Quality Climate Disclosures Support Green Transformation

Climate change and its associated risks and opportunities are major concerns for the global marketplace. Recent years have seen an increase in natural disasters and accidents caused by extreme weather conditions. Managing climate risks and transition opportunities is essential for business development. The market demand for standardised and transparent climate information has continued to grow, and the strengthening of climate-related disclosure requirements has become a common demand. In April 2024, China's stock exchanges issued the Guidelines for Self-Regulation of Listed Companies-Sustainability Report (Trial), which sets clear requirements for the disclosure of climate and other sustainability information.

This research presents the risks and opportunities under global climate change, analyses the climate change disclosure requirements in the Guidelines, and explores the existing disclosure performance and challenges in the market, to provide a reference for companies to improve the quality of information disclosure and their risk management framework. CSI provides CSI ESG Ratings, Climate Transition Scores and CSI Index Services to support investment institutions in developing climate investments and financing. These services also provide applicable tools for companies to explore transition opportunities.

Climate change is a global challenge, and addressing climate change is a cause shared by all of humanity. The urgency and severity to deal with climate change impact are accelerating, and the risks and damages climate change brings shall not be ignored. According to WMO's "State of Global Climate 2023", the past year has become the hottest year on record. Extreme weather and climate events represented by extreme heat and drought, tropical cyclones and extreme cold waves have significant socio-economic impacts on all inhabited continents. The report "China Climate Bulletin 2023" released by China Meteorological Administration shows that the average temperature in China in 2023 reached the highest level since 1951, and meteorological disasters have caused direct economic losses of 330.6 billion yuan. Climate change is a real crisis bringing up future challenges, responding to which has become a global consensus.

Cascading effects are frequently seen in climate risks and climate-related risks are proving to be non-negligible sources of financial risks. Climate issues are essentially the discussion of externalities, and concentrated exposure to climate risk is likely to cause economic losses, thereby affecting the jurisdiction's economic growth and financial stability, and even triggering severe cross-border risk transmission. According to the NGFS report, for financial institutions, climate-related transition risks and physical risks will trigger the dilemma of increasing credit risk, market risk, underwriting risk and liquidity risk of companies and financial institutions through micro- or macro-economic transmission channels, affecting the functioning of the financial system, impairing economic development and transition, and negatively altering global supply and demand.

Chart 1: How Environmental Risks are Transmitted to Financial Risks 

(Source: NGFS , CSI)

The Report to the 20th National Congress indicates that actively addressing climate change is significant to the modernisation of harmony between humanity and nature. It is not only a strategic choice for long-term development under the climate crisis but also an opportunity for green economic transition. "The era of global warming has ended; the era of global boiling has arrived." said United Nations Secretary-General António Guterres. The UAE Consensus delivered in COP 28 has advocated for all parties to work together to address climate change. China, as an important participant, contributor, and torchbearer in the global endeavour for ecological civilisation, has taken practical measures, including adjusting and optimising industrial and energy structure, promoting pollution reduction and accelerating the construction of China's national carbon emissions trading market.

Climate change is a complex and holistic issue. The realisation of China's climate goals cannot be separated from companies' active participation. At this stage, enterprises are not only confronting the direct impact of extreme weather events on the upstream and downstream supply chains but also facing potential risks such as the reshaping of the product market by green consumption transformation, the tightening of carbon emission management policies and the increase in financing costs. Enterprises are the main body of economic development and also bear the mission of practicing energy conservation, environmental protection and scientific and technological innovation. Actively practicing green and low-carbon transition is not only a manifestation of enterprises fulfilling their social responsibilities but also an inevitable choice to improve their risk management framework and create and maintain international competitiveness.

Climate change is closely linked to the green and low-carbon transition of companies. Carbon-intensive companies lacking transition capabilities will be more passive in the future competitive landscape while emerging industries that fully exploit transition opportunities will have greater development prospects. Taking the Steel and Chemical industries as examples, enterprises lacking transition will face tighter demand as energy structures reshape and consumer preferences shift. Environmental penalties and litigation, carbon credit and tax pressures will also increase production and operating costs. Corporate financing activities will also face higher and stricter credit requirements and costs, especially when confronting the carbon reduction measures taken within the financial industry. If companies do not take proactive steps to transition to a low-carbon future, they will be subject to pressure and constraints from cash flow, supply chain, consumers and other aspects in the future competitive market landscape.

