Interview with Wang Yao, Director of International Institute of Green Finance, CUFE, regarding Compulsory ESG Information Disclosure and  ESG Market in China

In April 2022, China Securities Regulatory Commission (CSRC) issued the Working Guidelines for the Investor Relations Management of Listed Companies (2022) (hereinafter called the Guidelines), which were implemented on May 15. For the first time, the concept of   ESG has been included in guidance regarding investor relations management.

Why is ESG included in its investor relations management, and what does this mean for investors, listed companies, capital markets regulation, and high-quality development of listed companies in China?

In response to these questions, National Business Daily (hereinafter called NBD) interviewed an expert on ESG in China, Professor Wang Yao, Director General of the International Institute of Green Finance of Central University of Finance and Economics,  who also serves as a Deputy Secretary-General of Green Finance Committee of China Society for Finance and Banking, and Advisor of Green Securities Committee, Securities Association of China.

ESG has become a mainstream investment strategy internationally

NBD: Why did the Guidelines include ESG? Why is it included at this time? What factors are considered?

Wang Yao: In recent years, ESG has gradually developed into a mainstream investment strategy internationally and received more and more attention from investors, putting higher demands on the ESG performance of listed companies. The rapid development of ESG has also driven the attention of the Chinese market to ESG and gradually brought it into public attention.

In fact, Chinese regulators have already included ESG factors in relevant policies and have been increasing their requirements for corporate ESG information disclosure. In 2018, the Code of Corporate Governance for Listed Companies (2018 Amendment) proposed that environmental, social responsibility, and corporate governance should be fully considered, and the ESG framework was initially formed. The disclosure requirements for  Shanghai Stock Exchange Science and Technology Innovation Board (SSE STAR Market), released later, further strengthened the importance of ESG in investor relations management and put forward related disclosure recommendations. Fang Xinghai, Vice Chairman of CSRC, recently stated that China’s next step is to develop guidelines for mandatory disclosure.

The recently published Guidelines strengthened ESG information disclosure requirements in investor relations management and followed the trend of current policy and market development. The document further standardizes the management capabilities of listed companies and puts forward higher requirements, which will help promote ESG information disclosure of listed companies.

The investment preference shifting to the long-term value investment 

NBD: ESG is included in the investor relations management in the Guidelines. What does the inclusion of the ESG in the Guidelines mean for investors? 

Wang Yao: It is a significant innovation that provides a new view for investor relations management. It is a step towards standardization and improvement of investor relations management in China but also shows the determination to pursue the high-quality and sustainable development of China’s capital market in the long run.

On the one hand, the inclusion of ESG is in line with the theory of sustainable development. Considering carbon peaking and carbon neutrality goals, the non-financial costs of the enterprises will increase, and the ability to carry out low-carbon transformation will become one of the critical factors in evaluation. ESG, to a certain extent, will also become a rigid constraint for enterprises.

On the other hand, with the optimization and improvement of investor structure, investors’ independent judgment will continuously increase, and their investment expectations and demands will be higher. The inclusion of ESG will further strengthen the transparency of the non-financial information of enterprises, which will help investors better understand the enterprises and make well-informed judgments.

NBD: Conversely, how should investors treat this inclusion? What impact will it have on investors’ behavior and preferences?

Wang Yao: From the experience of capital markets in developed countries, ESG has become an important concept in investment strategies. Currently, institutional investors in China are also paying more attention to ESG, and they have started investing in it.

With the development of China’s capital market, the proportion of institutional investors is increasing, and their leading role in investment is even more pronounced. The institutional investors can lead individual investors to practice ESG. At the same time, listed companies are forced to pay more attention to ESG information disclosure.

The release of the Guidelines will help more institutional investors understand ESG concepts, take ESG into consideration, and shift from their investment preferences to long-term value investment. The general trend of ESG value investment has formed initially in China, and the environment conducive to the application of ESG strategies is maturing. At the same time, because  ESG investment is essentially value investing, it will be more stable in the context of China’s high-quality development and low-carbon transformation.

Companies with high ESG scores are favored by investors

NBD: Investor relations management is an integral part of corporate governance, so what is the significance of including ESG in corporate governance?

