Focus topics


Sustainable finance: China’s vulnerability to greenwashing

Whether it is Al Gore, a former BlackRock executive, or the Economist, alarms about greenwashing in the area of green finance are on the rise. Companies are therefore required by more and more countries to publish certain environmental and climate information on their activities. Beijing has now also issued new rules.

Sustainable investments are seen as a key building block in China’s efforts to achieve its ambitious climate targets. Beijing’s special climate envoy Xie Zhenhua recently stated that green finance will become an important part of China’s plan to achieve climate neutrality by 2060, which will be published soon. China’s central bank has made the sector one of its priorities for 2021 (as reported by China.Table). In early June, its chairman expressed hope for G20 countries to agree on a common standard for disclosing climate-related corporate information by the end of the year.

New regulation with weaknesses in climate data

At the end of June, China issued new regulations aimed at requiring companies to disclose the impact of their economic trading on the global climate. But these new rules fall far short of international standards. Under the rules, companies listed on Chinese exchanges are to voluntarily disclose in their semi-annual and annual reports what measures they have taken to reduce their carbon emissions during the reporting period and which impact these measures had.

The emphasis here lies on “voluntary” for most companies. Only large, particularly dirty companies (“key polluting enterprises”) that are listed on the stock exchange are required by law to publish environmental data in their annual and semi-annual reports. These data include:

  • the total quantity of emissions and designation of the pollutants,
  • which facilities were built and operated to prevent and reduce emissions, and
  • administrative sanctions imposed in the reporting period in the environmental field.

But the guidelines do not specify whether “major polluters” should also disclose the CO2 emissions they caused. Experts assume that they only have to report emissions of sulfur dioxide, nitrogen oxides, soot (particulates/dust) and volatile organic compounds because high emissions in these areas define a “key polluting enterprise.” For “non-key polluters” the submission of this data is still voluntary.

Initially, the China Securities Regulatory Commission had planned for all companies listed in China to disclose environmental information by 2020. But so far this has not happened, and no reason has been given for the delay. The Covid outbreak is speculated to have caused the delay.

Far behind international standards

By way of comparison, international climate-related disclosure standards outlined by the Task Force on Climate-Related Financial Disclosures (TCFD), among others, require companies to disclose the following information:

  • the level of greenhouse gas emissions, broken down into self-generated emissions (“Scope 1”) and those generated by electricity and heat consumption (“Scope 2”) as well as within the supply chain and, where applicable, during the use of the products sold (“Scope 3”),
  • Climate-related risks and opportunities – for example, competitive risks if the sale of internal combustion cars is no longer permitted, but also acute risks due to extreme weather events
  • The impact of climate-related risks and opportunities on the organization’s business and financial planning, for example, costs the organization faces from new regulations to mitigate climate change,
  • the processes used by the organization to identify, assess, and manage climate-related risks.

Financial sector calls for more climate information

International investors are calling for further efforts in ESG reporting by Chinese companies. The Norges Bank Investment Management (NBIM), the investment management division of the Norwegian Central Bank, responsible for investing the Norwegian Government Pension Fund Global, informed China’s Securities Regulatory Commission that companies would “benefit from more detailed guidance [on ESG information disclosure]”. China’s authorities could follow international frameworks such as the TCFD on ESG disclosure, suggested Norwegian Investment Managers, which, according to their own statements, have invested about $5 billion in Chinese equities and $1.8 billion in fixed-income investments in China.

Experts believe there is still much to be done. Janz Chiang, environmental analyst at consulting firm Trivium China, says: “The existing disclosure requirements are useful, but expanding mandatory environmental information disclosure to all listed companies would be a huge step forward in improving the comparability of green-ness among listed companies”.

Climate information lacking in ESG reports

However, some Chinese companies indeed provide information on the environmental and climate impacts of their activities voluntarily. But they are very incomplete. While 85 percent of all companies listed in China’s most important stock index (Chinese Securities Index 300) now publish an annual ESG report with information on environmental, social and governance issues, only twelve percent of these reports are reviewed by independent auditors.

The volume and quality of this data are inferior in comparison to data provided by companies of other major exchanges such as the US, Japan, the UK or Hong Kong. This is evidenced by a report by Chinese insurance company Ping An. Only 26 percent of the ESG reports of the CSI 300 companies contain any information on the greenhouse gas emissions caused by the respective companies. According to Ping An, many Chinese companies often don’t even know how to calculate their CO2 emissions in the first place, “especially if they need to be categorized into Scope 1, 2 and 3 emissions,” meaning if emissions along the supply chain and emissions occurring during the use and disposal of their products is to be disclosed as well. The situation looks even worse for Chinese companies on other stock market indices. Only 27 percent of all companies listed in China published ESG reports last year.

According to the financial services provider MSCI, listed Chinese state-owned enterprises are also ranked among the world’s largest CO2 emitters that do not publish any information at all on their emissions. Accordingly, seven Chinese companies are among the world’s ten largest CO2 emitters that do not disclose any data.

Green Finance currently with zero climate impact

Accordingly, it comes as no surprise that the effect of green finance has been limited at best. Analyst Chiang says: “Green finance has not significantly reduced emissions or addressed climate change.” This is despite the fact that the country claims to be the second-largest green finance market in the world. But it’s not just a lack of useful information about environmental and climate impacts of companies. Chinese standards on the definition of green investment made by companies also barely meet international standards (as reported by China.Table).

But Chiang is optimistic that the climate impact of green investments will change soon, as there is “increased political impetus driving the growth in green finance with a focus on ensuring that funds are impactful”.

This includes a push by the central bank for China’s financial institutions to disclose climate-related information. According to Chiang, the first pilot projects are in the works. And Yi Gang, chairman of the central bank, has repeatedly stated that disclosure should be made mandatory for financial institutions. However, this is only possible if financial institutions receive useful climate data from companies to which they lend money or in which they hold stakes.

Related

    Climate change ‘major risk for China’s modernization’
    Zero-Covid destroys trust
    Leading the world with key laboratories
    The US courts China – while the EU pouts