ESG information disclosure under board leadership

Environmental, social and governance (ESG) rating indices contribute to helping investors and stakeholders identify opportunities for managing long-term investment risks, providing a new perspective for evaluating and examining corporate assets.

The board of directors, as the core of corporate governance, plays a crucial role in integrating ESG matters into the overall corporate governance system, seizing opportunities to attract external financing and enhance management efficiency.

SIGNIFICANCE TO CORPORATE GOVERNANCE

Mandatory requirements for ESG-related information disclosure have been instituted in domestic and international capital markets. International organisations and institutions such as the European Parliament, the European Council, the US Securities and Exchange Commission, and the Stock Exchange of Hong Kong (SEHK) have issued technical standards or guidelines for ESG disclosure.

A-share listed companies’ annual reports, as well as the social responsibility reports of the SSE and the Shenzhen Stock Exchange, require the board of directors to establish institutional arrangements for ESG.

China’s Ministry of Ecology and Environment, the China Securities Regulatory Commission, and the China Banking and Insurance Regulatory Commission have also issued departmental regulations to standardise the lawful disclosure of environmental information by enterprises, and their supervision and management activities.

According to the SEHK’s 2022 Analysis of ESG Practice Disclosure, the disclosure rate of board oversight regarding ESG matters increased from 31% in 2018 to 97.5% in 2022, while that of ESG-related management policies and strategies increased from 14% in 2018 to 95.5% in 2022.

The ESG evaluation index and corporate economic performance are positively correlated. According to the China ESG Development White Paper (2021), ESG-related indices have demonstrated a positive performance trend of risk performance in the past three years in terms of return, risk and risk-adjusted equity.

These ESG indices have outperformed benchmark indices such as the CSI 300, the CSI 500 and the CSI 800. Data from the Global Sustainable Investment Alliance reveals that sustainable investment assets reached a staggering USD35.3 trillion by the end of 2020, marking a 15% increase since 2018 and accounting for 35.9% of the total global assets under management. The ESG index of a company has become a crucial benchmark for investors and stakeholders to assess a company’s governance.

REQUIREMENTS FOR BOARDS

China concept stocks and H-share listed companies are required to disclose independent ESG reports. Companies such as Alibaba and JD.com have implemented the four-dimensional framework of the Task Force on Climate-Related Financial Disclosures and provided detailed disclosures. According to the 2022-2023 Hong Kong Capital Market ESG White Paper, 1,265 H-share listed companies released independent ESG reports separately from annual reports for the 2021 fiscal year, with an independent disclosure rate of 51.2%.

A-share listed companies have been establishing dedicated ESG committees at the board level. Dozens of A-share listed companies, including Sinopec, have set up ESG-specialised committees, with the board chairman serving as the committee’s chairman or director.

Both domestic and international rating agencies consider the board of directors as an important component in their ESG rating criteria, setting board-related corporate governance indicators. MSCI, for example, values the linkage between the board and executive compensation and sustainability.

Moody’s indicators include board structure, policies and procedures. SynTao Green Finance considers information disclosure, independence of the board, executive compensation and board diversity as its indicators, while Harvest Fund Management focuses on board structure and supervision.

INSTITUTIONAL DESIGN AT BOARD LEVEL

1. Board diversity. The board of directors should be diverse, including female directors, independent directors, and directors with specialised ESG skills and backgrounds to ensure effective oversight of ESG-related matters.
2. Establishment of ESG committees or working groups. Clearly define the role and responsibilities of the ESG committee to minimise overlapping or dispersed responsibilities among various specialised committees. Maintain smooth communication between different committee agendas and ensure full board engagement in critical issues. Board members can serve on multiple committees, such as the strategic committee responsible for ESG-related financing and investment decisions, the audit committee overseeing risk management, and the compensation and assessment committee incorporating ESG priorities into compensation and incentives.
3. Linking board compensation to ESG targets. According to data from the S&P 500 index, the proportion of companies that link executive compensation to some form of ESG performance increased from 66% in 2020 to 73% in 2021. According to the FTSE 100 index, 45% of companies have incorporated executive compensation into ESG indicators, and 78% of board members and executives believe that strong ESG performance contributes to enhancing core company value and/or financial performance. When linking board compensation to ESG targets, it is important to ensure that ESG goals are auditable and regularly reassessed.

MANAGEMENT SYSTEM CONSTRUCTION

Categorise and define ESG responsibilities:

1. Environmental. Supervise matters related to operational impact on the environment such as greenhouse gas emissions and energy consumption.
2. Sustainability. Monitor the company’s efforts to establish a sustainable business model, emphasising the sustainability of future business and/or current operations.
3. Employee health and safety. Oversee employee health and safety plans and measures.
4. Corporate social responsibility. Supervise general corporate social responsibility efforts.

Refer to the SEHK’s 2022 Analysis of ESG Practice Disclosure and consider establishing ESG-related management systems in the following areas:

• Clearly define criteria, rules and processes for determining significant ESG issues, including: the frequency and format of reports from specialised committees or management to the board of directors; the frequency of board discussions on such issues; the internal and external resources and expertise available for the ESG management process; and aligning governance with the company’s business strategy.
• Monitor the progress of ESG-related goals and indicators, assessing the effectiveness and efficiency of measures taken to address specific ESG risks, including: measurement systems or industry benchmarks against which to evaluate progress; the process for data collection and verification; and compare data to historical records, and select benchmarks.

At the board level, optimising the layout of ESG is a necessary requirement for standardised corporate management. In terms of policy interpretation and system development, companies can seek professional guidance and advice from specialised rating agencies, accounting firms and law firms that possess relevant expertise and external resources.

Wang Kun is a partner and Gao Yi is an associate at Blossom & Credit Law Firm

Blossom & Credit
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Haidian District
Beijing 100086, China

Tel: +86 10 8287 0263
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电子信箱 ：

wangkun@baclaw.cn

gaoyi@baclaw.cn

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