Wang Yao: Investor relations management is important fart of the governance and strategic management for listed companies. They use specific methods to present the details of the company’s operating conditions and development prospects to existing and potential investors. Effective investor relations management for listed companies helps them enhance their market value, build a broad shareholder base and strengthen their financing ability.

Including ESG in a company’s communication enables listed companies to gradually recognize the important role of investors in the decision-making process. Communicating ESG information can bring value to both listed companies and investors. Firstly, it can help investors express their expectations towards ESG  and accurately state their needs. Secondly, listed companies can deliver better results based on the investors’ expectations.

Adding ESG to investor relations management is of great significance for improving corporate governance, building company’s image, and increasing company’s value.

NBD: communicating information with investors is also an important part of information disclosure for listed companies. What is the significance of including ESG in communication for improving information disclosure?

Wang Yao: ESG information disclosure is an important condition for investor protection and a guarantee for companies’ long-term development. For investors, information disclosure is the window to learn about the overall operating conditions of companies. More communication with investors is conducive to safeguarding investor right to information.  Access to information makes it easier for investors to make investment decisions, reduce risks, and achieve optimal resource allocation.

For listed companies, the inclusion of ESG in communication is conducive to ensuring the truthfulness, timeliness, and completeness of company information disclosure. It enhances the overall transparency of market operations. It reduces information asymmetry, thus helping to strengthen the level of information disclosure of listed companies, regulating the operation of listed companies, and improving corporate governance structure.

NBD: ESG information disclosure is more about non-financial data. How does this relate to the investment value of listed companies? Apart from the regulation, why do more and more listed companies choose ESG information disclosure?

Wang Yao: ESG can reflect important information about company performance in non-financial aspects, representing a series of factors on environmental, social, and corporate governance. ESG information disclosure enables listed companies to sort out their performance to fulfill social responsibility. It promotes sustainable operation and development of companies, attracts investors’ attention, and increases the value of the investment.

In addition to regulatory requirements, more and more listed companies are now focusing on voluntary ESG information disclosure.

On the one hand, companies face the challenge of green and low-carbon transformation development, and fulfilling carbon peaking and carbon neutrality goals. ESG information disclosure can enable companies to find the best strategy. Listed companies need to incorporate non-financial ESG performance into their investment philosophy and into the evaluation criteria to achieve green and low-carbon transformation goals.

On the other hand, from the perspective of risk management and returns, companies with higher ESG scores generally have better risk resistance and are more suitable for investment. Companies with excellent ESG information disclosure are more welcomed by investors and can obtain excess investment returns, which positively guides long-term investment and value investment. Also, it attracts more and more listed companies to disclose actively.

Regulation promotes disclosure 

NBD: The Guidelines include ESG in the investor relations management. At the beginning of the year, the new listing rules of the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE)  also included CSR-related content for the first time. What kind of regulatory trend does this reflect?

Wang Yao: Undoubtedly, the regulatory authorities are paying more attention to the ESG information disclosure of listed companies. On the one hand, there is an urgent need to guide enterprises to a low-carbon transition in a way that can be promoted and measured under the “double carbon” target; on the other hand, as the global economy enters a new era of development, ESG is one of the solutions to the precise, efficient and sustainable use of resources.

Although domestic regulators are late in ESG management and disclosure requirements, there has been some initial success, and the ESG-related regulation has been accelerating. The Shenzhen and Shanghai Stock Exchanges issued the Guidance for Social Responsibility of Listed Companies of Shenzhen Stock Exchange and the Guidelines on Environmental Information Disclosure of Listed Companies on the Shanghai Stock Exchange in 2006 and 2008 respectively. 

The Guidelines for Establishing a Green Financial System were jointly issued by seven ministries in 2016 even put forward the planning requirements for mandatory environmental information disclosure. In 2018, the Code of Corporate Governance for Listed Companies initially clarified the basic framework for ESG information disclosure.

From 2019 to 2022, the issuance of ESG-centered relevant documents has been improving in terms of content and frequency. A certain degree of mandatory and specific requirements were put forward in terms of management regulations, rules, standards, disclosure principles, etc. For example, the Rules Governing the Listing of Stocks on STAR Market issued by the SSE in 2019 made it clear that ESG information disclosure would be piloted on the STAR market and that detailed content disclosure such as negative information would be emphasized in the requirements for information disclosure. The Administrative Measures for the Legal Disclosure of Enterprise Environmental Information, which began with the enforcement of environmental information disclosure, were implemented in February this year.

