Environmental Disclosure in China

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A factory looms in the distance in Beijing. Credit: Jens Schott Knudsen

In Brief

Transparency drives sustainability. The world’s general perception is that China is one of the world’s biggest culprits in greenhouse gas emissions and other pollutants, and also one of the least transparent in disclosures about them. China is taking important steps in this direction. In fact, with sufficient support from the corporate, financial, and government sectors, China could lead the world in improving environmental disclosures and contributing to environmental sustainability on a scale commensurate with its global economic impact.


Key Concepts

  • China’s leadership of the G20 in 2016 offers the world’s largest polluter the opportunity to transform its reputation for disregarding the environment.

  • The government’s first step must be to push for greater transparency in its reporting on pollution.

  • Corporate environmental information disclosure is a key element to establishing a green financial system in China. This establishes transparency and market competitiveness by more accurately reflecting the true environmental costs and values of a corporation’s strategy, and it affords corporations the opportunity to more effectively integrate environmental, social, and governance strategies.

  • Chinese regulators should require listed companies and State-Owned Enterprises to offer full environmental disclosure on the pollution they generate as a first step towards steering industry towards a greener future.

The first step to achieving environmental accountability in China is to open up about just how much impact the country’s rapid growth is having. That means full environmental information disclosure from Chinese industries on the country’s physical environment and natural systems. This information disclosure is sometimes mandated by law, statute, policy, convention, or, in the absence of other guidelines, “best practice.”

 

Important steps are already being taken in establishing country-wide standard operating procedures that began with the country’s emergent non-governmental organization (NGO) community. International NGOs such as the Sustainability Accounting Standards Board (SASB) have proposed standards for each industry, along with performance.

 

However, transparency and disclosure do not have long traditions in China, as many still believe the old adage that “silence is golden.” Historically, most Chinese companies chose not to disclose environmental information proactively, although that is changing as Chinese companies become more like their Western counterparts and start to disclose more environmental information and communicate with external stakeholders.

 

An important piece of evidence for such change is the increase in the number of corporate sustainability reports that have been published in China since the late 1990s.

 

The earliest corporate sustainability report identified in China was published in 1999 by Shell China, and describes the company’s operations and environmental impacts in China. By the early 2000s, the number of corporate sustainability reports in China increased steadily from one to over 20, although most reporters at that time were foreign companies.

 

However, the last decade has seen State-Owned Enterprises (SOEs) and private Chinese companies join the trend. As these companies were mostly industrial leaders in their own sectors, sustainability reporting practices were widely recognized and spread, which drove up the number of reports. There are currently over 2,000 companies publishing corporate sustainability reports.

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The number of corporate sustainability reports in China (2001-2014). Credit: SynTao Research, 2015

Approximately 30 percent of reports follow international reporting protocols such as GRI Guidelines and the UN Global Compact principles. These reports contain more useful data and information than reports that do not follow these guidelines. SynTao’s Message Queue Interface database captures material and quantitative indicators disclosed by corporate sustainability reports in China, and the statistics indicate that around 27 percent of the reports contained materiality and quantitative indicators as of 2014. Though this number is still low, it is rapidly improving.

 

The biggest driver for this change is regulation promoting corporate sustainability reporting. For example, as of December 2008, the Shanghai Stock Exchange requires three types of companies to release a corporate social responsibility (CSR) report: Corporate Governance Index constituent companies, dual-listed companies (listed in overseas markets), and financial companies. On the Shenzhen Stock Exchange (SZSE), as early as 2006, the market had already started promoting CSR reports by issuing a set of CSR guidelines for listed companies under Article 5 of China’s 2006 Company Law.1 In its 2008 annual report, the SZSE required the sample companies in the SZSE 100 Index to release CSR reports.

 

Environmental authorities in China also work hard to promote better disclosure of corporate environmental information. In 2007, the State Environmental Protection Administration (SEPA, now known as the Ministry of Environmental Protection, or MEP) issued the “Measures on Open Environmental Information (for Trial Implementation).”2 According to this document, the government encouraged companies to disclose on a voluntary basis. For polluting companies whose pollutants surpass national or regional discharge standards or whose total pollutant discharge surpasses the standard of local governments, mandatory disclosure is required.

 

Despite encouraging companies to report without the threat of regulatory action, voluntary disclosure does not guarantee compliance or even quality of information reported. Under a voluntary disclosure system, the regulatory grey area creates the possibility of corruption and draws attention to companies who are early-adopters while leaving the rest of the market to continue with “business as usual.” Since early-adopters may receive more scrutiny from the media and regulators, companies that fear regulatory action due to low environmental performance would not report.

