amount and percentage of assets or business activities vulnerable to physical/transformation risks, and internal carbon pricing, not only allow the implicit financial performance of listed companies to be quantified but also help these companies gain more reasonable attention in the investment market.
Similarities:
The overall framework of the "Guideline" generally follows the ISSB S1 framework.
In the areas of Environment (E), Social (S), and Governance (G), most topics align with international standards such as GRI and SASB, as well as key regulatory focuses in emerging markets, ensuring the main issues are disclosed.
Differences:
1. Definition of the scope of mandatory disclosure for enterprises.
2. From a general perspective, the principle of double materiality is established, unlike ISSB, which only focuses on "financial" materiality.
3. Consideration of disclosure costs: Although quantitative requirements have been added, they are relatively lenient. The overall tone of the "Guidance" is still quite "pragmatic," based on the situation of Chinese enterprises. For example, the attitude toward climate-related quantitative disclosures is that "capable enterprises" should do them, with no mandatory disclosure for Scope 3. Regarding "climate change" as a single issue, it mainly includes "climate adaptability" and "climate transition plans," with most indicators still being relatively standardized. Although there is mention of capable enterprises conducting climate scenario analysis, there are no more detailed indicators or explanations.
4. Inclusion of China-specific topics and disclosure clauses: Under the "environment" disclosure issue, the disclosure indicators for environmental governance assessment and penalties under "pollution prevention and control" are more specific to the Asia-Pacific market. This is related to the severe local pollution issues in emerging Asian markets and the focus on environmental regulation and penalties as key performance indicators (KPIs). The theme of "circular economy" is also in line with China's ongoing emphasis on environmental resources, particularly in areas like resource recycling and renewable resource consumption.
Under the "social" disclosure issue, "rural revitalization" is considered a characteristic of China. The specific content of this issue is also found in international standards. The GRI standard has a "Local Communities" category, which looks at a company's support for local communities, including employment, economic development, and charitable activities. The "China-specific" aspect of this issue is its emphasis on "rural areas" and support for poverty alleviation and related efforts.
Attention to industrial enterprise supply chain risks is also a prominent focus during the entire economic and energy transition process. The "Guidance" specifically emphasizes industrial enterprises, which is also related to the current restrictions and requirements imposed by Western countries on China's component manufacturing, electric vehicles, and battery exports during the climate and energy transition process. At the same time, the security of the supply chain for key minerals during the energy transition is another focal point.
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Li Ping, Director of the Lawyer Law Research Association of the Shanghai Law Society and Chairman of the National Enterprise Compliance Subcommittee, delivered a summary and vote of thanks. He expressed heartfelt gratitude to the Lawyer Law Research Association of the Shanghai Law Society for hosting the event, and sincerely thanked the experts for their passionate sharing as well as the online and offline participants for their full engagement. Finally, he emphasized that the seminar was very fruitful and hoped that the communication platform built by the Lawyer Law Research Association of the Shanghai Law Society would provide more opportunities and scenarios for professional discussions and learning in the future, bringing more cutting-edge information to industry exchanges.
If you want to know more information, please contact us:
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Phone: + 86 21 64067720
Email: info@leveragelimited.com
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Leverage Global Limited
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Phone: +852 30696906
Email: bruce.lau@leveragelimited.com
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