As of August 2024, during the last 12 months, China has continued to increase its efforts in nationwide ESG policymaking. The State-owned Assets Supervision and Administration Commission (SASAC), the Ministry of Finance, stock exchanges and local government authorities have issued ESG policies and guidelines in their specific sectors, covering a wide range of topics and discussing comprehensive contents. For instance, in December 2023, the State Council issued the Opinions on Comprehensively Promoting the Construction of a Beautiful China, emphasizing the acceleration of the green transformation of development methods, actively and steadily promoting carbon peak and carbon neutrality, comprehensively encouraging green and low-carbon development in key areas, and promoting the conservation and intensive use of various resources. This proposed exploring the development of environmental, social and corporate governance evaluations, comprehensively promoting the construction of a beautiful China, and accelerating the modernization of harmonious coexistence between human and nature. In March 2024, the People’s Bank of China issued the Guiding Opinions on Further Strengthening Financial Support for Green and Low-carbon Development, proposing to guide listed companies to disclose sustainable development information and support credit rating agencies to incorporate ESG factors into their credit rating methods and models, with the goal of building a financial support system for green and low-carbon development in China over the next five years.

In April 2024, three Chinese Stock Exchanges, i.e. Shanghai Stock Exchange, Shenzhen Stock Exchange and Beijing Stock Exchange, respectively released their Guidelines for Self-regulation of Listed Companies - Sustainable Development Report (Trial). The three guidelines for the first time explicitly require the sample companies included in the major stock indexes in China (including the SSE 180 Index, SSE Star Market 50 Index, Shenzhen 100 Index and ChiNext Index) and companies concurrently listed both domestically and abroad to disclose their 2025 sustainable development reports (no later than 2026), and encourage other listed companies to disclose on a voluntary basis.

In June 2024, the State-owned Assets Supervision and Administration Commission of the State Council issued the Guiding Opinions on the High-standard on Fulfilling Social Responsibilities According to High Standards by Central Enterprises in the New Era, requiring that ESG work be included in the overall management of social responsibility work, and that enterprises actively grasp and respond to the opportunities and challenges brought by the development of ESG. In these guiding opinions, it is recommended that the listed holding companies shall implement high-standard environmental management requirements focusing on ESG issues, actively fulfill social responsibilities, improve corporate governance, strengthen high-level ESG information disclosure, continuously improve ESG governance capabilities and performance levels and enhance value recognition in the capital market.

Besides the above nationwide policies, China is also gradually building ESG policies and guidelines that are in line with local conditions. ESG-related policies have also been introduced at the local level. They are mainly concentrated on financially developed regions such as Shanghai and the surrounding Yangtze River Delta urban agglomeration, Guangzhou, Shenzhen and the surrounding Pearl River Delta urban agglomeration, and the Hong Kong Special Administrative Region. The policy content mainly involves the environmental information disclosure of financial institutions within the jurisdiction.

ESG in China is not officially defined in statutory laws and regulations, but it is reflected in many forms. ESG in China comprises of three inherent elements: environmental protection, social responsibility and corporate governance. Since the concept of sustainable development was introduced to China decades ago, China has always taken ESG as one of its development goals. After the introduction of dual carbon goals, ESG practice became more popular among investors and legal practitioners in China. In practice, Chinese government and companies primarily concentrate on reducing carbon emissions as their ESG initiatives.

In China, the major laws specifically related to ESG primarily focus on environmental protection. Examples of nationwide “E” laws include the Environmental Protection Law (amended in 2014), the Ocean Environmental Protection Law (amended in 2023), the Law on Prevention and Control of Atmospheric Pollution (amended in 2018), the Environmental Impact Assessment Law (amended in 2018), the Law on Soil Pollution Prevention and Control (enacted in 2018), and the Law on Prevention and Control of Water Pollution (amended in 2017).

Additionally, the Work Safety Law (amended in 2021) is an example of the “S” laws in China. There are other relevant regulations concerning ESG themes, including those issued by government departments, e.g the China Securities Regulatory Commission (CSRC) and regulatory agencies such as the stock exchanges. They introduced requirements for listed companies to integrate the concept of sustainable development into their daily operations and development strategies, mandating timely disclosure of ESG information.

Most “S” and “G” related legislation is incorporated into the clauses of various laws rather than existing as separate statutes.

For example, the Labor Law and Labor Contract Law, along with the Social Insurance Law and Trade Union Law, regulate employment relationships and protect workplace rights, social security and the right of association.

Other laws, such as the Company Law, the Anti-Unfair Competition Law and Antitrust Law, address governance in certain contexts. Among them, the Anti-Unfair Competition Law restricts business operators from offering bribes, disrupting market competition or undermining the legitimate rights and interests of consumers or other operators. Similarly, the Antitrust Law aims to improve social benefits by preventing the adverse impacts of monopolies and providing a conducive environment for innovation and consumer protection, which contributes to the sustainability of China’s economy and society.

Additionally, laws such as the Criminal Law, the Law on the Protection of Rights and Interests of Women and the Law on the Protection of Minors also touch on ESG themes to some degree.

