Sustainability reporting is a way for companies to measure their impact and performance on key environmental, social and governance issues ranging from climate change, resource scarcity, labor practices, product safety, data security, board diversity, to business ethics. The monitoring of key performance indicators is critical to sustainable business operations and can help improve the company’s existing strategy. Moreover, it is an effective way to stay accountable to staff, investors and shareholders.
For example, investors are increasingly seeking out the full risk profile of a company before they invest. An Environmental Social Governance (ESG) Report is a good way for companies to provide a standardized and comprehensive set of data to address investor concerns, and will answer key questions, such as “how do the values of this company add value to your investment?”
According to a report released by the Climate Disclosure Standards Board, the number of companies that produce sustainability reports on a regular basis in China increased exponentially over a 10-year period, rising from 19 in 2006 to 3,040 in 2016.
Although non-financial disclosures are still mostly voluntary for the private sector in China, businesses are finding as concerns for sustainability grow, there is mounting demand from customers and investors for disclosure of their business’ impact.
How your metrics are read by different stakeholders
The Global Reporting Initiative (GRI), an independent standards organization that helps businesses report on their impacts, defines sustainability reports as an overview of a business’ economic, environmental and social impact caused by everyday activities. In many cases it can also be a way for an organization to present its values, governance model and commitments to stakeholders.
These stakeholders can be internal, such as employees, managers or the board or external, such as investors, suppliers, government, creditors, shareholders, customers and the wider community.
The rise of CSR and ESG reporting in China
As it stands, there is currently no comprehensive CSR disclosure regime for all businesses. Instead, the regulatory framework for non-financial reporting mostly consists of a series of legislative and policy documents specifying requirements for particular types of businesses—such as public companies, state-owned enterprises or highly polluting companies.
For example, China’s Securities Regulatory Commission (CSRC) has requirements for listed companies on the disclosure of social responsibility-related information and some local authorities, such as those in Shanghai and Shenzhen, have also issued guidance on corporate sustainable development and social responsibility.
The Hong Kong Stock Exchange also upgraded its ESG reporting to “comply or explain” back in 2016. In 2019, it updated its requirements to include gender diversity guidance and the Corporate Governance Code. More recently in July 2020, the Hong Kong Stock Exchange introduced a series of even more stringent requirements—including occupational health and safety (OH&S) disclosures, board oversight of ESG issues disclosures and shorter deadlines for publishing ESG reports.
In addition, the importance of reporting environmental, social and governance risks is steadily growing in China. In fact, mandatory ESG disclosure is on its way for all listed companies in China.
According to the CSRC, this was expected to come into force by 2020—however with the advent of the COVID-19 outbreak, this may be pushed back to a later date.
Reporting in practice
Sustainability reporting uses standardized quantitative and qualitative metrics to measure a business’ overall impact. The key is for the sustainability report to be clear, reliable and comparable (over time and with other market players).
The most commonly used and globally recognized reporting style is the Global Reporting Initiative (GRI) Sustainability Reporting Standard, modeled after the generally accepted accounting principles (GAAP). This has become increasingly popular in China with large companies, such as China Mobile and BMW Brilliance Automotive Ltd., now using the Simplified Chinese translation of the GRI standards released in 2018.
The GRI standards are internationally recognized and track performance indicators under 146 individual data headings.
For China, sustainability reporting remains an important entry point to implementing its 2030 Sustainable Development Agenda, which was first introduced in 2016. The Chinese government is now rapidly improving its corporate reporting landscape and striving to integrate sustainable development strategies into business’ daily operation and management activities.
Businesses should therefore not only be ready to adopt a sustainability strategy but be ready to communicate its progress to the government and other stakeholders using the globally recognized sustainability reporting standards.
This article was first published in China Briefing. Since its establishment in 1992, Dezan Shira & Associates has been guiding foreign clients through Asia’s complex regulatory environment and assisting them with all aspects of legal, accounting, tax, internal control, HR, payroll, and audit matters. As a full-service consultancy with operational offices across China, Hong Kong, India, and ASEAN, we are your reliable partner for business expansion in this region and beyond. For inquiries, please email us at email@example.com. Further information about our firm can be found at: www.dezshira.com.