ESG update

As awareness of environmental and social governance compliance grows in Asia, savvy enterprises are keeping abreast of evolving regulation

CHINA

PHILIPPINES

TAIWAN

China’s ESG rules approach maturity after 20 years

China’s first policy on environmental, social and governance (ESG) performance reporting – the Announcement on Corporate Environmental Information Disclosure – was issued by the State Environmental Protection Administration in 2003. It encouraged and supported enterprises to disclose environment-related information.

Twenty years later, last December, the State Council released its Opinions on Comprehensively Promoting the Construction of a Beautiful China. In article 24, section 9, the council explicitly called for an exploration of the evaluation of environmental, social and governance. The opinion marks the first appearance of the ESG concept in a central government-level document, which provides a clear indication that China supports the development of ESG.

Last year’s opinion endorsed ESG topics such as ecological environmental governance and green economic development into the Beautiful China initiative, which is helpful for clarifying ESG at a regulatory level in China. In turn, this effectively promotes the future implementation of ESG in China.

In May this year, the Ministry of Finance issued its draft Corporate Sustainability Disclosure Standards – General Guidelines for comment, symbolising the gradual establishment of a unified ESG disclosure standards regulatory regime in China.

The guidelines clearly define aspects such as scope of application, disclosure objectives, disclosure elements, and requirements on disclosure quality. They expand the application scope of ESG disclosure requirements from listed companies to non-listed companies, and from large enterprises to small/medium-sized enterprises.

The guidelines mandate enterprises adhere to the principles of reliability, relevance, comparability, verifiability, understandability and timeliness when making ESG-related disclosures. Additionally, they detail the definition, disclosure objectives and specific content requirements for four disclosure elements (governance, strategy, risk and opportunity management), as well as metrics and goals.

The guidelines address reporting periods, compliance statements, decisions on significant uncertainties, corrections of prior errors, and reporting format.

The release of the guidelines not only provides clear regulatory and institutional guidance for corporate ESG disclosure but also brings a comprehensive Chinese ESG disclosure framework aligned with international standards.

Into the market

The Shanghai, Shenzhen and Beijing stock exchanges have followed suit, issuing clear guidelines for ESG-related disclosures by listed companies. Under the supervision of the China Securities Regulatory Commission, the three exchanges formally issued respective Guidelines on the Sustainable Development Reporting of Listed Companies on 12 April this year, with effect from 1 May.

Certain listed companies fall under the exchanges’ guidelines and are mandatorily required to issue sustainable development reports:

1. Companies listed on the Shenzhen Stock Exchange and included in the Shenzhen 100 Index or the ChiNext Index;
2. Companies listed on the Shanghai Stock Exchange and included in the SSE 180 Index or the Star 50 Index; and
3. Companies dual-listed domestically and abroad.

The Beijing Stock Exchange, however, does not mandate such a disclosures requirement but listed companies may disclose voluntarily.

In terms of disclosure principles, the guidelines set a dual importance principle by giving equal weight to financial importance and impact importance. Based on the features of their own industries and business operations, listed companies should identify whether each topic in the guidelines has a significant impact (financial significance) on their business model, business operations, development strategy, financial status, operating results, profits, financial methods and costs in the short, medium and long term.

Companies must also identify whether their performance under each topic has a significant impact on the economy, society and environment itself (impact significance). Companies must explain their procedures for analysing the intensity of impacts.

In terms of timetable, company sustainable development reports must be prepared and approved by each company’s board of directors within four months of the end of each fiscal year and disclosed no earlier than the annual report. The reporting company and reporting period should be identical to the annual report.

As for the framework, companies are required to analyse and disclose sustainable development topics with financial significance, focusing on four core areas: governance, strategy, risk and opportunity management. For issues of impact significance only, companies must make disclosures against the specific provisions of the guidelines, ensuring that stakeholders can fully understand the context.

Since Chinese listed companies are still in the early stages of ESG disclosure from a regulatory standpoint, both the Shanghai and Shenzhen exchanges have set up transitional arrangements. Listed companies that fall under the disclosure requirements must release their 2025 sustainable development report by 30 April 2026. The Beijing Stock Exchange, however, has not specified the initial reporting period or made such transitional arrangements.

In terms of legal liability, the guidelines provide that, “if the disclosing company violates these guidelines, the exchange will take disciplinary measures or impose sanctions on a case-by-case basis”. This strengthens regulatory pressure on companies to a certain extent and provides a primary legal basis for the regulatory and disciplinary measures taken by regulatory authorities.

Nevertheless, since the guidelines do not prescribe exact legal consequences, requirements on the mandatory disclosure of sustainable development reports by Chinese listed companies are primarily declarative, rather than regulatory, in nature.