The drafting of the Guidelines, from releasing the draft in 2021 to official issuance, played an important role in strengthening corporate sustainability requirements, and ESG information disclosure, ans well as cultivating ESG concepts among the public. The document will play a double role in raising public awareness about ESG issues:(1) it emphasizes protecting the small and medium investors’ rights; (2) sustainable development trend is signaled to domestic and overseas capital markets.

NBD: What other conditions are required for the mandatory disclosure of ESG information for listed companies in China?

Wang Yao: Before implementing mandatory ESG information disclosure, China needs to solve some challenges and build the right mechanisms. This mainly refers to but is not limited to the clarification of definitions and standards of ESG, improving the understanding of ESG by society. Besides, qualitative and quantitative ESG indicators need to be further disclosed, and relevant methodological research and market application need further accumulation. Additionally, there is a lack of third-party ESG information disclosure support and an insufficient amount of appraisal agencies on the market. Additionally, ESG-related data from government regulators need to be further opened up. 

The financial market is also guiding companies to strengthen ESG disclosure and engage in ESG practices through ESG investment. However, ESG lacks unified standards. The inconsistent quality of ESG data has also caused a certain level of misunderstanding about the performance and effectiveness of the ESG investment market. Therefore, improving ESG infrastructure at the regulatory level is the key to establishing mandatory ESG information disclosure of listed companies in China and building an efficient ESG market.

Sustainability is essential for high-quality development

NBD: What is the significance of ESG information disclosure for the high-quality development of listed companies?

Wang Yao: For listed companies, improving their sustainability is important to achieve high-quality development. ESG can be used as a yardstick to effectively measure the level of sustainability, hence providing the foundation for meeting “dual carbon” goals and high-quality development.

The regulation of ESG information disclosure will further help to improve the companies’ awareness of sustainable development and guide them to consider the environmental and social benefits while pursuing economic benefits. Besides, regulation helps incorporate ESG concepts into the company’s strategic planning, strengthens ESG capacity building, and enhances their market competitiveness. By improving ESG-related information disclosure capabilities, listed companies can improve the quality and transparency of their information, which helps them expand their financing channels, reduce financing costs, and facilitate their resource allocation to achieve high-quality development.

NBD: What positive impact will the Guidelines have on the high-quality and international development of China’s capital market by including ESG in the communication of investor relations management?

Wang Yao: The inclusion of ESG in the Guidelines for the first time reflects the regulators’ continuous efforts to strengthen the responsibility of listed companies for environmental, social, and corporate governance issues. It also reflects the capital market’s growing demand for high-quality and sustainable development.

As an essential part of investor relations communication, the disclosure of ESG-related information will, on the one hand, improve the transparency of listed companies’ information and help them to continuously improve its quality. On the other hand, it will further protect investors’ rights and interests by strengthening their fundamental right to information about ESG. It is a big step in ensuring a high-quality capital market.

ESG performance is one of the key considerations for foreign investors. In this regard, the Guidelines are also a response to the demands of the overseas investors. Improving ESG information disclosure of listed companies will simultaniously force them to improve the ESG performance. Reporting the ESG information will gain more favor from foreign investors and enhance the confidence of foreign investors in China’s capital market. It will further promote the alignment of China’s capital market with the international capital market and improve the global competitiveness of Chinese enterprises.

NBD: What other suggestions do you have for their ESG information disclosure?

Wang Yao: The construction of the ESG information disclosure system for listed companies in China is not yet mature.

Looking at the institutional standards, there is no unified ESG information disclosure framework and standards. Therefore, regulators should research and formulate policy requirements related to ESG information disclosure and promote the process of mandatory ESG information disclosure in the first place. Secondly, stock exchanges should develop detailed guidelines for mandatory ESG information disclosure of listed companies and standardize the information disclosure framework.

In terms of supporting mechanisms, regulators must introduce supporting measures in line with ESG information disclosure and incorporate major ESG-related violations into the early warning mechanism and delisting mechanism while improving institutional safeguards to ensure that ESG information disclosure is effectively put into practice.

Regarding market guidance, regulators should work with self-regulatory organizations and industry associations to conduct ESG-related training activities for listed companies and set incentives to guide the standardization of their ESG information disclosure.