At the same time, some companies are facing new opportunities. The Photovoltaic and New Energy industries, for example, are aligning themselves with the national transition strategy and are receiving more convenience in corporate financing and borrowing. As the market's interpretation of sustainable development gradually deepens, the demands of investors and consumers are expected to increase further. In addition, the carbon credits accumulated by such companies due to their low carbon emissions also bring more carbon assets. The supportive policy environment and the further implementation of sustainable investment concepts are conducive to the steady development of such companies.

In general, climate change presents both risks and opportunities. Actively responding to climate change is not just an empty slogan but requires companies to continuously drive the transition. In this context, the market has created new demands for high-quality and highly transparent climate information. Strengthening the disclosure of climate information and broadening the application scenarios for climate data have become essential elements in promoting high-quality business development.

Transparent and standardised climate information is an important basis for identifying, mitigating and managing climate risks and opportunities. Strengthening the disclosure requirements for such information is a common demand from market stakeholders, including regulators and investment institutions. Improving the reliability, relevance, comparability, timeliness, and understandability of climate information disclosure is now an important basis for supporting climate-friendly investment and financing, as well as an essential measure to serve high-standard opening-up and promote international cooperation.

The world is making rapid progress in developing climate information disclosure, mainly reflected in the efforts made by the regulatory agencies to standardise climate information disclosure requirements. In 2023, IFRS officially released ISSB S1 and S2. The standards fully integrate the relevant recommendations of the TCFD and become a significant reference for companies worldwide to disclose climate-related financial information. The EU ESRS Standards and the US SEC Climate Rules also provide the reference for stakeholders in different jurisdictions. The standardised and transparent global climate information inflow is attracting increasing attention, and the interoperability between different standards is also constantly improving.

In China, a newly issued document has marked the milestone. Chinese stock exchanges issued the Guidelines for Self-Regulation of Listed Companies -- Sustainability Report (Trial) in April 2024. Before its release, China's domestic climate information disclosure mainly focused on managing key polluting enterprises and pilot projects of financial institutions, lacking applicable references for listed companies. The Guidelines provide a reference template for the selection of sustainability information disclosure standards for domestic enterprises. It adopts the principle of dual materiality by requiring listed companies to disclose ESG information regularly and comprehensively, taking into account the actual development stage of domestic companies while aligning with the international consensus.

Regarding climate change, the Guidelines put forward 8 requirements in Chapter III, Environmental Disclosure, proposing both voluntary and mandatory requirements to guide listed companies to follow the detailed disclosure framework and perspectives including climate change adaptation, transition plan, carbon emission disclosure, etc. It reflects China's determination to actively respond to climate change, encourage companies to assume social responsibility, and promote high-quality economic and social development.

The disclosure requirements on climate change in the Guidelines mainly include Article 21 to 28, covering specific disclosure requirements on framework, climate change adaptation, climate transition, carbon emissions, carbon reduction, etc. Though a more detailed reference guide has not yet been released, the framework, material topics and core elements of the Guidelines already reflect the consideration of benchmarking international standards while adapting to local development realities. It will help improve the quality and pertinence of listed companies' sustainability reports and the specificity and detailedness of the report content. Overall, the Guidelines will make the preparation of reports more standardised and accurate and further enhance the comparability and understandability of the reports.

Regarding the disclosure framework, the Guidelines are broadly consistent with TCFD and IFRS S2. They all construct reference frameworks for corporate climate-related information disclosure from the perspectives of governance, strategy, risk management, metrics and targets, etc. However, IFRS S2 includes "opportunity management" under the "strategy" theme, reflecting the company's insight and identification of climate-related opportunities in strategy formulation. The Guidelines classify this as "Impacts, Risks, and Opportunities Management", emphasizing that both risk prevention and control and opportunity management are important. When facing challenges such as environmental changes, companies should not only take the initiative to control risks and related impacts but also actively explore development opportunities.

Table 1: Comparison of Disclosure Framework of IFRS S2 and the Guidelines

Regarding climate adaptation, the Guidelines are built upon the current development stage and, therefore, adopt a combination of mandatory and voluntary disclosure. Firstly, it requires the disclosing entity to, in the context of the climate risks and opportunities it has identified, assess the extent to which its strategies, business models, and other similar aspects are adapted to climate change. Secondly, it encourages those disclosing entities that are able to assess their climate adaptation through scenario analysis and disclose the fundamental assumptions and procedures of such scenario analysis. 

