TerraLex Cross-Border Guide to Cross-Border Guide to ESG and Sustainable Finance

At present, as far as policies and regulations are concerned, Chinese enterprises have not yet formed a unified ESG information disclosure framework, and corporate ESG disclosure is mainly voluntary. Mandatory disclosure is limited to some information in specific industries.

Chinese law knows the following statutory ESG disclosure obligations:

Mandatory Disclosure of Environmental Information

Article 7 of the Administrative Measures for the Mandatory Disclosure of Environmental Information by Enterprises requires the following enterprises to disclose environmental information: (I) Key pollutant discharging entities; (II) Enterprises subject to mandatory cleaner production inspection; (III) Listed companies and bond issuing enterprises that have been investigated for criminal liability or received major administrative penalties for ecological and environmental violations; and (V) Other enterprises that shall disclose environmental information as prescribed by laws and regulations.

Enterprises shall prepare annual reports on the mandatory disclosure of environmental information and ad hoc reports on the mandatory disclosure of environmental information and upload them to the system for mandatory disclosure of environmental information of enterprises.

The annual environmental information disclosure report includes "basic enterprise information, environmental management information, pollutant generation, treatment and emission information, carbon emission information, ecological environment emergency information, ecological environment illegal information, temporary environmental information disclosure in the current year, and other environmental information stipulated by laws and regulations", a total of 8 types of information.

For information with high market attention and strong timeliness, enterprises are required to disclose it in a timely manner in the form of ad hoc environmental information disclosure reports in accordance with the law.

Transparency in listed companies

Notice on the issuance of the "Self-Regulatory Guidelines for Listed Companies on the Shanghai Stock Exchange No.1-Standardized Operation" regulates that sample companies listed on the Shanghai Stock Exchange in the "Shanghai Stock Exchange Corporate Governance Sector", domestic and overseas companies listed at the same time as financial companies shall disclose a report on the company's performance of social responsibilities (hereinafter referred to as the social responsibility report) at the same time as the annual report disclosure. Other qualified listed companies are encouraged to disclose non-financial reports such as social responsibility reports at the same time as the annual report disclosure.

Transparency in centrally administered enterprises Notice on Promulgating the Guiding Opinions on the Fulfilling of Corporate Social Responsibility by Centrally Administered Enterprises suggests centrally administered enterprises to establish a CSR reporting system. Qualified enterprises shall regularly publish CSR reports or sustainable development reports, announce the current situations, plans and measures for enterprises to implement CSR, improve communication methods and dialogue mechanisms for CSR, timely understand and respond to the opinions and suggestions of stakeholders and take the initiative to accept supervisions of stakeholders and society.

Transparency in listed companies

Self-Regulatory Guidelines for Listed Companies on the Science and Technology Innovation Board of the Shanghai Stock Exchange No.2-Voluntary Information Disclosure suggests that listed companies on STAR Market can disclose their (1) strategic planning; (2) industry operational information; (3) business operation data; (4) forward-looking information of the business; (5) profit forecast; (6) research and development and progress; (7) new products or services; (8) business cooperation; (9) obtained qualifications;(10) certification of scientific research strength; (11) financial data for matters other than accounting standards; (12) major public emergencies; (13) communication Letters; and (14) ESG information.

ESG information includes:

1. Environmental protection regulations, pollutant emissions, construction and investment of environmental protection facilities, main energy consumption structure, etc. to be observed.
2. Employee protection and development such as labor health, employee welfare, employee promotion and training, and personnel turnover.
3. Information on fulfilling social responsibilities such as product safety, compliance management, and public welfare activities.
4. Information on corporate governance and investor protection such as corporate governance structure, investor relations and protection, and information disclosure transparency.

Voluntary disclosure of information is mainly made by science and technology companies, but it also needs to comply with the general provisions of legal rules on information disclosure and must not conflict with the information disclosed in accordance with the law and must not mislead investors.

There is currently no unified ESG standard in China. Some regulatory documents provide general frameworks. The State Certification ESG evaluation by Shenzhen Stock Exchange

The State Certification ESG evaluation method introduces ESG values with Chinese characteristics and focuses on national strategies such as "double carbon", innovation-driven development, rural revitalization, and common prosperity, and it may be possible to avoid the problem that some foreign-funded institutions fail to adjust their ratings of Chinese enterprises according to the characteristics of the Chinese market.

Meanwhile, the ESG evaluation method includes the global consensus issues within the sustainable development framework and is in line with the United Nations Sustainable Development Goals (SDGs) or can avoid the problem that the ratings given to some Chinese organizations do not reflect the fact that the domestic ESG is still in an early stage of development, and thus the ratings given to Chinese companies are obviously high.

Corporate ESG Disclosure Guidelines Group Standard (T/CERDS 2-2022)

It is the first voluntary corporate ESG disclosure standard in China. It is highly operable and a useful supplement to international standards and regulatory requirements for ESG disclosure.