Enforcement related to ESG comprises a wide range of activities across various legal departments, involving civil, administrative and criminal liabilities. With regard to the environmental aspect, in September 2023, the Ecological Environment Bureau of Zhangzhou City, Fujian Province, inspected an enterprise providing environmental quality control services for sewerage factories and found discrepancies between the sampling time of the pollutant examined in its self-monitoring report and the factory surveillance video. The testing company violated the law by failing to implement proper sampling and falsifying data, leading to criminal liability for providing false certification documents. The case was transferred to the police by the local Ecological Environment Bureau for further criminal investigation in July 2024, and the case was still under investigation as of November 2024.

“S” theme cases can be found in many aspects of litigation, including under the Antitrust Law. On December 13, 2023, the Shanghai Municipal Market Regulation Administration imposed administrative penalties on four companies for abusing their dominant market positions: SPH No.1 Biochemical & Pharmaceutical Co., Ltd., Wuhan Huyou Pharmaceutical Co., Ltd., Wuhan Kede Pharmaceutical Co., Ltd. and Hubei Minkan Pharmaceutical Co., Ltd. They faced fines totaling RMB 1.219 billion and confiscation of illegal gains. The investigation, initiated on July 31, 2023, revealed that these companies were charging unfairly high prices for a medication essential for treating infections — inflating patient costs and national healthcare expenditures.

In March 2024, the CSRC issued an administrative penalty and market ban notice regarding the Evergrande incident. Evergrande is one of the major real estate developers in China. Due to false records in its annual reports, Evergrande’s public bond issuance was suspected of fraud, with cumulative financial fraud reaching hundreds of billions of yuan. The CSRC fined Evergrande 4.175 billion yuan. This incident also triggered a crisis of public trust in its auditing agency: PwC, which served as the auditor of Evergrande for 14 years, failed to warn the public of risks and continued to issue auditing reports with misleading information. By June 2024, this trust crisis led to seven of a famous accounting firm’s top ten clients terminating their contracts, resulting in losses of hundreds of millions of yuan to that famous accounting firm and the downsizing of PwC’s China practice.

Soft non-binding laws

Principles and concepts in some soft non-binding laws promoted by the UN and OECD have been included in policies and initiatives published by China. For example, in 2018, the CSRC revised the Governance Guidelines for Listed Companies, mandating that listed entities disclose ESG information and identifying sustainable development and green development as guiding principles. Subsequently, the Asset Management Association of China (AMAC) released the Green Investment Guidelines (Trial) and the ESG Evaluation System for Listed Companies in China. In 2021, the Ministry of Commerce and the Ministry of Ecology and Environment jointly issued the Guidelines for Green Development of Outbound Investment and Cooperation, emphasizing that green development is crucial for sustainable development. On August 11, 2024, the Central Committee of the Communist Party of China and the State Council issued the Opinion on Accelerating the Comprehensive Green Transformation of Economic and Social Development. It emphasizes the importance of ecological priority, conservation, and low-carbon, high-quality development and calls for coordinating efforts in carbon reduction, pollution control and economic growth to reach the goal of reform in the ecological civilization system and form a pattern of harmonious development between human beings and nature.

Although the abovementioned examples are soft and non-binding, local governments, state-owned enterprises and listed companies will take them into consideration in their activities.

Stakeholders

The government, as the most important stakeholder, is quite proactive in the promotion of ESG. In 2020, President Xi Jinping promised the world at the 75th United Nations General Assembly to “make efforts to achieve carbon peak by 2030, and make efforts to achieve carbon neutrality by 2060”. The “Dual-Carbon Goal” was officially written into the Government Work Reports, which has prompted more companies to pay attention to issues of ESG and study the impact of ESG on their business operations, in order to get more favorable treatment from the government. In July 2023, the General Office of the State-owned Assets Supervision and Administration Commission forwarded the research results of the project Research on the Preparation of ESG Special Reports for Central Enterprises Holding Listed Companies in the form of a notice. The research team constructed an indicator system of three level indicators from the three dimensions of ESG, covering two types of indicators: basic disclosure and recommended disclosure, and provided technical guidance for the preparation of reports by central enterprises and central enterprise-controlled listed companies. Some local SASACs and local state-owned enterprises also stepped up efforts to promote ESG reporting.

Additionally, driven by policies, financial institutions also release ESG reports more concentratedly. In 2021, the central bank formulated the Guidelines for Environmental Information Disclosure of Financial Institutions, which promoted the release of environmental information disclosure reports by national and local financial institutions, especially commercial banks. In practice, some banks release separate ESG reports and environmental information disclosure reports (or green finance reports, TCFD reports), forming a pattern of three regular reports together with the bank’s annual report.

However, researchers have found that some companies may have done some greenwashing when they released ESG-related data or disclosed ESG reports to the market. It has become a concern of many Chinese ESG scholars and policymakers, but so far China still lacks systematic laws or regulations that can fundamentally preventing greenwashing.