Overall, the concept of climate adaptation in the Guidelines is consistent with international initiatives, although some differences exist under the requirement of scenario analysis disclosure. IFRS S2 requires companies to use scenario analysis to assess business climate resilience. The US SEC rules require a registrant that uses scenario analysis to disclose the scenarios considered, including the parameters, assumptions, analytical choices, and the projected principal financial impacts on the registrant's business strategy under each scenario. The Guidelines' voluntary requirements take into account the cost of disclosure and the current climate model-building difficulty and echo the General Provisions it states at the beginning, that is, "a disclosing entity shall employ methods in line with its capabilities, the results of its previous works and its resources to collect information that can be both reasonably accessible and affordable".

Regarding climate transition, the Guidelines are substantially consistent with IFRS S2, requiring the disclosing entity to disclose its transition plans, actions, and progress in responding to climate risks and opportunities. Firstly, the simultaneous mandatory disclosure of transition plans, measures and progress responds to the market's call for transparency, preventing greenwashing and combating false claims. The commitments or goals disclosed by the company should be supported by specific action plans, and companies cannot carry out transitions based on unproven technologies, unrealistic assumptions, or plans without resource allocation. Secondly, for listed companies that have not yet met the disclosure requirements or have not set up a transition framework, the Guidelines provide an essential reference for carrying out transition activities.

Table 2: The specific requirements under the Guidelines' Article 23

Regarding carbon emissions, firstly, the Guidelines further clarify disclosure details, requiring the entities to calculate the disclosed total GHG emissions in the reporting period and convert different GHG emissions into metric tons of carbon dioxide equivalent, significantly improving the comparability and transparency of carbon data. Secondly, it puts forward mandatory disclosure requirements for Scope 1 and Scope 2 emissions and encourages qualified entities to disclose Scope 3 emissions. It also encourages entities that are able to engage a third party to audit or provide assurance on the GHG emissions data and other relevant figures. Thirdly, it requires the disclosure of the standards, methods, assumptions, or calculation tools used for GHG emissions accounting and the relevant changes. The rules will strengthen the quality of information on carbon emissions of listed companies. Fourthly, it encourages providing GHG emissions details regarding operational units or facilities, countries or regions, and sources. It also provides a window for stakeholders to understand the emission situation of enterprises in detail.

Compared to IFRS S2 and US SEC rules, the Guidelines appropriately consider local carbon emission disclosure performance to improve the feasibility and flexibility of the standard implementation. The 2022 reporting period data show that only about 740 listed companies in the A-share market have publicly disclosed carbon emission data, and the rate is less than 15%. At this stage, mandatory disclosure of Scope 3 data may put greater cost pressure on corporate data collection and analysis. The practical challenges of value chain identification, inconsistent calculation assumptions and data authenticity risks will also reduce the applicability of such data. The Guidelines have not further specified the GHG accounting method, and it is expected that with the standardization of domestic methods and tools, corporations will have a more detailed GHG accounting toolbox when referring to the Guidelines for disclosure.

Table 3: Comparison of the Guidelines' Article 24-26 with IFRS S2 and US SEC Rules

Regarding carbon emission reduction, the Guidelines require to disclose entities' participation in the various emissions reduction initiatives, emissions reduction targets and measures (e.g., management strategies, funding, development of technologies) and the outcomes., as well as for each scope level, the amount of GHG emissions directly reduced by such emissions reduction measures as redesigning production procedures, updating equipment, improving manufacturing processes, switching fuels, etc. Specifically, the Guidelines require the disclosure of registration and trading activities related to national projects for voluntary GHG emissions reduction and CCER. In IFRS S2, the requirement is to disclose the planned use of carbon credits to offset GHG emissions to achieve any net GHG emissions target. Besides, the Guidelines state that the disclosure of new technologies, products, and services that contribute to decarbonization and carbon neutrality and the related R&D progress shall be objective and prudent.

Overall, the Guidelines comprehensively combine international consensus and local reality, fully consider the capabilities of listed companies, market institutions and regulators, and take a step-by-step, orderly and differentiated approach to strengthen sustainability information disclosure. The release of the Guidelines provides a standardised framework for information disclosure and also lays a solid foundation for listed companies to achieve high-quality development.

The release of the Guidelines has provided an important reference for companies, and it is foreseeable that climate information disclosure will be significantly improved. Before the release of the Guidelines, domestic climate information disclosure was gradually strengthening, but it was still insufficient. As of May 2024, 2,119 A-share companies have disclosed their 2023 social responsibility reports, and 910 companies have disclosed carbon emission data. According to CDP's 2023 questionnaire statistics, current corporate disclosures focus mainly on Scope 1 and 2 emissions. Less than a quarter of companies use scenario analysis methods. It can be seen that the "voluntary" rather than "mandatory" disclosure of Scope 3 emissions and scenario analysis in the Guidelines is also more in line with the reality of the current disclosure performance.