China does not have a specific ESG general legal framework. However, several aspects of ESG are governed by various statutes, such as environmental law, labor law, unfair competition law or anti-corruption law, that provide for related obligations.

The main bulk of ESG regulation in China focuses on information disclosures.

The Chinese ESG regulations only apply within China.

In China, there is no specific legal provisions for ESG, but there are relevant regulations, guidance, or management methods for ESG in different fields, which play a regulatory and guiding role in practice. Examples of specific areas are as follows:

Disclosure and misrepresentation of ESG content by listed companies

Shanghai Stock Exchange Self-Regulatory Guideline No.2 for Listed Companies on the Science and Technology Venture Exchange - Voluntary Information Disclosure

Section 14, Environmental, Social Responsibility and Corporate Governance section sets out the obligation for companies to make relevant ESG-related disclosures prior to listing. It also requires science and technology companies to strictly comply with the general requirements of truthfulness, accuracy, and completeness in the process of voluntary disclosure. Although voluntary disclosure is not a mandatory disclosure, it constitutes an integral part of continuous information disclosure and is also required to follow the above principles, with no false statements, no misleading claims, and no material omissions. Misrepresentations and non-compliant disclosures in the ESG area should likewise be subject to the liabilities set forth in general laws such as the Securities Act.

“On the basis of disclosing general information on environmental protection, social responsibility fulfillment and corporate governance in accordance with the legal rules, science and technology companies may further disclose personalized information on environment, social responsibility, and corporate governance in accordance with their industry, business characteristics and governance structure. Specifically, these include:

1. environmental protection regulations to be complied with, pollutant emissions, construction and investment of environmental protection facilities, main energy consumption structure, etc.
2. Labor health, employee welfare, employee promotion and training, personnel turnover and other employee protection and development.
3. Information on product safety, compliance, public welfare activities and other aspects of fulfilling social responsibility.
4. information on corporate governance and investor protection, such as corporate governance structure, investor relations and protection, and transparency of information disclosure.”

False advertising and "greenwashing" practices of ESG violate the Against Unfair Competition Law

Rule 1 Article 8 in Law of the People's Republic of China Against Unfair Competition provides that “Business operators shall not make false or misleading commercial promotion for the performance, functions, quality, sales, user evaluation, accolades etc. so as to defraud or mislead consumers.”

Resist false advertising from the perspective of procedural law

According to Article 58 in Civil Procedure Law, for acts which harm public interest such as environmental pollution, infringement of the legitimate rights and interests of multiple consumers, etc., the authorities stipulated by the law and the relevant organisations may file a lawsuit with a People's Court, which is environment-related civil public interest lawsuits. According to the Interpretation of the Supreme People's Court on Several Issues Concerning the Application of Law in Hearing Environmental Civil Public Interest Litigation Cases, the relevant organisations include social organisations, foundations and social service agencies established and registered in accordance with the law, while the authorities are the civil affairs departments of the people's governments at or above the municipal level.

In China, there are regulations on the environmental responsibilities according to different entities, industries, and sectors. The different supervision standards and allocations of responsibilities are stipulated depending on the scenario and industry characteristics. In some of the sectors, there are no mandatory regulations on ESG, but environmental protection is explicitly included as a factor to be considered in transactions, investments, due diligence, etc. Specific examples are as follows:

Environment protection requirements for the listed companies

Shenzhen Stock Exchange Self-regulatory Guidelines for Listed Companies No.2-Standardized Operation of Listed Companies on the Growth Enterprise Market

9.1 “While pursuing economic benefits and protecting the interests of shareholders, listed companies should actively protect the legitimate rights and interests of creditors and employees, treat suppliers, customers and consumers with integrity, practice the concept of green development, and actively engage in environmental protection, community construction and other public welfare undertakings, thereby promoting the coordinated and harmonious development of the company itself and society as a whole.

9.3 A listed company shall, in accordance with the characteristics of its industry and its own operation, form a strategic social responsibility plan and working mechanism that are in line with the company's reality. The strategic social responsibility plan of a listed company shall at least include the company's code of business ethics, employee protection plan and career development support plan, technology investment and R&D plan for rational use of resources and effective protection of the environment, social development funding plan and mechanism arrangement for the implementation, management, and supervision of the social responsibility plan.

9.8 Listed companies should integrate ecological and environmental protection requirements into their development strategies and corporate governance processes, and fulfill the following environmental protection responsibilities in accordance with their production and operation characteristics, the extent of their impact on the environment, and other practical circumstances:

• comply with environmental protection laws and regulations and industry standards;
• develop and implement the company's environmental protection plan;
• efficient use of natural resources such as energy, water resources, raw materials, etc.;
• compliance with the disposal of pollutants;
• construct and operate of effective pollution prevention and control facilities;
• paying taxes and fees related to environmental protection in full;
• to ensure the environmental security of the supply chain;
• other environmental protection responsibilities should be fulfilled.

