PRC, Malaysian companies face new climate reporting rules

China and Malaysia are the latest markets in the region to take steps toward greater climate disclosure, with both consulting on new sustainability rules for issuers.

The PRC’s fragmented landscape made headway on 8 February with the release of draft guidelines for listed companies along similar lines to TCFD, but with a local twist. Social factors, particularly rural revitalization, and common prosperity, feature heavily in the rules.

And on 15 February Malaysia’s securities regulator released a consultation paper on a proposed timeline and staggered framework to align the market’s sustainability reporting regime with International Sustainability Standards Board (ISSB) standards.

Sustainability with Chinese characteristics

The new reporting rules unveiled by the Beijing, Shanghai and Shenzhen stock exchanges will be mandatory for up to 450 larger companies, including those on the SSE180, STAR50 and ChiNext indices from 2026, with others encouraged to follow suit.

Although the guidelines are still open to being amended (a consultation runs until 29 February), no major changes are anticipated. China has been keen to articulate its climate ambitions as global peers move toward partial or full adoption of ISSB standards. China is a member of ISSB, which opened a Beijing office in 2023. Standardised guidelines have been eagerly awaited by investors weary of traditional CSR reports.

The guidelines follow a TCFD structure, categorised into four key areas: Governance, Strategy, Targets and Metrics, and Risk Management. Issuers are only briefly encouraged to conduct scenario analysis and disclose Scope 3 data if they can do so. Nor are they required to disclose how they would incorporate ESG performance metrics into remuneration policies.

Some of the guidelines have a distinct political flavour, in particular the emphasis on social issues in line with the national development agenda. An entire chapter is dedicated to disclosure on ‘social information,’ which stresses rural revitalization and social contribution.

Companies are strongly encouraged to support rural revitalization efforts and disclose how they have integrated these initiatives into their corporate strategy, as well as detailing their systems for implementing them. Issuers are also asked to disclose any charity and volunteering activities, along with details of the funds invested and human capital leveraged to achieve results. How this impacts a company’s brand and business development should also be disclosed. This resonates with China's Common Prosperity initiative and ongoing rural revitalization efforts.

Key themes which emerge from corporate governance disclosure requirements include updates on corruption, bribery, and unfair competition. For example, companies must show what management systems are in place and disclose any penalties for violations of anti-trust laws. This is against the backdrop of several tech giants, including Alibaba, Tencent, and Meituan, being fined for anti-competitive behaviour.

The challenges ahead

While many A shares currently issue CSR, ESG, or sustainability reports, concerns persist over the reliability and quality of the information. In the absence of standardized reporting guidelines, many of these reports prioritised disclosure on social responsibilities, community events, and volunteer work over hard climate-related data.

The guidelines could lead to greater disclosure of Scope 1, 2, and 3 emission data and clarity on what companies are doing to address climate challenges. However, it remains a pressing question as to whether these companies are capable of—and have the resources to—deliver accurate information. Assurance is encouraged in the new rules if issuers have the capacity. At present, few companies have their data externally assured*.

While it is not yet mandatory in the new rules, Scope 3 disclosure will remain a challenge as companies struggle to pull together accurate information from their long line of supply chains (which could be unlisted companies who are not required to report on emissions) in different regions.

It may also be difficult to convince companies of the benefit of quality disclosure during a tough operating environment. The risk is that issuers will view compliance as a tick-box exercise, which has proven to be the case in annual reporting. In our latest 2023 CG Watch report “A new order’’ China came second last in our listed company survey, behind Indonesia.

Meanwhile, Malaysia mulls a phased ISSB adoption

Issuers in Malaysia are meanwhile on course to adopt ISSB standards in a phased approach, with the extent of external assurance also being canvassed in its consultation.

In the 28-page paper released on 15 February, the Advisory Committee on Sustainability Reporting (ACSR), which is chaired by the Securities Commission Malaysia, is soliciting views on the scope and timing of ISSB adoption, as well as asking what approach to take on assurance. The deadline for submissions is 21 March 2024.

A proposed timeline is set out in the paper, which would see companies having to make climate disclosure on principal business segments for the fiscal year ending on or after 31 December 2025. Issuers would be able to take advantage of transitional relief on adoption already provided under the ISSB standards, and ACSR is asking whether additional transitional leeway should be given. It envisages full adoption of IFRS S1 and IFRS S2 for fiscal years ending 31 December 2027.

The ACSR has asked whether external assurance should be mandatory, and if so, which standards should be used. It also posed the question as to whether assurance providers should be licensed.

*According to data provided by ValueOnline, only 114 A-share companies had their 2022 ESG reports assured, accounting for approximately 6.2%.