National Contact Points (NCPs)

China is not an OECD member and does not have an official NCP agent. However, there are organizations that serve similar NCP functions, including:

1. National Biodiversity Information Exchange Center: China is a party to the Convention on Biological Diversity, and its working coordination group is the National Biodiversity Information Exchange House under the Ministry of Ecology and Environment. The Center provides technical support for biodiversity protection and sustainable use.
2. Ministry of Ecology and Environment (MEE): oversees environmental protection policies and international cooperation related to environmental issues.
3. Ministry of Human Resources and Social Security: manages international exchange and cooperation, including planning and implementing initiatives in human resources and social security. It negotiates bilateral social security agreements, oversees staff management in international organizations and conducts talent development. Additionally, it handles exchanges with Hong Kong, Macau and Taiwan, manages cooperation with foreign NGOs and undertakes other tasks assigned.
4. Ministry of Agriculture and Rural Affairs: handles intergovernmental agricultural foreign affairs, agricultural trade promotion and negotiation, industry damage investigation, implementation of agricultural foreign aid projects, implementation of relevant international conventions and agreements, etc. It is responsible for coordinating and managing cooperation and exchange affairs between China and relevant international agricultural organizations.
5. National Energy Administration: its International Cooperation Department is responsible for organizing and promoting international energy exchanges and cooperation, undertaking relevant work in negotiation and signing agreements with foreign energy authorities and international energy organizations according to the division of labor, formulating energy opening-up strategies, plans and policies, and coordinating overseas energy development and utilization.
6. China Economic Liaison Center: facilitates foreign investment and economic cooperation, particularly in the context of the Belt and Road Initiative.

These organizations or government departments in China play essential roles in international collaboration and comply with various treaties related to sustainable development.

Corporate disclosure is one of the topics in the laws, regulations and obligations highlighted in Question 3. Even if other laws mentioned in Question 3 do not specifically concern corporate disclosure, the necessary disclosure obligation to government is also addressed. For instance, the Environmental Impact Assessment Law requires companies to disclose their plans before starting construction, adding production lines or increasing the capacity of existing facilities. Similarly, the Work Safety Law mandates that companies should inform the relevant government authorities of any hidden dangers identified during regular inspections.

When it comes to corporate disclosure to the public, as mentioned above, the regulations are evolving. The concepts of International Financial Reporting Standards (IFRS) and the International Sustainability Standards Board (ISSB) have also been introduced to disclosure regulations of China. Regarding whether the disclosure obligations are outcome-based or process-oriented, China takes a hybrid approach. For example, Chapters 2, 3, and 5 of the Shanghai Stock Exchange Listed Company Self-Regulatory Guidelines No. 14 — Sustainable Development Report (Trial) focus on the Sustainable Development Information Disclosure Framework, Environmental Information Disclosure and Governance Information Related to Sustainable Development. These chapters emphasize output measures; namely, companies must not only meet outcome requirements but also demonstrate strong performance in achieving those results. In contrast, Chapter 4, addressing Social Information Disclosure, requires companies to mandatorily disclose their specific inputs and performance in social responsibility. It highlights that having a good process is insufficient, and companies must also cultivate positive social relations to fulfill their social responsibilities effectively. The advantage of such a hybrid model is to prevent companies from pursuing results at all costs. The process-oriented approach ensures companies meet the requirements of environmental friendliness and good internal governance during the entire process of obtaining ESG results. Meanwhile, the outcome-based approach prevents companies from finding excuses for not fulfilling their disclosure obligations.

Reporting

SSE 180 Index, SSE Star Market 50 Index, Shenzhen 100 Index and ChiNext Index companies must submit Sustainable Development or ESG Reports according to the Guidelines for Self-regulation of Listed Companies - Sustainable Development Report (Trial) published by the three stock exchanges respectively in 2024. The SASAC also mandates that state-owned enterprises should enhance their ESG frameworks and disclose comprehensive reports by 2023. Other listed companies are not obligated to disclose ESG reports. But many large firms voluntarily publish their annual ESG reports on their investor relations pages or official websites, or through public announcements via stock exchanges if they are listed companies.

Companies are encouraged to disclose ESG information in double materiality. According to the CSRC, listed companies can voluntarily disclose information that may influence shareholders’ decisions. For instance, relevant details on ecological protection, pollution prevention and carbon emission reduction, especially third parties’ verification details, and insights into social responsibility efforts, including protecting stakeholder rights and contributions to poverty alleviation and rural revitalization. The Shenzhen Stock Exchange also encourages ChiNext companies to report on cybersecurity responsibilities, highlighting contributions to national projects and standards.

Private equity

In early 2018, the AMAC introduced the Green Investment Guidelines (Trial) and the ESG Evaluation System of Listed Companies in China. These guidelines require mutual funds and private equity (PE) funds investing in securities to create internal green investment policies, establish specific roles and hire analysts for detailed assessments of green investment targets. They must also submit self-evaluation forms regarding their management practices and the performance of their green investments. PE funds investing in private company equities can voluntarily follow these guidelines as well.

Entities in the PE industry are now encouraged to adopt green investment as a core operational strategy. Various guiding opinions from the Chinese government, including the Guiding Opinions on Strengthening Financial Support for Green and Low-Carbon Development, highlight the need for better environmental information disclosure. Financial institutions and financing entities must improve their disclosure systems and ensure compliance among listed companies and bond issuers. Additionally, the State Council’s opinions provide a framework for green investment for PE fund managers, urging them to tailor their approaches based on their specific circumstances. Financial institutions are also encouraged to disclose high-carbon asset exposure and set up emergency disclosure mechanisms for climate-related risks. These guidelines enhance the disclosure obligations for PE entities regarding sustainability and green initiatives while promoting scientific innovation, low-carbon rural development and green agriculture.