9.9 Listed companies may disclose or separately disclose the following environmental information in the company's annual social responsibility report according to their actual situation:

• the company's environmental protection policy, annual environmental protection targets and effectiveness;
• the company's total annual resource consumption;
• the company's investment in environmental protection and environmental technology development;
• the type, quantity, concentration, and destination of pollutants discharged by the company;
• the construction and operation of the company's environmental protection facilities;
• the treatment and disposal of waste generated by the company in the production process, and the recycling and comprehensive utilization of waste products;
• voluntary agreements signed with environmental protection departments to improve environmental behavior;
• The company has been rewarded by the environmental protection department;
• Other environmental information voluntarily disclosed by the company. Listed companies engaged in industries or businesses with significant impact on the environment should disclose the environmental information listed in the first to seventh items of the preceding paragraph in the social responsibility report, and focus on the company's work in environmental protection investment and environmental technology development.

9.10 The listed companies shall regularly assign a person to check the implementation of the environmental protection policy and shall correct any behavior that is not in line with the company's environmental protection policy and take corresponding remedial measures. In the event of a major environmental pollution incident, the company shall promptly disclose the cause of the environmental pollution, the impact on the company's performance, the impact of the environmental pollution, and the corrective measures to be taken by the company.

9.11 Listed companies or their significant subsidiaries that are key emission units announced by the environmental protection authorities shall disclose relevant environmental information in their annual reports in accordance with laws and regulations and the relevant regulations of the Exchange. If the company discloses the content of environmental information in the form of an interim report during the reporting period, it shall state the subsequent progress or changes. If the relevant matter has been disclosed in the interim report and there is no progress or change in the subsequent implementation, only an overview of the matter shall be disclosed, and the relevant search index of the interim report disclosure website shall be provided.”

Environmental impact assessment is required for construction projects

Article 16 of the Law of the People's Republic of China on Environmental Impact Assessment stipulates “the State shall implement classified administration of environmental impact assessment for construction projects in accordance with the degree of environmental impacts of construction projects. The construction entity shall produce environmental impact reports and environmental impact statements or complete environmental impact registration forms (hereinafter referred to as ‘Environmental Impact Assessment Documents’) as follows:

1. In the event of possible significant environmental impact, an environmental impact report shall be prepared for comprehensive assessment of the environmental impact.
2. In the event of slight environmental impact, an environmental impact statement shall be prepared for analysis or assessment of specific items relating to the environmental impact.
3. In the event of minimal environmental impact which does not warrant an environmental impact assessment, an environmental impact registration form shall be completed.”

Focusing on the development of green finance and guiding the flow of funds to green projects

Article 4 of the CBIRC Notice on Promulgation of the Guidelines for Green Finance in Banking and Insurance Sectors stipulates that “Banking or insurance institutions shall effectively identify, monitor, prevent and control environmental, social and governance risks in their business activities, focus on the possible harm to the environment and society and risks arising from the corporate governance defects and inadequate management of their clients (financing parties) and their main contractors and suppliers in the construction, production and operating activities, incorporate the environmental, social and governance requirements into the management process and the comprehensive risk management system, strengthen the information disclosure and the communication and interaction with stakeholders, and improve the relevant policies, systems and process management. Key clients mainly include the following four categories:

1. clients of bank credit loans;
2. clients taking out insurance relating to environmental, social and governance risks and other related insurances;
3. financing parties of investment projects of insurance fund entities; and
4. other clients that are required to carry out environmental, social and governance risk management as required by laws, regulations, or contracts.”

In China, there are no specific legal provisions on whether shareholders/investors can claim that a company is liable for ESG violations. Whether a specific shareholder can claim compensation from the company is judged according to the articles of association as well as the Company Law and other legal provisions.

Company Law of the People's Republic of China

Article 149 stipulates that “a director, supervisor or senior executive who violates the provisions of laws and administrative regulations or the articles of association of the company in his/her performance of duties and powers and causing the company to suffer damages shall bear compensation liability.”

Article 151 stipulates that “in the event of circumstances stipulated in Article 149 involving a director or senior executive, a shareholder or a group of shareholders of a limited liability company or shareholder(s) of a company limited by shares holding 1% or more of shares in the company for 180 days consecutively may submit a request in writing to the board of supervisors or the supervisor (in the case of a limited liability company which has not established a board of supervisors) to file a lawsuit with a people's court; Under any of the circumstances stipulated in Article 149 involving a supervisor, the aforesaid shareholder(s) may submit a request in writing to the board of directors or the executive director (in the case of a limited liability company which have not established a board of directors) to file a lawsuit with a people's court.