Chart 2: Disclosure of ESG Reports and Carbon Emission Data in the A-share market 

(Source: WIND, CSI)

Chart 3: Carbon Disclosure of Chinese Companies Participating in CDP 2023 Climate Change Questionnaire

(Source: CDP, CSI)

In selecting companies for mandatory disclosure, the Guidelines fully consider the strength and disclosure capabilities of different companies, urging large-cap listed companies to actively fulfil their social responsibilities while providing sufficient transition period and case references for small and medium-sized companies, thus further motivating companies to participate in sustainability information disclosure. CSI ESG statistics show that as of May 2024, about 450 A-share companies meet the mandatory disclosure requirements, accounting for 60% of the A-share market value. Central and local SOEs account for about 43% of the number and 36% of the A-share market value. Private enterprises account for about 41% of the total number and about 15% of the A-share market value. Based on the 2022 reporting period data, the carbon emission disclosure rate of SOEs in mandatory disclosure reached 68%, private enterprises reached 52%, and the proportion of enterprises with carbon emission reduction measures reached 94%, much higher than the average level of A-shares.

Chart 4: The Types and Industries of Mandatory Disclosure Companies

 (Source: WIND, CSI)

Many of the companies subject to mandatory disclosure are in the Industrials, IT, Healthcare, Financials and Materials sectors, accounting for 77% of the number (within the mandatory disclosure scope), and 39% of the A-share market value. The proportion of companies subject to mandatory disclosure in their respective industry is generally in the range of 8% to 15%. The 2022 reporting data shows that the proportion of companies disclosing carbon emissions data within the mandatory disclosure scope is higher than the overall industry performance, particularly in Financials (75%) and Consumer Staples (68%).

Chart 5: Carbon Emission Performance of the Companies Subject to Mandatory Disclosure

 (Source: WIND, CSI)

The ESG and climate risk management of the companies subject to mandatory disclosure is relatively outstanding. The CSI ESG statistics show that 95% of the companies within the scope of mandatory disclosure are rated BB or above, and 92% score more than 0.6 points (out of 1 point) on the climate change issue.

Chart 6: The CSI ESG Ratings and Climate Change Theme Performance of the Companies Subject to Mandatory Disclosure

(Source: CSI)

The release of the Guidelines has created essential conditions for the innovative application of climate information data. In the global context, climate investment and financing still need to be scaled up to achieve the goals of the Paris Agreement. There is still a need for greater coherence in the raising and use of funds and a great potential for domestic climate-themed financial products. To actively seize the new opportunities of climate change and to help companies make the transition, CSI will continue to promote the development of ESG business and index services to serve national strategies.

Firstly, CSI ESG Ratings take into account both the disclosure requirements of the Guidelines and the actual disclosure performance of companies. The market application of CSI ESG Ratings and climate-related data products continues to improve. CSI ESG Ratings include considerations such as climate change and environmental opportunities. The data is widely used in index and portfolio construction, providing fundamental support for climate investment, financing and sustainable development investments to help companies and industries actively transform and upgrade. At the same time, where data disclosure is limited, CSI ESG provides a viable way to measure corporate carbon performance through tools such as carbon emission estimation.

Secondly, CSI develops Corporate Climate Transition Scores, focusing on the risks faced by companies in carbon-intensive industries during the climate transition process and the management and development opportunities to address the risks. The scores comprehensively measure the effectiveness of companies in optimising production and operating methods, exploring zero-carbon technology innovation, implementing low-carbon transition, and providing analytical tools for implementing green finance and transition finance.

Thirdly, CSI actively releases climate-themed ESG indices, including the CSI 300 Carbon Neutrality Index, CSI Guoxin Central-SOEs Modern Energy Index, CSI Carbon Neutral 60 Index, etc. In total, CSI has launched 142 Sustainability/ESG indices. Currently, 87 index products track the CSI Sustainability/ESG indices with a total AUM of RMB 84.01 billion.

As a leading index provider in China, CSI will continue to explore the development and innovation of climate-related financial instruments and support risk prevention in the financial market. CSI will actively participate in communication with market institutions, continue to promote the implementation of the Guidelines and support the high-quality development of listed companies. CSI will continue to improve the CSI ESG Ratings and develop diverse ESG indices to provide more sustainable investment benchmarks and support national strategies.