Banks

Chinese banks have increasingly committed to green finance in recent years and have achieved significant results. The green loan and bond markets have expanded, aiding the economy’s green and low-carbon transformation. Major banks highlighted their green financial services in 2023 ESG reports, showing increased green loan balances and innovative products. They also focus on compliance, social responsibility and sustainable development to support the real economy. Overall, policy and financial institutions are promoting green development, inclusive finance and rural revitalization while enhancing compliance systems in areas like anti-corruption and anti-money laundering. Additionally, banks are actively engaging in social welfare and improving processes to foster high-quality inclusive finance development.

Small and medium-sized enterprises (SMEs)

According to China Reform News, the ESG disclosure rate among SMEs in China with a market value under 5 billion yuan is only 12%. While large enterprises, which comprise just 1% of the total number of enterprises in China, have started their ESG transformation, SMEs, making up 99%, still have significant room for improvement.

Fashion

The fashion industry essentially pays attention to its ESG performance because of its high energy consumption, high pollution and high labor intensity, and high possibilities of conflicts of values and cultures. As global social and ecological ESG awareness increases, and the fashion apparel industry enters a stage of “stable quantity and improved quality”, fashion companies are trying to strengthen their ESG management to achieve sustainable development and enhance competitiveness. China’s policies for the fashion apparel industry over the past five years have gradually eliminated obsolete production capacity, strengthened pollution control, encouraged science and technology to foster innovation, deepened the transformation of green and low-carbon industries, created Chinese-style fashion and optimized the industrial structure. These measures provide the right direction and strong guidance for the sustainable development of the fashion apparel industry.

Chinese fashion companies have paid more attention to ESG performance in recent years. For example, according to the 2022/23 ESG report of a famous clothing company, Bosideng, its down jackets are now made entirely of environmentally friendly recycled materials for fabrics, linings and zippers, which can be recycled in just four steps, thereby reducing recycling costs and minimizing resource consumption and carbon emissions during the disassembly and recycling process.

Meanwhile, Chinese fashion companies are also proactively engaging in ESG endeavors when developing in overseas markets. For instance, a well-known Chinese E-commerce fashion platform, Shein, innovatively applies cold transfer printing to the production of denim fabrics, saving nearly 9,000 tons of water during the whole production chain. Another Chinese fashion and sport clothing giant, Li Ning, adopts diversified environmental friendly building materials like strawboard in its offline stores to reduce the application of wood resources and ensure biodegradability.

Despite their efforts on environmental issues, Chinese fashion companies are still facing challenges on social and governance issues. For instance, the German Supply Chain Due Diligence Act requires foreign companies doing business in Germany to report human rights issues and environmental topics in their supply chains and to conduct due diligence on their suppliers. For Chinese fashion companies operating in Germany, however, it may be difficult to prove that all of their original manufacturers are environmentally friendly and in line with human rights and labor requirements according to EU law and social perceptions. Meanwhile, conducting due diligence may also increase the inputs in compliance when developing the brand and business overseas. Additionally, ESG-related sanctions have created some obstacles for Chinese fashion companies abroad. The Uyghur Forced Labor Prevention Act, a U.S. federal law enacted in late 2021, prohibits the importation of goods produced or manufactured in Xinjiang and relevant products throughout the supply chain. However, Xinjiang cotton is popular in the Chinese market and commonly used in the textile industry in China, and as a result, fashion brands entering overseas markets may have to spend extra costs in sourcing and securing the evidence that their clothing is not made from Xinjiang cotton. Otherwise, if the products potentially relating to Xinjiang cotton are detained by foreign customs or rejected by foreign customers for any reason, the company will suffer economic loss. For example, some giants in the fashion industry (e.g. H&M) have terminated their business relationship with one of their Chinese suppliers, claiming that the Chinese company suspiciously used forced labor in Xinjiang and thus violated the Uyghur Forced Labor Prevention Act.

Travel industry

Leading firms like Ctrip show strong commitment to ESG management, achieving results in employee care and environmental strategies with partner hotels. However, many SMEs are still in the early stages of ESG implementation. Recognizing this, the Chinese National Tourism Standardization and Technical Committee, an institution founded by the Ministry of Culture and Tourism, issued draft guidelines in November 2023 for standardized ESG disclosure in the travel industry. Disclosure should be made via independent reports, updates on corporate websites, annual reports and public media. Additionally, tourism companies must promptly disclose ESG-related emergencies and comply with international laws for overseas operations.

Automobile industry

The Chinese government has published a series of environmental protection-related policies to promote the development of new energy automobiles. The Announcement on Matters Related to the Implementation of the National VI Emission Standard for Automobiles promulgated in May 2023 stipulated the nationwide implementation of the National VI Emission Standard Stage 6b from July 1, 2023.