Where the board of supervisors or the supervisor (in the case of a limited liability company which has not established a board of supervisors) or the board of directors or the executive director refuses to file a lawsuit pursuant to the written request of the shareholder(s) or fails to file a lawsuit within 30 days from receipt of the request or where the circumstances are urgent and the company will suffer irrecoverable losses if a lawsuit is not filed forthwith, the aforesaid shareholder(s) shall have the right to file a lawsuit with a people's court directly in their own name to protect the interests of the company.

In the event of an infringement of the legal interests of the company by others which causes the company to suffer damages, shareholders mentioned in the first paragraph of this article may file a lawsuit with a people's court in accordance with the provisions of the aforesaid paragraphs.”

There are no specific legal provisions for ESG compliance issues. Environmental compliance is a special compliance and is one of the important components of corporate compliance, alongside special compliance in areas such as anti-bribery, overseas operations, data and personal information protection, and taxation. Generally, companies will fulfill their environmental compliance obligations in accordance with national standards and industry standards. For example, international standards include Compliance Management System Guidelines (ISO 19600:2014), Environmental Management System (ISO 14001:2015), and General Guidelines on Environment, Health and Safety, etc.; domestic standards include Compliance Management Guidelines for Central Enterprises (for trial implementation), Compliance Management System Guidelines (GB/T35770-2022/ISO 37301:2021).

Specifically, each aspect of a company's production and operation requires compliance management based on the industry and business environment in which it operates. For example, environmental protection-related qualifications, licenses, and administrative approvals are prerequisites for enterprises to engage in related activities. Common types are such as "Emission Permit", "Environmental Impact Assessment Report (Form) Approval for Construction Projects", "Qualification for Professional Contractors of Environmental Protection Engineering", "Hazardous Waste Management License", "Water Abstraction License", etc. It should be noted that the approach of EIA approval and discharge permit is reviewed together by the competent ecological and environmental authorities in some provinces, leading some enterprises to misperceive the relationship between the two and fail to renew the "discharge permit" in a timely manner after carrying out the relevant technical transformation, resulting in environmental compliance risks.

Administrative penalties, criminal liabilities and civil liabilities caused by the company's non-compliance should be borne externally by the company as the main body, and in some cases the company's main responsible person also needs to bear external liabilities and penalties. Relevant economic losses belong to the company's external debts, therefore, the shareholders of the above debts also apply the general rules of the Company Law and other general rules. Shareholders claim the right and scope of compensation also need to apply the rules of the company's external debts according to the general rules of the articles of incorporation and the Company Law.

Customers, creditors, or other affected subjects, whether individuals or commercial entities, can claim damages against other companies for damages caused by ESG's non-compliance. In addition to the general corporate law, industry standards, and civil and commercial compensation rules as standards, in China, there is also a public interest litigation and class action system related to environmental protection, where individuals and collectives can file claims as plaintiffs or demand that infringing companies eliminate their impacts and restore the status quo ante, etc.

PRC Civil Code - Chapter 7 Liability for Environmental Pollution and Ecological Damage

Article 1235 provides that “in the event of damage caused to ecological environment in violation of State regulations, authorities stipulated by the State or organizations specified by the law shall have the right to request the tortfeasor to compensate for the following losses and costs:

1. Losses caused by loss of service functions during the damage to the ecological environment and the completion of the restoration;
2. Losses caused by permanent damage to the functions of the ecological environment;
3. Expenses of investigations, appraisal, and assessment for ecological environmental damage;
4. Expenses for removal of pollution and restoration of ecological environment; and
5. Reasonable costs incurred in preventing the occurrence or amplification of the damage.”

Interpretation of Supreme People's Court on Several Issues Concerning the Application of Law in the Hearing of Environment-related Civil Public Interest Lawsuits

Article 18 provides that “for an act that pollutes the environment, damages the ecology, has harmed the social public interest or has the major risk of harming the social public interest, the plaintiff may request the defendant to bear such civil liability as cessation of infringement, removal of obstruction, elimination of danger, restoration of ecological environment, compensation for loss and apology.”

Article 31 provides that “where the defendant bears liability both in the environment-related civil public interest lawsuit and other civil lawsuits due to environmental pollution and ecological damage, and its property is insufficient to perform all obligations, the obligations determined in the effective judgment on other civil lawsuits shall be fulfilled first, unless otherwise provided for by the law.”

ESG is still a newcomer in China, and legislative bodies and government departments have not officially quoted it as a normative term. Therefore, there are currently no specialized laws and regulations on ESG in China. The lack of specialized legislation has led to fragmented and scattered ESG legislative provisions in China, where the contents of the three major ESG sub-issues, namely environment, social, and corporate governance, are scattered in environmental protection laws and regulations, labor protection, product liability, corporate governance, anti-unfair competition laws and regulations, as well as regulatory documents of domestic securities exchanges.

