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Chinese regulators set ESG disclosure rules as financiers eye investment opportunities

06 July 2021 Amena Saiyid

Chinese regulators issued new guidelines for publicly listed companies to disclose risks posed by environmental, social, and governance (ESG) factors, as financial advisers, institutional investors. and fund managers across mainland China, Hong Kong, and Taiwan, step up their investments in this arena.

The China Securities Regulatory Commission (CSRC) issued a final set of risk disclosure rules on 28 June that for the first time highlighted the growing interest in environmental protection and social responsibility.

With China's large clean technology manufacturing footprint, financial firms are exposed to risk posed by new and emerging technologies, as domestic and global appetite for investment in this sector heats up.

​As these financial firms launch new products, ranging from exchange-traded funds (ETFs) to green bonds, the Chinese government has stepped in with the intention of regulating what has become a growing sub-sector of financial activity in the country.

The CSRC rules require companies to disclose procedures for preventing pollution of air, water, and soil, plus methods for managing waste as well as reporting environmental incidents, especially if any penalties are associated with them.

Like its US counterpart—the US Securities and Exchange Commission—though, the CSRC encouraged companies to report voluntarily their carbon emissions to meet state goals of carbon neutrality. The agency also is requiring voluntary disclosure of risks posed by poverty alleviation outcomes and rural revitalization efforts.

The rules also encourage companies to disclose adverse impacts to biodiversity, but don't mandate reporting. This omission stands out given Kunming, China, is hosting the UN Biodiversity Conference 11-24 October. This conference includes the 15th Conference of the Parties to the Convention on Biological Diversity (CBD). Signed in 1992, the CBD is the first global agreement to cover all aspects of biological diversity, from conservation of species to sustainable and equitable use of all resources.

Above all, the rules provide no metrics for reporting ESG risks.

"We welcome the improvements on corporate governance disclosure, especially on issues related to controlling shareholders, internal controls, and management of subsidiaries," Christine Chow, global head of IHS Markit Strategic Governance Advisory and ESG Integration, told Net-Zero Business Daily 6 July.

Chow noted that the rules don't mention carbon neutrality goals or the Paris Agreement, even though those two factors are driving the push toward decarbonization policies and technologies that influence investors' risk. More can done to improve ESG performance disclosure, given China's pledge to become carbon neutral by 2060, she added.

"We expect more guidance on the nature-based solutions approach that should be integrated into companies' business operations given China's aspirational leadership on biodiversity," she said.

Meanwhile, Chinese financiers are tapping into investment opportunities in the ESG space as more and more countries align policies and resources towards a low-carbon future.

A 9 June survey by Brown Brothers Harriman, an American investment bank, reveals that ESG investments, especially through ETFs, captured the attention of investors in mainland China, Hong Kong, and Taiwan. While the firm did not disclose information about specific funds devoted to ESGs, it said the survey identified a clear interest on the part of investors.

At least 92% of those surveyed in mainland China, Hong Kong, and Taiwan said they plan to allocate more capital to ESG strategies this year, and more than half of the 146 respondents said they expect to have at least 11% of their portfolio in ESG-linked ETFs.

Globally, a record $73.95 billion flowed into ETFs and exchange-related products linked to ESG factors through the first five months of 2021, nearly triple the $26.42 billion of flows into the products by the same point in 2020, according to a 24 June estimate by ETFGI, a consultancy covering trends in global ETFs.

Posted 06 July 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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