In addition, the tax relief policies for new energy vehicles illustrated the Chinese government’s encouraging attitude towards the development and promotion of new energy automobiles. With the supportive policies, the new energy automobile industry in China is growing rapidly. According to a survey conducted from 2020 to 2023 by the Shanghai Electric Vehicle Public Data Collecting Monitoring and Research Center, the total number of new energy vehicle users in Shanghai’s rural areas has increased from 14,000 to 63,000, with an average annual growth rate of about 63%. Furthermore, in May 2022, the National Development and Reform Commission and the National Energy Administration promulgated the Implementation Opinions on Accelerating the Construction of Charging Infrastructures to Better Support the Promotion of New Energy Vehicles in Rural Areas and Rural Revitalization, aiming to accelerate the supportive infrastructures of new energy automobiles in rural areas. Since then, Chinese automobile manufacturers have been encouraged to innovate in the construction, operation and maintenance models of charging infrastructures in rural areas, support the purchase and use of new energy vehicles in these regions, and enhance the publicity, service and management of new energy vehicles in rural areas.

However, a higher market share of new energy automobiles is not the end for the automobile industry in terms of China’s ESG endeavors. Chinese automobile manufacturers and governing authorities are increasingly paying attention to ESG management. Early in 2021, the “full life-cycle management of automobile use” had already become the policy direction of China’s automobile industry: to construct an interactive system of information on the entire life cycle of automobile use, from manufacture to recycle and dismantling. Chinese manufacturers of new energy vehicles are committed to developing their own full life-cycle management. For instance, Geely Auto has spawned a whole life-cycle value management system of automobiles, covering different stages like car sales, sub-new car subscription and operation, used car re-operation, vehicle recycling and dismantling, parts and components remanufacturing, etc., and enhancing the value of automobiles at different stages to satisfy the needs of different groups through refined operation and intelligent management, and creating a new model of closed-loop automobile distribution.

Chinese government and automobile manufacturers also make efforts in “S” issues. For example, automobiles collect numerous data during their operations, including sensitive information such as travel tracks, driving habits, voice, etc. Therefore, the data privacy issue is always a challenge in the automobile industry. To tackle this issue, China adopts several regulations to stipulate statutory requirements in data processing and data security of automobile industry. Meanwhile, the Chinese national standard regarding the information security of motor vehicle data further instructs manufacturers on data security issues. Those regulations and national standards indicate that China’s information security standard for the automobile industry is under continuous improvement.

Energy industry

In 2024, various government departments issued green and low-carbon policy documents for China’s energy industry, emphasizing support for green development and low-carbon transformation. The Guidelines for ESG Disclosure of Energy Enterprises implemented by industry associations and energy companies outlines the principles and requirements for ESG disclosure across sectors like coal, oil, natural gas, electricity and renewables. Additionally, on June 15, 2024, the State Energy Group released the Three-Stage Implementation Path Study on ESG for State-Owned Energy Enterprises. This study encourages energy companies to address ESG concerns such as climate change and greenhouse gas emissions, explore low-carbon development paths, improve external ESG disclosure and promote a gradual transition to low-carbon energy.

Real estate industry

In 2024, China’s National Development and Reform Commission and the Ministry of Housing and Urban-Rural Development launched a Work Plan to enhance energy conservation and carbon reduction in the construction sector. Key tasks in this Plan included improving energy efficiency in new urban buildings, renovating existing structures, advancing low-carbon energy use, implementing heat metering, enhancing the sustainability of rural housing and promoting green construction. On May 22, 2024, the Shanghai E-House Real Estate Research Institute and China Real Estate Information Corporation (CRIC) released the 2024 Real Estate Company ESG Assessment Report, revealing that among 55 real estate companies, four were rated AA and seven were rated A, with none achieving AAA. The independent ESG report disclosure rate reached 39.05%. In the environmental dimension, 71% of the companies had disclosed data, and 69% had set management goals (with inconsistent standards). Socially, 58.2% of the companies had provided comprehensive data, though some were lacking in terms of employee welfare. Dedicated ESG management organizations had been established in most companies from the governance perspective. Moreover, the real estate industry is still faced with significant social and governance issues because some real estate companies are still struggling to complete the construction and delivery of the pre-sold housing, and having to tackle the debt crisis or even bankruptcy restructuring.

E-commerce

In China, e-commerce plays a significant role in the promotion of ESG concepts and practices. Major companies wield substantial capital to influence ESG practices. These companies can impact ESG by focusing on sustainability while guiding consumers and allocating internet traffic. In 2021, Alibaba aimed for carbon neutrality in its operations and a 50% reduction in its value chain’s carbon intensity by 2030, implementing policies to address waste packaging, such as encouraging consumers to return cartons at Cainiao Stations. Additionally, Alibaba is expanding e-commerce in rural areas, helping 160 key revitalization counties achieve over 4.3 billion yuan in sales in 2023. Vipshop also committed to carbon neutrality by 2030, using 100% green electricity at its headquarters and recycling over 43 million cartons, cutting carton use by more than 20,000 tons.

Game industry

The gaming industry thrives by fostering a competitive yet non-toxic environment for consumers (especially for teenager consumers). Online gaming addiction has always been one of the biggest challenges for the game industry. The 2020 amended Law on the Protection of Minors set out the statutory requirements for the prevention of minors’ addiction to a gaming network. The Notice on Further Strict Management to Effectively Prevent Minors from Becoming Addicted to Online Games published by the Press and Publications Administration in August 2021 further stipulated that all online games should be connected to a real-name verification system to prevent addiction, and all online game users should use real identity information to register their game accounts. In 2024, the newly amended Law on the Protection of Minors further required online game companies to consider the protection of minors’ physical and mental health, to protect minors’ legal rights and interests, and to implement prevention measures for network addiction. When it comes to the game companies, efforts have also been made in preventing minors’ gaming addictions. Tencent, China’s largest gaming company, addresses this by promoting healthy gaming through a real-name and anti-addiction system, linking online personas to real identities and enforcing in-game regulations. Additional measures to regulate minors’ experiences allow parents to monitor their children’s in-game purchases and screen time. While these restrictions may limit Tencent’s profits, they reflect the company’s social responsibilities.