 

After making strides in disclosure transparency, China now needs to encourage more reporting. To decrease the possibility of corruption and establish clear precedent, we propose that listed companies be required to report on a “comply-or-explain” basis.  Companies would either need to issue an integrated report along regulator-stipulated guidelines (“comply”), or submit a statement explaining why they could not issue a report for that given period (“explain”).

 

Without the mandatory requirement from the government for companies to produce a CSR report, the information disclosed by Chinese listed companies lacks sufficient statistics to allow the market to evaluate the environmental values and risks of companies. It also weakens the ability of markets to build a comprehensive green finance framework and develop environmental products such as indexes and ratings.

These issues of transparency were partly addressed by 2015’s Environmental Act, which encouraged public participation. The Act clearly says that the public has the right to access to environmental information and to participate in environmental protection. This is important because it empowers civil society organizations (i.e. NGOs) and media to call for corporate transparency. In fact, NGOs play an important role in pushing corporate environmental disclosure, as they are very eager to access more environmental information so that they can press companies to reduce environmental impacts.

 

But, there is still much to be done. NGOs and media that consolidate environmental disclosure data need to play a more significant role in communication. Two exemplary disclosers are the Institute of Public and Environmental Affairs (IPE), a non-profit organization based in Beijing, and Securities Times, which is the official newspaper authorized by the China Securities Regulatory Commission (CSRC) to release news on Chinese listed companies.

Saturday, 8 June, 2013 8:30 –9:20 GLOBAL PERSPECTIVE AND VIEWPOINTS VIEWPOINT: CORPORATE RISK AND CLIMATE CHANGE?Presented by Zurich Insurance Group?Globally, governments have failed to reach an agreement on climate change. Traditional activist groups are putting pressure as never before on corporations to change their business practices. Public awareness of environmental harm is increasing, and consumers are using their buying power to boycott unsustainable goods and services. What are the implications as corporations look to more sustainable ways of operating? How can companies manage their risk and minimize their cost of adapting to climate change? Discussion leaders:?Douglas Baker, Chairman and CEO, Ecolab?Zhang Yue, Chairman and CEO, Broad Group? Moderator: Brian Dumaine, Senior Editor-at-Large and Co-chair, 2013 Global Forum, Fortune Photograph by Fortune Global Forum
At a Fortune Global Forum held in Chengdu, China in 2013, the CEOs of Ecolab and Broad Group discussed with the Vice Minister of the National Development and Reform Commission the growing pressures on corporations to operate more sustainably. Credit: Stefen Chow / Fortune Global Forum

IPE aims to promote widespread public participation in environmental governance by disclosing corporate environmental information and hazards in the surrounding environment. In 2006, IPE developed a pollution database covering 31 provinces and approximately 300 cities in China, and disclosed live corporate pollution information every hour. This includes statistical information from various governmental departments, such as environmental protection, water resources, oceanography, agricultural land resources, and fishing. Based on the environmental information collected in the database, IPE launched the China Water Pollution Map and the Air Pollution Map, which have collected 110,000 and 50,000 corporate pollution records, respectively, as of February 2015.

 

IPE’s Pollution Map application, called “Blue Sky,” has been downloaded by more than three million smartphone users.3 The first of its kind in China, this map regularly publishes fine-grained environmental pollution data for cities and major watersheds, all collected by scientists and trained volunteers. Much of the environmental data published before Blue Sky was presented in aggregate (without geospatial locations) and in paper-copy only. For the first time, a new internet-accessible data source existed to verify—and in many cases contest—previous pollution findings. The creator of this map and other initiatives, Ma Jun, has won numerous international awards for his work on environmental transparency and disclosure in China.

 

Despite its landmark contributions toward environmental data transparency in China, Blue Sky is far from complete. In order to improve the quantity and quality of data coverage, we would need a larger volume of sensors within Blue Sky, more regular data updates, and map overlays that geo-locate corporate environmental performance data with areas of densest corporate activity. In addition to the existing data in Blue Sky and government-collected data from the MEP, corporate environmental reports—produced on a comply-or-explain basis—would provide this third type of data with which to approximate the overall environmental performance of each location.

 

In January 2015, Securities Times launched the Sewage Standing of Chinese Listed Companies on a weekly basis.4 This project compares the pollution information of approximately 2,500 listed companies in A-share markets and evaluates the environmental risk of these companies based on the information. Some high-risk companies in the Standing have been criticized and penalized by the government because of their poor environmental performance. These disciplinary actions represent some of China’s first regulatory attempts to include environmental disclosure and thus environmental performance in its heretofore exclusively GDP-driven performance metrics.