On the environmental issue, China has always attached great importance to the supervision and restraint of enterprise waste treatment and pollution emissions. In the Chinese environmental legal and regulatory system, as the basic law for Chinese environmental protection, the Environmental Protection Law formally establishes the basic principles of protecting the environment as a priority and preventing pollution and stipulates that all units and individuals have an obligation to protect the environment. At the same time, it also stipulates the special obligations of enterprises in different environmental fields. Therefore, the environmental protection obligations of enterprises mainly come from the relevant provisions of basic laws and administrative regulations such as the Environmental Protection Law, the Environmental Impact Assessment Law, and the Pollutant Discharge Permit Management Regulations, as well as the special environmental protection laws such as the Air Pollution Prevention and Control Law, the Water Pollution Prevention and Control Law, the Solid Waste Pollution Environment Prevention Law, the Soil Pollution Prevention and Control Law, the Noise Pollution Prevention and Control Law, and the Clean Production Promotion Law. The 2018 revised "Code of Corporate Governance for Listed Companies" has a dedicated chapter on stakeholders, environmental protection, and social responsibility, which requires listed companies to actively implement green development concepts and incorporate ecological and environmental protection requirements into their development strategies and corporate governance processes, playing a leading role in pollution prevention and control, resource conservation, and ecological protection.

On the social issue, China's current laws and regulations mainly focus on labor rights protection and product liability supervision. Taking the former as an example, China has formed a labor protection legal system composed of multiple laws and regulations, including the Labor Law, the Labor Contract Law, the Labor Dispute Mediation and Arbitration Law of the People's Republic of China, the Employment Promotion Law, the Labor Dispute Mediation and Arbitration Law, the Labor Security Supervision Regulations, the Regulations on the Employment of Disabled Persons, the Regulations on Work-Related Injury Insurance, the Regulations on the Protection of Women Workers' Labor Rights and Interests, the Provisions Prohibiting the Use of Child Labor, etc. Among them, the Labor Contract Law establishes the basic principles of legality, fairness, equality and voluntariness, negotiation and agreement, and good faith and credit, and requires employers to formulate and improve labor systems to ensure that workers enjoy labor rights and fulfill labor obligations. The "Code of Corporate Governance for Listed Companies" requires listed companies to strengthen employee rights protection, support employee representative congresses, and union organizations to exercise their powers in accordance with the law. The board, the supervisory board, and the management should establish diverse channels of communication with employees, listen to employees' opinions on the company's operations, financial status, and major issues related to employee interests, etc.

On the corporate governance issue, ESG emphasizes the focus on corporate governance and behavior, and its value concept has also been implemented and followed in China's commercial legal system. For example, the "Code of Corporate Governance for Listed Companies" requires listed companies to actively fulfill their social responsibilities in community welfare, disaster relief, poverty alleviation, and public welfare, while vigorously practicing the concept of green development, integrating ecological and environmental protection requirements into development strategies and corporate governance processes, while encouraging listed companies to pair up and assist poverty-stricken counties or villages, proactively engage in industrial development, talent cultivation, and employment promotion in poor areas. In addition, the "Anti-Unfair Competition Law", which came into effect on April 23, 2019, requires that business operators bear social responsibilities and abide by laws and regulations during production and operation activities, not engage in disrupting market competition order, and not harm the legitimate rights and interests of other operators or consumers. The Company Law (Draft Amendment) published on 24 December 2021 requires companies to comply with laws and regulations and to give due consideration to the interests of stakeholders such as employees and consumers, as well as the public interest such as ecological and environmental protection, and encourages companies to publish social responsibility reports.

On the whole, although China has not yet undertaken specific ESG legislation, policies and legislative frameworks on the environment, climate, energy, labour, corporate governance, data security, the digital economy, consumer protection, anti-unfairness and anti-monopoly, and other socially sustainable development goals have largely taken shape, providing a good ground for Chinese companies to practice ESG concepts, fulfil their social responsibilities in accordance with the law, and promote sustainable development in the financial markets under the rule of law.

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In Chinese mainland, there are several statutory and regulatory frameworks that are aimed at promoting sustainable finance and investment, including those related to ESG indicators and impact indicators. Some of the key frameworks are (not exhaustive):

Standard system

1. The 14th Five-Year Plan for the Development of Financial Standardization: this document points out that standards are an important pillar for the sustainable development of green finance, and that the principle of "domestic unification and international convergence" should be followed to establish and improve a set of strict, clear, detailed, and operable standards. The document proposes a number of specific tasks: unifying standards for green bonds, enriching standards for green financial products and services, accelerating the development of environmental information disclosure standards for listed companies and debt-issuing enterprises, studying the development and promotion of carbon emission accounting standards for financial institutions, establishing an ESG evaluation standard system, establishing statistical standards for loans that can measure the effect of carbon emission reduction, exploring the development of standards related to carbon financial products, and accelerating the study and development of transition finance standards.
2. Catalogue of Projects Supported by Green Bonds: this catalogue sets out guidelines for green finance projects in China, aimed at promoting environmental protection, energy conservation, and sustainable development.
3. The China Green Bond Principles specify the varieties of green bonds in the form of annexes, including four categories of ordinary green bonds (including two sub-categories of blue bonds and carbon neutral bonds), carbon income (environment-related equity) green bonds, green project income bonds and green asset-backed securities. This is the first time that China's green bond market has unified the classification of varieties.
4. Company Law of the People's Republic of China: this law puts in place statutory guidelines for corporate governance in China, including provisions aimed at ensuring companies operate in a sustainable and socially responsible manner.

