The number of A-share listed companies that disclosed their ESG (Environmental, Social, and Governance) annual reports this year, also known as "Sustainable Development Reports," increased by 20% compared to last year and by 51% compared to the year before. Alongside the growth in quantity, the market has begun to focus on the quality of disclosure.
According to journalist statistics, this year saw 2,210 A-share listed companies disclose their 2023 Sustainable Development Reports, a significant increase from the 1,838 in 2022 and 1,463 in 2021. At the same time, the vast majority of companies included in the CSI 300 Index have also disclosed their 2023 Sustainable Development Reports.
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However, there have been some skeptical voices in the market: some companies' ESG reports exhibit an over-packaging phenomenon, resembling advertisements more than announcements. How can we prevent listed companies from using ESG report disclosure for "marketing" and "greenwashing"? How can we use this as a lever to truly promote corporate sustainable development?
Quality is as important as quantity; announcements should not be treated as "advertisements."
A recent survey report on the current state of sustainable development work by listed companies in 2024, made public by the China Listed Companies Association, shows that 50.09% of the sample companies have established relevant executive bodies, while 49.91% have not yet done so. The proportion of companies that have and have not established sustainable development-related systems are 43.73% and 56.27%, respectively. A significant 81.02% of listed companies are primarily motivated by internal development when carrying out sustainable development work, and 76.03% of companies also have the need to enhance their brand and reputation.
In April of this year, a responsible person from the Listing Department of the China Securities Regulatory Commission (CSRC) stated in a public setting that for most listed companies, sustainable development reports are not mandatory disclosures, but this does not mean they can be disclosed arbitrarily. Companies should not treat announcements as "advertisements," use ESG disclosure as a means of brand marketing, or provide misleading information to investors by excessively packaging under the "guise" of ESG.
"ESG reports should follow corresponding disclosure principles, including materiality, completeness, balance, comparability, timeliness, etc. Companies' products and services can integrate ESG values and contributions into the overall disclosure framework, rather than just displaying them in the report," said Li Site, ESG Operations Manager at the testing and certification service organization, CTI Testing.
Li Site stated, "ESG information should be reasonable, truthful, accurate, and traceable to avoid 'greenwashing' suspicions. Companies can establish an internal review mechanism for ESG non-financial information and, where possible, invite qualified independent third parties to conduct audits, optimize the ESG data mechanism, and enhance the credibility of the report."
"The department that writes the ESG report determines the report's positioning," said Lang Hua, Director and Partner at the ESG service organization, SynTao.
She said in an interview, "If the company's investor relations department is responsible for writing the report, it will usually be written strictly in accordance with the standards and specifications of information disclosure. Companies led by the strategic department in ESG will pay more attention to the integration of ESG with corporate strategy and the improvement of governance efficiency. If the company's public relations and communication department takes the lead, in addition to applying standard specifications, they will pay special attention to the promotion of brand value and focus more on the brand communication attributes of the report.""ESG reports are written like marketing soft articles, fundamentally because some companies treat ESG reports as an upgraded version of social responsibility reports," said Gao Yanhui, the person in charge of ESG business at the Capital Science and Technology Development Strategy Research Institute.
He cited an example, stating that the main participants in the social responsibility report were once the company's marketing and branding departments, and the purpose of releasing the report was to enhance the company's reputation. Gao Yanhui believes: "Simplifying the understanding of ESG reports as an upgraded version of social responsibility reports has led to a certain deviation in the old cognition."
"Of course, disclosing ESG reports does not contradict enhancing brand influence," Gao Yanhui believes that companies should disclose ESG information with positive language, grasp the boundary of not deviating from the facts and not 'greenwashing', "It is recommended that companies strictly follow the disclosure rules, speak what they do, and do what they say."
Enhancing sustainable development capabilities with quantitative indicators
A recent research report by Orient Securities summarized the ESG disclosure performance of the constituent companies of the CSI 300 Index in 2023, believing that the current ESG disclosure rate is high, and the quality of disclosure has been further improved, but there are still issues such as the lack of quantitative indicators.
The "Guidelines for Sustainable Development Reports of Listed Companies" published by the Shanghai, Shenzhen, and Beijing stock exchanges in April this year requires that the disclosing entities should improve the level of informationization and digitization in the collection, accounting, and analysis of data related to sustainable development, enhance the reliability and comparability of the disclosed data, and continuously improve the quality of sustainable development information disclosure.
"The lack of quantitative indicators in ESG reports may be due to companies' unwillingness to disclose, inability to disclose, or inability to disclose," Gao Yanhui said. For some companies, ESG reports are new things, and they worry that disclosing quantitative indicators will have a negative impact on the company; the company has not yet mastered the professional ability to disclose ESG data in a short time; it may also be that the accumulation of ESG-related data requires time, and the company naturally cannot disclose when there is no quantitative data.
Gao Yanhui believes that to solve the problem of the lack of quantitative indicators in disclosure, in addition to companies establishing a clear ESG indicator system, they should also consider taking the opportunity of digital transformation and using digital technology to empower ESG management.
"The establishment and implementation of ESG quantitative targets by companies mean that ESG management is truly internalized in actions, and it will also bring corresponding cost pressure," Lang Hua believes. Some listed companies can only meet the ESG disclosure requirements at present, and there may not be corresponding quantitative management mechanisms within the company.
Lang Hua further analyzed that when a company discloses ESG quantitative targets, it means that a higher commitment has been made, and the achievement of the commitment requires systematic investment in funds, resources, and human resource deployment. Announcing targets to the outside world also means that it will be subject to more supervision and pressure from the outside world.She mentioned that some international companies set short-term, medium-term, and long-term quantitative ESG targets in their ESG reports to follow up on the progress of these goals, and to disclose measures to promote and implement the targets, management mechanisms, challenges, and response strategies. Such reports are more likely to be welcomed by investment institutions. Currently, not many A-share companies have achieved this. With the implementation of the "Sustainable Development Report Guidelines" by the three major exchanges, and as investors truly integrate ESG into their decision-making factors, more companies will be encouraged to carry out ESG quantitative management.
Li Shi Te believes that a good ESG report should include quantifiable and executable short-term, medium-term, and long-term targets, as well as consistent and comparable quantitative performance indicators. On one hand, the short-term, medium-term, and long-term targets set by companies should be integrated into the overall planning of business operations, such as the company's overall ESG goals and key issue management targets for the next 3 to 5 years, along with corresponding measures, regular reviews, and timely improvements when targets are not met. On the other hand, quantitative data should be based on a scientific and comprehensive data management system, with regular collection, review, and reporting of data, and accurate reporting of the data.
Li Shi Te cautions that with the increasing stringency of ESG regulatory requirements, the quality of ESG data will become key to the quality of the report, and suggests that listed companies prepare in advance.
The Shanghai, Shenzhen, and Beijing exchanges have taken into account the actual situations of various companies and clearly mentioned in the guidelines that for indicators that are difficult to disclose quantitatively, qualitative disclosure can be made and the reasons for the inability to disclose quantitatively should be explained.
The aforementioned responsible person from the China Securities Regulatory Commission (CSRC) stated that the CSRC will promote the external audit and certification of ESG information, continuously improve the accuracy and disclosure quality of listed companies' ESG data; support credit rating agencies to continuously establish and improve green enterprise and green bond rating methodologies; promote increased ESG investment, introduce more indices and fund products, and foster a virtuous cycle with a more robust ESG ecosystem.