Short video industry

In response to the principle that “the Internet is not a place outside the law”, China, led by the State Administration of Radio, Film and Television, is enhancing its regulation of the short video industry due to the increased social concerns about unhealthy or fake information. In 2024, major platforms like Douyin, Kuaishou and Bilibili removed numerous micro-short videos and penalized related accounts. A notable case in this regard is Qin Lang’s Paris winter vacation homework incident (in which an influencer fabricated a story that an elementary school student Qin Lang lost his homework book in a public lavatory in Paris, right before the end of the vacation), where the account “Thurman猫一杯” was banned for fabricating events to gain attention.

For big firms operating in this industry, ESG is also a challenge: personal privacy protection is a particularly critical issue for them. In its ESG report, ByteDance mentioned that its subsidiary TikTok faces pressure from the U.S. government regarding national security and user data privacy.

With strong public encouragement, large corporations have implemented systematic ESG governance. For instance, Tencent launched an ESG working group directly led by its Board of Directors to address ESG-related matters. Similarly, Haier, one of the well-known home alliance manufacturers in China, developed top-down ESG governance structures that drive the company’s ESG efforts. Notably, Haier established an ESG committee, enabling its Board of Directors to comprehensively supervise Haier’s ESG-related matters and fulfill ESG governance responsibilities, including ESG policies and strategy development, ESG risk assessment and ESG target review. The top managers of each ESG functional department and business department form the ESG Executive Leadership Team, which coordinates and guides the effective implementation of ESG management, and reports the working progress to the ESG Committee on a regular basis. Other leading companies in China are also developing their own ESG management programs by learning from the pilot companies’ experiences in this regard.

In fact, the rise of ESG-driven development led to the increasing demand for ESG professionals in enterprises. According to Liepin’s big data, the demand for talent in newly created ESG positions from May 2022 to April 2023 rose by 64.46%. In some financial institutions in China, the Chief ESG Specialist is an emerging position and the candidates are offered high remuneration for such high-level ESG positions. For example, Lenovo, a Chinese giant laptop manufacturer, hired experienced ESG Specialists to manage ESG issues in daily operations, which contributed to the company obtaining MSCI’s highest rating of AAA for two consecutive years.

However, the trend also reveals the shortage of ESG talent in China. In 2024, the Beijing Municipal Government announced plans to “strengthen ESG talent development, provide policy support for professionals in the district who have obtained ESG qualifications or certificates, and enhance the professional level of practitioners in the area. Enterprises are encouraged to create ESG-exclusive positions”.

ESG rating agencies

Mostly, investors may refer to ESG rating agencies’ published rating results to evaluate the ESG performance of the investment targets, in order to decide whether they should invest. In China, the leading international ESG rating agencies’ ratings and reports, such as MSCI ESG, S&P ESG Index, Bloomberg and Morningstar, are commonly accepted by investment managers or finance institutions. At the same time, several other rating agencies, such as Wind ESG Rating and Sino-Securities ESG Rating, covering ESG ratings of most A-share listed companies, are also popular in China. Companies rarely engage directly with ESG rating agencies; however, companies (especially listed companies and large companies) may meticulously prepare their ESG-related information to improve their own ESG ratings.

ESG benchmarks

Currently, several influential and widely recognized information disclosure standards and evaluation systems have been established internationally, including those from MSCI, FTSE Russell, S&P, Thomson Reuters and Sustainalytics. In recent years, the growth of domestic ESG rating agencies in China has gained significant momentum. Thinktanks, data technology firms, consulting companies, index providers, financial institutions and other organizations have developed ESG rating methodologies tailored to the unique characteristics of Chinese companies. Based on these methodologies, they have created their own ESG rating systems. Institutions like the Green Finance Institute of Central University of Finance and Economics, China Securities Index Co., Ltd. and Wind Information Technology Co., Ltd. are increasingly being referenced by Chinese enterprises in order to assess their ESG performance.

Private companies

Usually, private companies may focus on developing an environmentally friendly supplier chain as a “selling point” to attract consumers and investors. The EU has issued a series of regulations on supply chain compliance in recent years, setting stricter compliance requirements for Chinese companies operating businesses in Europe. For instance, Chinese companies have to conduct due diligence on themselves and their suppliers in order to comply with the EU Corporate Due Diligence Directive effective in January 2023, which will increase their compliance inputs. Meanwhile, for Chinese companies who fail to conduct due diligence in accordance with these directives, or who find that they are unable to meet the EU’s ESG-related compliance requirements, their competitiveness will be weakened, ultimately reducing their income.