Information Disclosure

1. Administrative Measures for the Mandatory Disclosure of Environmental Information by Enterprises 5 categories of enterprises, including a certain range of listed companies and companies issuing bonds, are required to disclose environmental information in accordance with the law.
2. The Work Plan for Improving the Quality of Listed Companies Held by Central Enterprises, which requires listed companies held by central enterprises to implement the new development concept and explore the establishment of a sound ESG system. The work programme sets out a clear target to promote the disclosure of ESG special reports by more listed companies held by central enterprises, with a view to achieving full coverage of the disclosure of relevant special reports by 2023.
3. The Shanghai Stock Exchange and the Shenzhen Stock Exchange have respectively updated their “Listing Rules” and for the first time included relevant content on corporate social responsibility, including incorporating social responsibility into corporate governance, requiring disclosure of a company's fulfillment of social responsibility obligations, and the risk of forced delisting for harmful conduct. The “Listing Rules” specifically state that listed companies shall prepare and disclose non-financial reports such as social responsibility reports in accordance with regulations. In actual practice, the exchanges have already implemented mandatory disclosure requirements for some listed companies, including Shanghai Stock Exchange's sample companies in the corporate governance sector, companies listed both domestically and abroad, financial companies, and Shenzhen Stock Exchange's SZSE 100 sample companies.

In summary, China's ESG statutory sustainable finance and investment framework has gradually become more robust, and the government and financial institutions have begun to recognise the importance of ESG, with further improvements to come.

Below are the voluntary sustainable finance and investment frameworks followed in China in the ESG area (not exhaustive): Standard system

Guiding Opinions on Regulating Asset Management Business of Financial Institutions: the guidance requires that financial institutions should take full account of the balance of risk and return when conducting financial products and asset management business, and manage their investments in accordance with the principles of compliance, information disclosure, reasonable pricing and investor protection, and highlights the risks and opportunities of ESG that should be considered in the investment process.

Information Disclosure

Guidelines on Disclosure of Environmental Information by Financial Institutions: although disclosure is still a voluntary standard, it has also contributed to more financial institutions, especially banks, producing environmental disclosure reports.

Incentive mechanism

1. Guidelines for Green Finance in Banking and Insurance Sectors, which requires that banking and insurance institutions should promote green finance from a strategic perspective, increase their support for the green, low-carbon and circular economy, and promote the overall green transformation of economic and social development.
2. The ESG Due Diligence Management Initiative for China's Insurance Asset Management Industry advocates insurance asset management institutions to actively promote green transformation and guide stakeholders, including investee companies, to work together to build a green development ecosystem from the perspective of due diligence management responsibilities.

International cooperation

The Principles for Responsible Banking (PBR) were developed by 30 banks from around the world, supported by the UN Environment Program Finance Initiative (UNEPFI). With over 300 signatory banks, the PRB are the world’s foremost sustainable banking framework. Bank of China, China Construction Bank, China Postal Savings Bank, Bank of Communications of China, Agricultural Bank of China and Industrial and Commercial Bank of China have joined the United Nations Environment Programme Financial Action Plan (UNEPFI) and signed the Principles for Responsible Banking (PRB), pledging to take greater responsibility in addressing climate change and other environmental risks and achieving sustainable development goals.

The main objective of the above frameworks is to encourage sustainable finance and investment, as well as the implementation of environmental, social, and corporate governance, to help companies achieve sustainable development in the economic, social, and environmental aspects.

Chinese law does not contain any regulations that would explicitly require financial institutions and investment advisors to consider ESG factors in their investment activities. Chinese regulators currently tend to encourage pension funds to incorporate ESG concepts into their investment strategies but have not yet revised their pension fund investment regulations to address this and are still using the Administrative Measures on Investments of Basic Pension Insurance Funds in 2015. There is an essential fit between pension management and the ESG concept. Pension funds have long-term, risk-averse, and public attributes, and these attributes determine the long-term profitability of pension funds. In addition to the consistency between the attributes of pension funds and the ESG concept, the need for the pension industry to practice the ESG concept is also reflected in 5 aspects: it is in line with the general trend of globalization, in line with the direction of China's social and economic development, conducive to accelerating the construction of China's ESG ecosystem, and helps promote the healthy development of the capital market and the pension industry

As the global trend shifts towards more sustainable and responsible financial models, ESG factors have become important considerations in evaluating investment value and long-term investment success. In China, regulatory bodies have also begun to focus on the development of ESG investments and encourage financial institutions and investment advisers to consider ESG factors to support sustainable development and the global environment. Consideration of ESG factors can help financial institutions, investment advisers and pension providers to reduce investment risk, improve investment returns and reduce negative social and environmental impacts to achieve sustainable development goals.

