The new Securities Law, effective from 1 March 2020, adds a separate section on “information disclosure”, imposing stricter requirements for listed companies. In addition, the Securities Law confirms that information disclosure is the core requirement of the registration-based IPO system on the Shanghai Stock Exchange (SSE) Star market. Therefore, issuers and listed companies are subject to much stricter information disclosure requirements.
Piling additional disclosure obligations on issuers and listed companies is intended to help the public make a better overall assessment of issuers and listed companies. In assessing a listed company, investors and the general public should take into account corporate social responsibility (CSR), in addition to the operating capability of the listed company and the issuer.
According to the Research Report on the ESG Evaluation System of Chinese Listed Companies – issued by the Asset Management Association of China (AMAC), the Research Institute of Finance, and the State Council’s Development Research Centre (DRC) – a company shall, while creating economic value, also shoulder its responsibility for the community, the larger society and the environment. In the pandemic of COVID-19, it is particularly important for listed companies to undertake the above-mentioned responsibilities.
During the pandemic, many listed companies have adjusted or transformed their production lines to produce medical supplies and personal protective equipment, initiatively taking on the important task of providing vital medical supplies for the areas hit hard by the virus.
Outside China, LVMH also revamped its production lines during the outbreak of COVID-19 and submitted its formula for hand sanitisers to the French Ministry of Health. Another well-known company, Ralph Lauren, is manufacturing face masks through its charitable arm. Although these listed companies may be bound by laws and regulations in making operational or production adjustments, their significance to national and public security is self-evident.
The new Securities Law does not mandatorily require issuers and listed companies to disclose their CSR performance to the public. However, China’s Code of Corporate Governance of Listed Companies requires that: “Listed companies should actively fulfil their corporate social responsibilities and form sound corporate governance practices. While maintaining their sustainable development, improving their operating results and safeguarding the interests of shareholders, listed companies should fulfil their corporate social responsibilities in terms of community welfare, disaster relief and public well-being.”
The Rules Governing the Listing of Stocks on the Science and Technology Innovation Board of Shanghai Stock Exchange, as revised in April 2019, add a separate section for CSR, requiring that, “companies listed on the Star Market should actively assume CSR, disclose CSR in their annual reports, and both prepare and disclose a CSR report, sustainability report and environmental responsibility report where necessary. In case of any major event that violates its social responsibility, the listed company shall fully assess and disclose its potential impact in a timely manner, explain the causes, and provide solutions.”
In addition, changes to environmental factors such as water supply, climate, and public health and safety have posed common challenges to all the companies in every industry, and the listing rules require listed companies to incorporate, “ecological conservation and environmental protection requirements into the development strategy and corporate governance process, and perform a series of environmental responsibilities according to their own production and operation characteristics, and actualities”.
Many international organizations and rating agencies have established their own assessment systems for the CSR of listed companies, and regard CSR as an important part of the corporate governance of listed companies. In addition, more and more stock exchanges have incorporated CSR into their disclosure requirements on listed companies.
For example, the Stock Exchange of Hong Kong published the Consultation Conclusions on the Review of the Environmental, Social and Governance Reporting Guide and Related Listing Rules in late 2019. The new version of the guide and related listing rules, effective for financial years commencing on or after 1 July 2020, require listed companies and issuers in Hong Kong to disclose their ESG reports on an annual basis, and for the same period covered in their annual reports.
Given the COVID-19 outbreak, introducing a CSR assessment system for listed companies further helps the public to consider issuers and listed companies in all respects, rather than simply their operational capability. Regarding how to disclose CSR performance and establish a sound disclosure system under the new Securities Law, the author believes this will gradually be made clear in the course of implementing the new Securities Law.
The author believes that those listed companies assessed as highly socially responsible deserve preferential government policies on, for example, taxation and refinancing. Listed companies’ reasonable business adjustments in response to the crisis regarding public security, CSR or environmental responsibility, including but not limited to the expansion of business scope and the use of intellectual property rights, should be granted special exemption or recognition in accordance with national laws and policies.
It is clear that public health and safety, CSR, and environmental responsibility are important issues that a listed company cannot afford to ignore in its course of business operation. Strengthening dedication to social and environmental responsibilities is an important driving force of listed companies to seek higher profitability and sustainability.
The global COVID-19 outbreak brought great challenges to all economies and their pubic security globally. If the government and people in a country are unable to cope with the adjustments caused by public security and environment, listed companies are bound to feel a huge impact on their business operations and long-term interests. Therefore, listed companies should strengthen their ESG commitment and better perform their disclosure obligations regarding these responsibilities.
Willow Wei is a counsel at Dentons