In practice, regulatory authorities lack a directly applicable legal basis to supervise and punish listed companies on grounds of violating mandatory disclosure obligations. The authorities can only regulate them by referring to the general rules of listed company information disclosure – namely, the Measures for the Administration of Information Disclosure of Listed Companies.

As the guidelines have just been implemented, there have so far been no applicable cases of penalties being imposed for violating disclosure provisions. Therefore, the regulatory regime needs to be furthered by the introduction of new rules of implementation.

Nevertheless, as the development of the regulatory regime is picking up pace, listed companies that are required to disclose should focus on their legal compliance under applicable disclosure rules.

Disclosing such information comprehensively, truthfully and accurately is not only an inevitable choice for companies in the context of preventing legal risks, but also a favourable method of demonstrating the potential value of the company.

Conclusion

To sum up, although the central government has yet to establish a unified or overarching regulatory regime on ESG matters, the promulgation of ESG policies is being driven as a top-down reform. There is growing attention being paid to corporate governance and sustainable development aspects at higher levels, especially concerning ESG issues.

At this stage, the guidelines issued by the three exchanges have endorsed leading international disclosure standards and can be considered in line with the regulations of major countries or regions, such as with the EU’s corporate sustainability reporting directive.

The guidelines will not impose additional compliance burdens on companies that are required to disclose sustainable development information. ESG reporting by mainland listed companies will gradually become a mainstream activity. This trend not only helps to regulate corporate governance and sustainable development responsibilities but also raises awareness of ESG issues across more industries in China.

Grandall Law Firm (Beijing)
9/F, Taikang Financial Tower, 38 North Road
East Third Ring, Chaoyang District,
Beijing 100026, China
Tel: +86 10 6589 0699
Fax: +86 10 6517 6800
Email: grandallbj@grandall.com.cn
www.grandall.com.cn

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ESG laws in the Philippines

Under the Philippine Development Plan (PDP) for 2023-2028, the National Economic and Development Authority aims to position the country as a prime destination for foreign investment in environmental, social and governance (ESG) investments and mitigating climate change.

As such, ESG regulations have been steadily gaining traction to foster ESG awareness and involvement by the private sector. The ESG regulations strive to keep up with global trends on sustainability reporting and raise corporate governance standards with global best practices.

Key government regulators such as the Securities and Exchange Commission (SEC), the central bank, Bangko Sentral ng Pilipinas (BSP), Insurance Commission (IC) and the Department of Environment and Natural Resources (DENR) are at the forefront of strengthening ESG compliance by the private sector.

Disclosure requirements

Sustainability reporting is covered by the Revised Code of Corporate Governance for both public and publicly listed companies (PLCs), namely SEC Memorandum Circular (MC) No. 19, series of 2016, and MC No. 24, 2019.

The SEC recommends disclosure of how covered companies manage ESG issues. PLCs, in particular, are required to attach an appropriate sustainability report together with annual reports (SEC MC No. 4, 2019).

A globally recognised standard or framework in reporting sustainability and non-financial issues is likewise recommended, such as the G4 Framework by the Global Reporting Initiative, the Integrated Reporting Framework by the International Integrated Reporting Council, and/or the Sustainability Accounting Standards Board’s Conceptual Framework (principle 10, SEC MC No. 19, 2016).

A “comply or explain” approach is implemented where covered companies are required to identify any areas of non-compliance, and explain reasons for non-compliance. The IC adopts the same approach in requiring IC-regulated entities – such as insurance/reinsurance companies and brokers, pre-need companies and health maintenance organisations – to disclose its ESG compliance (IC Circular Letter No. 2020-71).

In the banking sector, banks are expected to embed sustainability principles – including those covering environmental and social risk areas – in their corporate governance framework, risk management systems and strategic objectives. These should be consistent with their size, risk profile and complexity of operations.

Under the BSP’s Manual of Regulations for Banks (MORB), banks are required to approve Environmental and Social Risk Management System policies, procedures and tools to identify, assess, monitor and mitigate exposures to environmental and social (E&S) risks.

The central bank requires banks to disclose in their annual reports an overview of the E&S risk management system, a breakdown of E&S risk exposures and their impact on the bank, and the progress of initiatives undertaken to integrate sustainability principles in their governance framework, a risk management system, business strategy and operations (section 153, MORB).

Greenwashing

Aware of the appeal of companies’ ESG commitments to investors, the SEC has taken a protective stance to ensure that investors are safeguarded from greenwashing.

No investment company other than a Sustainable and Responsible Investment (SRI) Fund shall use the term “ESG”, “sustainability” or words of similar import in its name and/or marketing materials, unless otherwise permitted by the SEC (section 2 c.ii, SEC MC No. 11, 2022).