Policies such as tax incentives and subsidies are currently in place to encourage financial institutions and/or pension institutions to incorporate ESG considerations into their investment decisions. For example, tax incentives such as exemption of VAT on interest income and pre-tax deduction of loan loss provision for financial services for small and micro enterprises and rural revitalisation, implementation of preferential deposit reserve ratios for eligible banks, creation of re-financing and re-discounting tools for supporting agriculture, small and micro enterprises and carbon emission reduction support tools, etc., to direct financial resources to key areas such as rural revitalisation, small and micro enterprises and green and low carbon.

China is beginning to incorporate ESG investment concepts into long-term funds with certain social attributes, such as pension funds. The National Social Security Fund is an important part of China's pension fund. According to the China Pension Development Report 2021, since 2020, the National Social Security Fund has commissioned overseas investment managers to carry out pilot ESG investments in conjunction with foreign ESG investment strategies. At the same time, NSSF has also established a special subject group to study and improve the top-level design of ESG investment and will gradually promote the ESG investment concept among domestic investment managers in the future.

Chinese law does not specifically address greenwashing and does not provide consequences for non-compliance with these measures. However, China's “greenwashing” regulation is in the process of being upgraded and put in place. In the Chinese market, regulators are also increasingly concerned about ESG and the risk of "greenwashing" in the wave of green finance, with specific regulatory initiatives to enhance information disclosure by financial institutions, including the publication of ESG reports or environmental disclosure reports by financial institutions, and the disclosure of quantitative information on carbon emissions reduction.

China Banking and Insurance Regulatory Commission (CBIRC)

On 1 June 2022, the CBIRC issued the "Green Finance Guidelines for the Banking and Insurance Industry", which stipulates the disclosure of information by banks and insurance institutions, i.e., "they should disclose their green finance strategies and policies and fully disclose the development of green finance. It is also the first time that a bancassurance institution needs to eventually become carbon neutral, with particular emphasis on the need to assess the intensity of carbon emissions from the asset portfolio (referred to as "scope three emissions", which includes all other indirect emissions generated in the enterprise value chain).

China Central Depository & Clearing Co., Ltd. (CCDC)

Based on the China Bond Index System, CCDC has launched the first national green bond environmental benefit information database and green bond environmental benefit information disclosure portal. The Green Bond Database covers basic information on the stock of "materially green" corporate credit bonds from 2002 to 2020, information on the projects in which the proceeds were invested and the environmental benefits of the projects disclosed, allowing users to search and download environmental benefits data. The construction of the Chinese Debt Indicator System has undergone many rounds of in-depth discussions with regulators and market institutions, and has been approved by the relevant institutions, which can prevent "greenwashing" to a certain extent.

The People's Bank of China (PBC)

In July 2021, the People's Bank of China issued the Guidelines on Environmental Information Disclosure for Financial Institutions setting the financial industry standard and setting the framework for environmental information disclosure by financial institutions. The PBC is committed to exposing green financial information to the sun, requiring financial institutions to publicly disclose information on the issuance of carbon emission reduction loans and the amount of carbon emission reduction driven by the loans, and to have third-party professional institutions verify and validate the information, so that the use of each green fund is subject to public supervision and "greenwashing" is not allowed to succeed. In recent years, financial institutions have explored environmental information disclosure from large to small, from easy to difficult, at different levels and in different steps, and more than 200 financial institutions in the pilot area have prepared environmental information disclosure reports on a trial basis.

The Supreme People's Court of China has recently issued several cases relating to "greenwashing" of financial markets. The details are as follows: Case I:

A Clean Energy Consulting Company in Beijing v. A Photovoltaic Investment Company Service Contract Dispute

In this case, the People's Court supported the third party providing technical services' claim for service fees and interest for projects that had completed the nationwide CERs, in accordance with the law, encouraging voluntary greenhouse gas emission reduction trading and safeguarding the orderly development of CCER trading activities.

Case 2:

A Container Company of Shenzhen v. Shenzhen Development and Reform Commission Administrative Punishment

In this case, the People's Court supported the supervision of administrative authorities in fulfilling their regulatory duties and imposed administrative penalties on key emission units that failed to fulfil their obligations to clear carbon emission allowances, providing strong judicial protection for the achievement of greenhouse gas emission control targets.