Additionally, given the early development of ESG concepts abroad, the mainstream ESG evaluation methodology is modelled on giant multinational companies with excellent ESG practices. However, Chinese companies have their own characteristics in ESG performance. For example, due to the cultural differences between China and the Western world, Chinese companies may overlook focused indicators such as the responsible drinking concept or issues relating to employee care in international mainstream ESG rating systems. To be specific, on one hand, cultural differences reflect different attitudes toward the drinking of alcohol during business meals. Many large EU and U.S. companies advocate for responsible drinking in their corporate policies, empowering employees to make personal decisions based on individual preferences and circumstances. In contrast, some Chinese companies — particularly private enterprises — tend to encourage drinking and toasting at business meals as a means of promoting their products, which remains quite common. This cultural difference may result in lower performance evaluations for Chinese private companies under some ESG assessment methods. Considering the above, the mainstream ESG evaluation systems may not objectively and comprehensively reflect and evaluate the ESG practices of Chinese companies. Consequently, Chinese companies’ efforts in ESG performance may also be underestimated.

For private companies who plan to go public, ESG performance can serve to attract international investment and help prepare for future public offering. However, at present, ESG reports in China primarily come from listed companies and large enterprises with international footprints, with limited participation from local private companies, especially SMEs. Many SMEs have concerns about the low return on investment in ESG, which may have hindered their ability to upgrade their current technologies to green and low-carbon technologies, ultimately impacting their profitability.

Public companies

Beyond ensuring regulatory compliance, we observed that some public companies are proactive in developing approaches to ESG issues. Some public companies make donations to charities or schools in impoverished areas, or to grow trees in areas of desertification. Some designed or used energy-saving buildings or building materials to ensure green construction. Some market players are using their products or services to further promote the concept of ESG. For instance, a business simulation game launched by Tencent, Carbon Island, focuses on environmental issues, helping players learn about carbon neutrality and low-carbon living.

Public companies and private companies may address ESG issues in their disclosure and also in their products and services, to attract consumers and investors. Large listed companies pay more attention to ESG than average-sized companies, and most of them have invested a lot of money to improve their ESG practices. As the universal language of sustainable development in the international community, ESG is the focus for companies to enhance their market influence and expand their business territory.

Government-owned organizations

State-owned public listed companies are to some extent the pioneers to echo national policies, such as “dual carbon”, energy and resource conservation, compliance discharge of pollutants, product safety and quality as well as protection of labor rights and interests, which are also the highlighted focus of ESG. Therefore, some state-owned public listed companies are proactive in making positive responses to ESG issues and in several industries, such as electric power, coal, dairy and liquor. Specifically, in the three dimensions of ESG, state-owned enterprises pay more attention to environmental risk management and actively take measures to respond to stakeholder concerns, such as setting up good employee benefits, vigorously participating in charitable poverty alleviation and providing comprehensive product after-sales services, while focusing on improving organizational structure and enhancing information disclosure transparency. ESG ratings of state-owned public listing companies are higher than private listed companies.

Other government-owned organizations such as public schools and research institutions are investing increasing efforts and resources in ESG; for example, doing research, publishing reports and making industrial standards related to ESG. For instance, in April 2023, the China Reform Holdings Corporation Ltd., one of the state-owned enterprises supervised by the SASAC, released the first ESG evaluation program for central holding enterprises, including a generic system for ESG evaluation and 31 industry-based models. The evaluation system contains more than 120 indicators and 400 underlying data under the three major topics of ESG, and covers 4,720 listed companies in the A-share market. In December 2023, the Institute for Sustainable Development Goals, Tsinghua University published its Research Report on ESG Rating Indicator System for Local Governments in China (2023), which constructs an ESG rating indicator system for local governments and provides quantitative ratings on the ESG performance of cities and provinces.

ESG agenda

No official regulation or policies relating ESG agenda implementation has been observed in China except for the “30-60” “Dual Carbon” goal. However, an ESG agenda may exist in some industries or companies. For example, the three Guidelines for Self-regulation of Listed Companies - Sustainable Development Report (Trial) respectively launched by three Chinese stock exchanges in April 2024 illustrate that China is moving from the era of voluntary ESG disclosure to the era of mandatory disclosure, and listed companies which fall within the applicable scope must release their sustainable development reports for 2025 no later than 2026.

Insufficient understanding of investment concepts and challenges to investment practices

Given that China is still in its start-up stage of ESG, most listed companies focus on disclosing ESG-related management structure, internal policies and goals in their ESG reports, but rarely disclose implementation methods and specific measures, or any gaps between the outcome and the goal.

Limited scope of data disclosure and insufficient data standardization

Investment decisions need to be analyzed and determined based on public information. However, there is a lack of high-quality ESG data without mandatory, standardized ESG information disclosure rules. ESG information appears in various forms via non-comparable disclosure reports, with more qualitative descriptions and fewer quantitative indicators, more positive reports and fewer negative issues. Unaudited and non-comparable information, and difficulty in verifying the validity of data may have reduced investors’ confidence in making ESG-related decisions. But we believe this challenge will be tackled, because some of the Chinese government departments are promoting the applicable disclosure standard in their respective sector; for example, the CSRC and the National Energy Administration. Those disclosure standards have taken into consideration the popular international standard published by organizations like ISSB.

Interference brought by “greenwashing” behavior

With the rise of ESG investment, the “greenwashing” problem has gradually penetrated into the financial field. In order to attract capital inflows, some institutions promote compliance with ESG standards in their product investment strategies without any adoption of ESG-related strategies in the target screening process. In addition, different rating standards and rating results create challenges in identifying “greenwashing” behavior, making it difficult for investors to choose genuine ESG targets.