 

On November 11, 2015, China’s Green Finance Task Force of the China Council for International Cooperation on Environment and Development, a commission established by the Chinese government and of which the World Resources Institute’s president Andrew Steer is a co-chair, released a new report on how green reform can spur the country’s transformation to a clean economy. The first of its kind produced by such a high-profile international organization, this report calls for “mandatory environmental disclosure requirements for listed companies.”5

 

This blueprint nicely lays the groundwork for “The Green Finance Task Force” in the 2016 G20 initiative, where China is taking the lead in developing a set of recommendations for consistent, comparable, reliable, clear, and efficient climate-related disclosures, as set out in the FSB’s proposal in November 2015.6 Ultimately, this global approach aims to ensure that clear standards are enforced—not just in China, but elsewhere. The Green Finance Task force will create an ‘apples for apples’ global system of environmental information disclosure.

 

The “Climate Disclosure Standards Board (CDSB) Framework for reporting environmental information and natural capital” and the climate-related disclosures in the sector-specific standards available on the SASB’s “Standards Navigator” can form the basis for these standards. These standards allow accounting firms to provide audit opinions on these disclosures that are completed as rigorously as those for financial disclosures.

Here is where China has a great opportunity to exercise leadership. We suggest that the appropriate government authorities—the China Securities Regulatory Commission (CSRC), in coordination with the Ministry of Environmental Protection, the State-owned Assets Supervision and Administration Commission, the Ministry of Finance, and other institutions—issue regulations on a “comply-or-explain” basis that all listed Chinese companies should use the work of the CDSB and SASB in their environmental disclosures. Regulations would need to be paired with coordinated enforcement provided by the CSRC and the various stock exchanges.

26-27 February 2016, Angel Gurría, Secretary-General of the OECD, in Shanghai, China, launching Going For Growth report. left/right: OECD Secretary General Angel Gurría with Chinese Finance Minister Lou Jiwei during the launch of Going for Growth 2016 on 26 March 2016, at the G20 finance ministers meeting in Shanghai, China. Shanghai, China. Photo: OECD/ Chinese Govt.
Angel Gurría, Secretary-General of the Organization for Economic Co-operation and Development meets with Chinese Finance Minister Lou Jiei on March 26, 2016 at the G20 finance ministers meeting in Shanghai, China. Credit: OECD / Chinese Government

That is a first step. We further suggest that these disclosures be included with the company’s financial disclosures in an effort towards integrated reporting. An up-and-coming form of corporate reporting, Integrated Reporting concisely communicates how an organization’s strategy, governance, performance, and prospects, in the context of its external environment, lead to the creation of value in the short, medium, and long term.7 Given its emphasis on balancing short-term and long-term corporate performance based on measurable standards, Integrated Reporting provides a coherent and flexible platform for Chinese companies to report, in a comparable way, to companies in other global markets while maintaining the flexibility to adapt as these markets change.

 

China’s window of opportunity to lead in corporate environmental disclosure is as sizeable as the impact of its business on their surroundings. The potential for China to lead will depend on the courage of economically self-interested institutions to step up to their own challenge and turn a window of opportunity into a field of innovation.

 

References

  1. Lin, Li-Wen. Corporate Social Responsibility in China: Window Dressing or Structural Change. Berkeley Journal of International Law 28(1) [online] (2010) http://scholarship.law.berkeley.edu/cgi/viewcontent.cgi?article=1377&con....
  2. Congressional-Executive Commission on China. Measures on Open Environmental Information (Trial) [online] (2007) (Chinese): http://www.gov.cn/ziliao/flfg/2007- (English translation): http://www.cecc.gov/resources/legal-provisions/measures-on-open-environm....
  3. Qin, Liu. ‘Blue Sky’ app to get China’s public thinking about solutions to pollution crisis. China Dialogue [online] (April 28, 2015) https://www.chinadialogue.net/article/show/single/en/7870–Blue-Sky-app....
  4. Sewage Standing of Chinese Listed Companies.Shanghai Securities News [online] (2016) http://www.cnstock.com/.
  5. Zhu, Shouqing. By Taking 5 Steps, China Can Start Leading the Green Finance Revolution. World Resources Institute [online] (November 11, 2015) http://www.wri.org/blog/2015/11/taking-5-steps-china-can-start-leading-g....
  6. Perry, J. FSB proposes creation of disclosure task force on climate-related risks. Financial Stability Board [online] (November 9, 2015) http://www.fsb.org/2015/11/fsb-proposes-creation-of-disclosure-task-forc....
  7. International <IR> Framework. International Integrated Reporting Council. [online] (2015) www.integratedreporting.org.