Case 3:

Agricultural Bank of China, a county branch v. Fujian a chemical company and other carbon emission allowance enforcement

In this case, the People's Court sold carbon emission allowances to satisfy the respondent's debts, accurately grasping the legal attributes of carbon emission allowances as a new type of property and better coordinating the relationship between the protection of creditors' rights and interests and the development of enterprises, which is of reference significance for the improvement of carbon emission allowance enforcement rules.

In China, the main legal documents related to green finance are: Guiding Opinions on the Building of a Green Financial System, Green Investment Guidelines (for Trial Implementation), Green Finance Regulation of Shenzhen Special Economic Zone and the Guidelines for Green Finance in Banking and Insurance Sectors, which set out the requirements for ESG governance of different financial entities.

1. Financial institutions should establish special departments and positions, as well as special ESG internal control systems, to provide and coordinate specialized green financial services.
2. Banking and insurance institutions should effectively identify, monitor and prevent and control environmental, social and governance risks in their business activities, focus on the hazards and risks arising from the construction, production and operation activities of customers and their main contractors and suppliers due to corporate governance deficiencies and inadequate management, incorporate environmental, social and governance requirements into their management processes and comprehensive risk management systems, strengthen information disclosure and communication and interaction with stakeholders, and improve relevant policies, systems and process management. The key customers should be pay attention to include the following 4 categories: bank credit customers, customers who take out insurance related to environmental, social and governance risks, etc., financiers of investment projects of insurance fund entities, other customers who should carry out environmental, social and governance risk management according to laws and regulations or contractual agreements, etc.
3. Interested parties of the financial institutions should identify their ESG obligations, identify the ESG risks they face, manage their ESG risks and improve the ESG performance according to the nature of the enterprises, the industry in which they are located, regional characteristics, referencing the evaluation indicators or standards implemented by financial institutions.

There are no specific legal requirements for ESG in China in the area of M&A, and it is more common for ESG considerations to be incorporated into due diligence and corporate compliance building. Therefore, the primary criterion of ESG due diligence is to verify whether the target subject complies with the requirements of relevant domestic laws in terms of environmental, social and management aspects. From this perspective, the compliance review of the target subject's compliance with domestic laws falls within the scope of traditional legal due diligence.

For banking and insurance institutions: in 2016, multiple departments jointly issued the Guiding Opinions on the Building of a Green Financial System, putting forward requirements for green financial development in credit, securities market, funds, and insurance, etc. On June 1, 2022, the CBRC issued the Guidelines for Green Finance in Banking and Insurance Sectors, requiring banks and insurance industries to pay attention to their own environmental, social and governance performance, and explicitly requiring banks and insurance institutions to strengthen credit and investment due diligence and pay attention to the environmental, social and governance performance of their customers throughout the process. Therefore, it has become a clear regulatory requirement for banks and insurance institutions to identify their own and their clients' ESG risks.

For investment institutions: as an international non-profit organization supported by the United Nations, Principles for Responsible Investment (PRI) has been recognized and followed by many large financial institutions and others for its principle guidance on ESG investments. As of June 10, 2022, 101 Chinese institutions have joined PRI, 74 of which are investment management institutions. It can be seen that ESG performance has become an important concern for many investors' investment decisions, and identifying ESG risks has become a prerequisite for investment decisions. In practice, some domestic investment institutions have established internal ESG review standards and decision-making processes for outbound investments.

For companies: for enterprises with investment and financing needs, given the increasing emphasis on ESG by financial institutions, enterprises also need to assess their own ESG risks in a targeted manner to meet the requirements of financial institutions. In particular, it is important to note that many multilateral financial institutions have established lender-specific ESG policies and requirements, and domestic companies applying for loans from these institutions, for example, are usually required to undergo ESG due diligence by the institutions. For domestic and foreign listed companies, especially those with mandatory ESG disclosure obligations, they are required to disclose their performance in terms of ESG on a regular basis (usually each financial year). For this purpose, these listed companies need to gain a deeper understanding of their ESG status and risks, and thus achieve ESG performance enhancement and disclosure.

The example in specific practical area is as follows:

According to Article 4 in CBIRC Notice on Matters Relating to Financial Equity Investments with Insurance Funds “IV. For a financial equity investment with insurance funds, the target enterprise to be invested shall not fall under any of the following circumstances... (VIII) where there is high pollution, high energy consumption, failure to attain energy saving and environmental protection standards of the State, excess capacity, or lower technology value-added...” Therefore, in the case of outbound equity investment by insurance funds, if the due diligence results show that the target entity has significant risks in terms of “E (environment)”, it may directly lead to the transaction falling into the scope of being prohibited by the regulatory authorities. In the event that ESG risks constitute a major obstacle to the project, it cannot be ruled out that the relevant entity may choose to abandon certain projects.