Some believe that ESG might be a waste of money

Companies may consider circumventions of the negative financial consequences of implementing ESG measures, and may end up committing data fraud to alleviate regulatory pressures. Nevertheless, regulation has reinforced the supervision on data disclosure to prevent data fraud and greenwashing in sustainability statements. Therefore, companies may have to set up specific positions or may have to purchase and install certain devices in order to prepare for this data reporting, which may increase the companies’ costs in the short term.

On the other hand, the severe challenges of global environmental crises such as global warming and frequent extreme weather bring more uncertainties to global economic development. With the continuation of the Russia–Ukraine War and the Israeli–Palestinian conflict, and the continuous evolution of international geopolitical crises, the future direction of the world pattern and global economic development has gradually become blurred. The core strategy for companies, especially some small or medium-sized companies, is to reduce operational risks and “survive” at this stage, rather than committing to the ESG goals. In addition, ESG management also causes extra costs, and is therefore becoming a waste of money from some companies’ perspectives.

Typically, besides information obtained from self-disclosures by enterprises — such as annual reports, ESG reports, corporate social responsibility (CSR) reports and announcements by listed companies — information from NGOs, academics, government sources, news outlets and social media is also an important reference. In China, for instance, statistics disclosed by NGOs play a significant role in ESG considerations. The Institute of Public and Environmental Affairs (IPE), a non-profit environmental research organization based in Beijing, has developed the Blue Map website, a database that collects, collates and analyzes environmental information from government and corporate sources, including environmental monitoring data. However, data obtained from NGOs must be cleaned and deduplicated before being considered for ESG ratings. Additionally, rating results and underlying information from ESG rating agencies such as MSCI and Sustainalytics are also highly valuable for investors and analysts as references.

In July 2020, the EU and China, coordinated by the International Platform on Sustainable Finance (IPSF), launched a Working Group on taxonomies to assess existing frameworks for environmentally sustainable investments. In November 2021, the group published the first version of the Common Ground Taxonomy (CGT) report, followed by a second version. Although these reports are not legally binding and do not establish a mandatory standard for IPSF member jurisdictions, the influence of CGT reports in the international financial community are gradually expanding, and many Chinese and international market participants have adopted the CGT reports to label green financial products. In May 2023, the Working Group declared to initiate phase II of the CGT report, continuing to expand the scope of economic activity categories and environmental objectives covered by the CGT.

In Hong Kong, the Monetary Authority (HKMA) introduced the Hong Kong Taxonomy for Sustainable Finance to create a classification framework that facilitates capital flows and reduces greenwashing risks. The HKMA is working with the Climate Bonds Initiative to develop this taxonomy, which aligns with China’s Green Bond Endorsed Projects Catalogue and the EU Taxonomy.

As of now, there is no general ESG taxonomy published within the jurisdiction of China. However, specified in the field of the environment, in 2021, the People’s Bank of China, along with other regulatory bodies, issued the Green Bond Support Project Catalog (2021 Edition), which sets stricter standards for defining green projects. It excludes high-carbon projects and adopts the “no significant damage” principle. This catalog improves the management and efficiency of green bond issuance and aligns with international classification standards, allowing for better identification and investment in green assets.

ESG, as an emerging concept introduced to China, is still under development. With the global emphasis on sustainable development and corporate social responsibility, the Chinese government and enterprises have significantly improved their understanding and practice of ESG in recent years. Meanwhile, the capital market is increasingly interested in the non-financial performance of portfolios. Large Chinese companies and listed companies have started to publish social responsibility reports or sustainability reports to demonstrate their efforts and achievements in good governance and sustainability. Among the major topics under ESG, the climate and environmental factors under “E” are becoming critical risk factors for the sustainable development of the global economy. The increasing social and economic impacts of globalization and climate change promote global structural economic transformation focused on emissions reduction and carbon neutrality. Consequently, traditional business models of listed companies, including Chinese listed companies, are facing challenges and intense pressures from shifts in policies, demographics, capital, resources and consumption patterns.

Looking ahead, ESG in China will be driven by a variety of factors domestically and abroad. We have observed the establishment of standardized frameworks for ESG disclosures, evaluations and investments, which are making ESG performance more visual and comparable. This will assist in enhancing transparency in ESG disclosure, prompt the curb of greenwashing, and help consumers and investors to critically evaluate ESG claims and costs.

As ESG is attracting increasing attention from investors, corporates’ ESG risk management abilities will also be enhanced. From an external perspective, international organizations and regulators will increasingly promote ESG standards to push corporates’ management of ESG. Internally, for companies with excellent ESG practices, their internal systems will be continuously optimized to show sustainable development to stakeholders and therefore strengthen their corporate image. Listed companies will integrate ESG into their strategies and employ systematic approaches to solve ESG-related issues and implement response policies.

In the long run, an environmentally friendly operation mode will help companies to develop energy-saving technologies, ultimately reducing inputs, while good governance may enhance the stability of companies. Proactively addressing social responsibilities can enhance corporate image and build trust with consumers, investors and regulators, boosting market share price and building favorable financing conditions. Therefore, our attitude towards the long-term prospects of ESG is quite optimistic.