This article explores the latest developments in environmental, social, and governance (ESG) practices in two of Asia's economic powerhouses. In China, new sustainability reporting guidelines have been introduced for listed companies, emphasizing standardized ESG disclosures to foster high-quality development. Meanwhile, Japan is moving towards mandatory sustainability reporting, building on existing initiatives such as the Tokyo Stock Exchange's climate-related disclosures and the Financial Services Agency's rules on sustainability information. We will investigate the evolving ESG landscape in China and Japan, highlighting the efforts driving sustainable business practices in both countries.

THIS ARTICLE IS WRITTEN BY ALIM ABASI ([email protected]). ALIM IS A SENIOR MANAGER AND ASIA DESK LEADER AND IS PART OF RSM NETHERLANDS BUSINESS CONSULTING SERVICES WITH A SPECIFIC FOCUS ON SUSTAINABILITY AND INTERNATIONAL TRADE.

China

China has been actively progressing its ESG reporting standards to match its ambitious environmental objectives, including reaching peak carbon emissions by 2030 and achieving carbon neutrality by 2060, alongside efforts to improve social equality and corporate governance.

On April 12, 2024, the China Securities Regulatory Commission (CSRC) released the "Guidelines for Sustainable Development Reporting of Listed Companies" (hereinafter referred to as the "Guidelines"), requiring listed companies to publicly disclose ESG reports starting from May 1, 2024, marking the beginning of standardized ESG information disclosure in China. To be more specific, the Guidelines require companies listed on the SSE 180 Index, the STAR 50 Index, the SZSE 100 Index, the ChiNext Index, and companies listed both domestically and overseas to disclose their first sustainable development report for the year 2025 by no later than 2026. Other listed companies are encouraged to voluntarily disclose. From a market perspective, the Guidelines will enhance the overall ESG awareness in the A-share market, guiding the market to cultivate a favorable atmosphere for long-term and value investing.

Overall, the content of the Guidelines is largely consistent with the draft for public comments which was released on February 8, 2024, gathering domestic and foreign disclosure systems and excellent practices. In terms of concept, they consider the substantial principles of both the Global Reporting Initiative (GRI) and the International Sustainability Standards Board (ISSB), and in terms of framework, they draw on the four-pillar framework of the Task Force on Climate-related Financial Disclosures (TCFD). At the same time, based on the actual situation of China's capital market, specific topics such as rural revitalization and innovation-driven development are set up, fully demonstrating China's characteristics and advantages in the field of sustainable development.

The officially released "Guidelines" consist of 6 chapters and 63 articles, outlining the framework for sustainable development reporting.  There are also 4 core components in the disclosure Framework. The Guidelines require disclosure entities to analyze and disclose around four core components: "Governance, Strategy, Impact & Risk & Opportunity management, and Indicators & Targets". It covers 21 specific topics from the aspects of environment, society, and corporate governance, including climate change, pollution emissions, ecosystem and biodiversity protection, rural revitalization, innovation-driven, and employee-related matters.

Regarding disclosure principles, listed companies need to adhere to the Double Materiality principle, which is similar to the Corporate Sustainability Reporting Directive (CSRD) initiated by

the European Commission.

The release of China's ESG reporting guidelines is a significant milestone in the country's ESG development, filling a crucial piece of the puzzle in the global mainstream capital market's sustainable information disclosure system. This marks a key step in enhancing China's influence and voice in the global ESG framework and instills confidence in sustainable development.

Japan

For many years, Japan has been acknowledged as one of the countries with the highest number of companies and organizations declaring their commitment to sustainability disclosure. The Sustainability Standards Board of Japan (“SSBJ”) was established in October 2023 to develop sustainability disclosure standards for Japanese companies. 

On March 29, 2024, SSBJ announced the release of new exposure drafts for proposed standards for companies to report sustainability and climate-related information, based on the recently released sustainability disclosure standards by the IFRS Foundation’s International Sustainability Standards Board (ISSB), the initiative launched to create a global baseline for environmental financial disclosures that can be used by companies, governments and investors alike. It is seeking feedback on its plan to introduce disclosure standards for major companies, in the latest push towards mandatory reporting in one of Asia’s leading economies. Such consultation from SSBJ will be open until July 31, 2024. The SSBJ said that it is soliciting feedback on the drafts and has previously indicated that it aims to publish finalized sustainability reporting standards by the end of March 2025.

The Japanese standards include certain “jurisdiction-specific options” such as the ability to report information for a different period from that covered by the company’s financial statements in some circumstances. This also has been released in the consultation documentation, setting out the differences between its drafts and the ISSB standards, including details on how companies should report their greenhouse gas emissions if they are subject to the Japanese Act on Promotion of Global Warming Countermeasures, one of Japan’s central climate laws.

Forward thinking

In China, driven by ESG policies, there's ongoing enhancement in the comprehensiveness, thoroughness, and specificity of corporate disclosures. However, disparities persist across industries, with some sectors exhibiting higher disclosure rates than others, leading to an imbalance in disclosed indicators. For instance, while the steel, petroleum, and petrochemical industries demonstrate high ESG disclosure rates, other sectors like commerce, retail, and media need further development. Furthermore, indicators such as the customer complaint rate and employee turnover rate exhibit relatively low disclosure rates, failing to adequately reflect the actual conditions of listed companies and certain underlying risks. 

The influence of ESG on global trade is significant and constantly changing, reflecting evolving global circumstances and expectations. The research revealed a rapid increase in the disclosure rate of ESG indicators over the past couple of years. The representative trends in ESG reporting standards that we discussed are excellent examples of positive developments aligned with the CSRD value chain reporting requirements. It is also anticipated that more and more Asian countries are likely to follow this trend.

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