To qualify as an SRI fund, the investment company must adopt one or more sustainability principles or ESG factors as its key investment focus and appropriately reflect such in its registration statement or prospectus (section 2.a, SEC MC No. 11, 2022).

One or more strategies may be adopted by the investment company to achieve its investment objective. However, an investment company shall not qualify as an SRI fund if a negative or exclusionary screening or ESG integration is adopted only for financial returns and not accompanied by other sustainable investment objectives (section 4, SEC MC No. 11, 2022).

The SEC sets the expected exposure or minimum asset allocation percentage that is consistent with the SRI fund’s sustainable investment objective to at least two-thirds of its net asset value (section 2.b, SEC MC No. 11, 2022).

Breach of such ESG investment threshold – or inconsistency of the fund’s underlying investments with its sustainable investment objective – is reportable to the SEC. The fund manager is expected to rectify such breach or inconsistency within 30 business days from the date of discovery. Failure to rectify may disqualify the investment company as an SRI fund (section 9, SEC MC No. 11, 2022).

Meanwhile, investments that do not wish to be a qualified SRI fund but intend to include sustainability or ESG factors or considerations in marketing materials are required to disclose additional information, including the percentage of the non-SRI investment company’s net asset value expected to be allocated to ESG investments, and how the non-SRI fund has attained its ESG or sustainable investment objectives during the reporting period (section 12, SEC MC No. 11, 2022).

Violating these rules can result in imposition of a monetary penalty accumulating daily over continuing violation, depending on the nature and extent of the violation. The investment fund may likewise be suspended and its registration statement revoked, without prejudice to any other actions and sanctions that may be taken or imposed under other applicable laws or regulations (section 13, SEC MC No. 11, 2022).

Sustainable financing

The BSP has approved measures to scale up sustainable finance in the Philippines. In 2023, the BSP increased the single borrower’s limit (SBL) to eligible green or sustainable projects by an additional 15% on top of the prescribed SBL of 25% (BSP Circular No. 1185, 2023). In 2024, the central bank established the Philippine Sustainable Finance Taxonomy Guidelines for banks to observe when extending credit or sustainable financial products and services (BSP Circular No. 1187, 2024).

Producer responsibility

The Extended Producer Responsibility (EPR) Act of 2022 obliges enterprises that generate plastic packaging waste to register and submit to the DENR-led National Solid Waste Management Commission an EPR programme for plastic packaging to achieve efficient management of plastic packaging waste and plastic neutrality through efficient recovery and diversion schemes (section 44-E, Republic Act (RA) No. 9003, as amended).

Among information to be included in the programme are the specific type of packaging materials and product brands for which they are used, the plastic packaging footprint, plastic waste diversion target, status of implementation, geographic implementation or rollout plan, and the status of compliance.

Tax incentives may be given to incentivise initiatives under the EPR system and exact compliance from obliged enterprises subject to standard processes in the identification of qualified activities under the Strategic Investment Priority Plan.

The EPR programme costs are considered as necessary business expenses, which are deductible from annual gross income in accordance with the National Internal Revenue Code (section 45, RA No. 9003, as amended).

The regulations also require submission of an annual EPR Compliance Audit Report prepared by an independent third-party auditor to certify the veracity of the reporting plastic product footprint generation, recovery and EPR programme compliance (section 19.1.1, DENR administrative order No. 2023-02).z

Failure to register an EPR programme or comply with the targets for recovery of plastic products shall be penalised with monetary penalties ranging from PHP5 million (USD86,000) to twice the cost of recovery and diversion of the footprint or its shortfall, as well as automatic suspension of the obliged enterprise’s business permit in the event of a third offence (section 49, RA No. 9003, as amended).

Low carbon bill

Under the current 19th Congress, a Low Carbon Economy Bill has been filed and is pending deliberation. Section 19 of the proposed legislation seeks to impose a yearly cap on greenhouse gases (GHG) of the covered sector with the highest GHG and most cost-effective opportunities to avoid or reduce emissions.

If the bill is passed into law, GHG emissions allowances will be allocated by the DENR to covered sectors. The allowance shall authorise the emission of one metric of carbon dioxide, or equivalent in the case of global warming pollutants other than carbon dioxide (section 20 of the bill).

The Low Carbon Economy Bill also seeks to establish a carbon trading system under which allowances issued pursuant to law may be sold, exchanged, purchased or traded, subject to further policy guidelines.

Outlook

Although government regulators have issued various ESG-related regulations in recent years, it is evident that the majority of these regulations are focused on reporting and disclosure requirements.

ESG awareness across corporations and organisations in the Philippines may be further enhanced by laws and regulations that would require them to take a more active approach towards ESG.

The EPR Act of 2022 and proposed Local Carbon Economy Law are steps in the right direction towards this end.

Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW)
22F, ACCRALAW Tower, 2nd Avenue corner 30th Street,
Crescent Park West, Bonifacio Global City,
1635 Taguig City
Metro Manila, Philippines
Tel: +632 8830 8000
Fax: +632 8403 7007 / +632 8403 7009
Email: accra@accralaw.com
www.accralaw.com

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Taiwan shifts up an ESG gear in 2024

From newly enacted and amended environmental, social and governance (ESG) regulations, it is clear that Taiwan’s lawmakers have singled out carbon reduction and sustainability disclosure for priority over all other environmental, social and governance issues, and are determined to tackle the two head-on.

Taiwan’s main ESG law, the Climate Change Adaptation Act, took effect on 15 February 2023, and sets 2050 as the deadline for achieving carbon neutrality, establishing a carbon pricing system to facilitate the goal.

The act authorises the government to collect carbon fees and offer economic incentives – including carbon credits and preferential carbon fee rates – to encourage companies to reduce carbon emissions. ESG initiatives have shifted up a gear this year on several fronts.

Carbon trading

Regulations on domestic carbon credit trading took effect on 15 August 2024, creating the legal framework for Taiwan’s first domestic carbon credit exchange platform. After its launch on 2 October, all carbon credits approved by Taiwan’s Ministry of Environment (MOE) will be traded on the platform.

Factory operators and high-rise construction project owners can apply for carbon credits towards newly generated emissions or carbon fees by obtaining them on the platform or earning them by implementing carbon offset programmes, which can include the use of low-carbon fuels, adoption of negative emission technologies, improved energy efficiency, use of recycled energy, and manufacturing upgrades.

Carbon fees

Meanwhile, regulations governing carbon fee collection were enacted on 29 August 2024, making carbon pricing a reality. Under the regulations, the carbon fee scheme first targets enterprises emitting more than 25,000 metric tonnes of carbon dioxide equivalent per year. Its radar includes 281 enterprises in Taiwan, accounting for 500 factories.

A carbon fee rate is expected at the end of 2024, and to apply from 2026. Enterprises that propose emission reduction programmes will receive preferential rates if approved by the MOE.

Sustainability reporting

To promote transparent disclosure of sustainability practices by Taiwan’s listed and over-the-counter (OTC) companies, sustainability reporting guidelines were updated in January 2024. These require that all listed and OTC companies prepare sustainability reports in accordance with the international Global Reporting Initiative standards, starting in 2025.

They also recommend companies to apply Sustainability Accounting Standards Board standards when preparing sustainability reports. Furthermore, the amendment to annual report guidelines for public companies, dated 25 November 2022 requires that public companies meeting statutory criteria disclose climate-related information and greenhouse gas inspection results in their annual reports, along with carbon reduction goals, strategies and action plans.

Despite criticism from environmental NGOs that the emission threshold subjecting companies to carbon fees is still too high, the laws on carbon reduction and corporate disclosure of sustainability and climate-related information have become more stringent in Taiwan. Besides exploring possible carbon offsetting/reduction measures to lower carbon emissions/fees, companies are advised to prepare for the following challenges:

(1) Full sustainability disclosure.
Now that submitting sustainability reports has become a legal obligation for listed and OTC companies, the government is expected to crack down harder on so-called “greenwashing”. Legal experts are debating the possible liabilities if any part of a sustainability report or annual report is judged untrue.

As false disclosure or fraudulent concealment can be a crime under Taiwan’s Criminal Code and Securities and Exchange Act, companies obliged to disclose sustainability and climate-related information should ensure all information is accurate and complete.

(2) Operational data collection.
Most information in sustainability reports and annual reports comes from a company’s daily operations, so the issue of how to collect and truthfully disclose all operational data is a pressing concern for companies in Taiwan.

This is because sluggish information flow is a feature of bigger companies, due to passing through many hands before arriving on the chief executive’s desktop, if it gets there at all. In some cases, operational information is kept by frontline operators, never forwarded anywhere else. Companies will have to optimise their information flow to ensure they can efficiently collect all information that must be disclosed under the law.

Key takeaway

Legislative momentum in Taiwan is pushing for carbon neutrality in 2050, but at the same time the government is holding fast to its nuclear-free policy, which critics say may handicap the ambitious endeavour.

Whether nuclear power will one day return to the energy mix is hard to forecast, but it would be prudent for companies in Taiwan to track developments in ESG laws, taking all possible measures to curb carbon emissions and meet the sustainability disclosure requirements.

Lee and Li, Attorneys-at-Law
8F, No. 555, Sec. 4, Zhongxiao E. Rd., Taipei 11072, Taiwan
Tel: +886-2-2763-8000
Fax: +886-2-2766-5566
Email: attorneys@leeandli.com
http://www.leeandli.com

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