Overview of Chinese Ministry of Finance's Corporate Sustainability Disclosure Guidelines - General Requirements (Exposure Draft)

By Guo Peiyuan, Zhang Rui and Liu Tao

?(This article is machine-translated from Chinese. The original article can be found here )

On 27 May, the Ministry of Finance issued the "Guidelines on Corporate Sustainability Disclosure - General Requirements (Exposure Draft)", which put forward general requirements for corporate sustainability disclosure in China, taking an important step in the construction of China's sustainability disclosure guidelines system. This article explains the main contents of the General Requirements, the comparison with the existing standards and guidelines, and the possible impact.

?

I. Key contents

The exposure draft of the General Requirements consists of six chapters, including the General Provisions, Disclosure Objectives and Principles, Information Quality Requirements, Disclosure Elements, Other Disclosure Requirements and Supplementary Provisions. The first chapter is the General Provisions, comprising eight articles, which stipulate the purpose of formulation, the scope of application, the standard system, the reporting body, the concepts of sustainable information and value chain, related information, information system and internal control requirements. Chapter 2 is the disclosure objectives and principles, with 5 articles, stipulating the objectives of sustainability information disclosure and users of information, and clarifying the materiality principle, materiality assessment, aggregation and disaggregation, and the proportionality approach involved in the disclosure objectives. Chapter 3 is Information Quality Requirements, comprising 6 articles, stipulating 6 information quality requirements that should be met by the sustainability information disclosed by enterprises, namely reliability, relevance, comparability, verifiability, understandability and timeliness. Chapter 4 is on disclosure elements, comprising seven articles, which stipulates the four core elements that should be included in the sustainability information disclosed by enterprises, namely governance, strategy, risk and opportunity management, indicators and targets, as well as what needs to be disclosed under each element. Chapter 5 is Other Disclosure Requirements, which consists of 6 articles, stipulating the timing of reporting, comparable information, statement of compliance, judgement and uncertainty, correction of errors, and location of reporting and disclosure. Chapter 6 is the bylaws, with one article, which stipulates that the guidelines are to be interpreted by the Ministry of Finance.

?

The purpose of the General Requirements is to regulate the basic concepts, principles, methods, objectives and general common requirements for the disclosure of corporate sustainability information, which are of general applicability and are applicable to enterprises established within the territory of the People's Republic of China that carry out sustainability disclosure in accordance with the regulations. The General Requirements stipulates that the reporting entity should be consistent with the reporting entity of the financial statements, and if the reporting entity is a consolidated entity, then the parent company and subsidiaries covered by the sustainable information disclosure should be consistent with the scope of consolidation of the consolidated financial statements. The General Requirements specifies that enterprises should publicly release an independent sustainability report, and the timing of disclosure can be disclosed to the public at the same time as the financial report, or subject to regulatory requirements.

?

II. Key features

According to the drafting instructions issued by the Ministry of Finance, the preparation of the Exposure Draft of the General Requirements mainly adheres to the general idea of "actively drawing on, focusing on our own, incorporating the best of both worlds and highlighting the characteristics". The "positive reference" here is mainly manifested in the fact that it is based on the General Disclosure Requirements (IFRS S1) issued by the International Sustainability Standards Board (ISSB), and maintains a general convergence with IFRS S1 in terms of the information quality characteristics, disclosure elements and relevant disclosure requirements. However, the General Requirements takes into full consideration China's national conditions in terms of the purpose of its formulation, scope of application, disclosure objectives and materiality criteria.

?

It is important to note that the General Requirements is only one component of the nationally harmonised system of sustainability disclosure standards envisaged by the Ministry of Finance. Article 3 of the General Requirements states that corporate sustainability disclosure guidelines include three types: basic guidelines, specific guidelines and application guidelines. The General Requirements set forth general requirements for corporate sustainability disclosure; the Specific Guidelines set forth specific requirements for corporate disclosure on environmental, social and governance sustainability topics; and the Application Guidelines explain and refine the Guidelines and the Specific Guidelines, including the Industry Application Guidelines and the Guidelines Application Guidelines, which provide guidance on the application of the Guidelines and the Specific Guidelines by the relevant industries, as well as operational provisions on key and difficult issues. The basic guidelines can be regarded as the "Basic Guidelines" and "Specific Guidelines". It can be argued that the basic guidelines are the "fundamental law", and the formulation of specific guidelines and application guides should follow the basic guidelines, which also explains why the Ministry of Finance first issued the Exposure Draft of the Basic Guidelines.

?

A nationally harmonised system of sustainability disclosure standards is an ambitious goal that will necessarily have to be implemented in stages. The overall goal of the Ministry of Finance is to have the basic corporate sustainability disclosure guidelines and climate-related disclosure guidelines in place in China by 2027. By 2030, a unified national system of sustainability disclosure standards will be basically completed. The requirements for enterprises are also progressive, with the overall route expanding from listed to non-listed companies, from large enterprises to small and medium-sized enterprises, from qualitative to quantitative requirements, and from voluntary to mandatory disclosure.

?

III. Comparison with IFRS S1

The General Requirements are based on international standards and therefore the General Requirements has more similarities with the ISSB standards, in particular IFRS S1. Firstly, the blueprint of the sustainability disclosure standards system has a similar structure to ISSB, with the Basic Standards corresponding to S1 (General Requirements), the Specific Standards corresponding to S2 and future issue standards such as S3 and S4, and the Application Guidelines corresponding to technical support documents such as SASB. Secondly, the Exposure Draft of the Basic Standard follows the framework of the four elements of IFRS S1, namely "Governance, Strategy, Risk and Opportunity Management, Indicators and Objectives", and the contents of the disclosure elements in Chapter 4 correspond to the contents of IFRS S1 in general. Thirdly, the Exposure Draft of the Basic Standard follows IFRS S1's formulation of information quality requirements, i.e. reliability, relevance, comparability, verifiability, comprehensibility and timeliness, which is basically the same as that in Appendix IV of IFRS S1.

?

The differences between the General Requirements and IFRS S1 are mainly in the following points. Firstly, they express the users of information slightly differently, with the main users of IFRS S1 being the main users of general-purpose financial reports, while the Exposure Draft of the Basic Standard defines a broader range of users, including investors, creditors, the government and its relevant authorities and other stakeholders. Second, because of the broader scope of users, the General Requirements can be considered to follow the principle of dual materiality (or double materiality), i.e., assessing whether sustainable risks and opportunities have significant current or expected financial impacts on the enterprise and whether the enterprise's activities have a significant impact on the economy, society, and the environment, whereas IFRS S1 is considered primarily in terms of financial materiality. Thirdly, regarding the form of disclosure, the General Requirements particularly emphasises that enterprises should make independent sustainability reports, which should be published on official websites or in other ways, whereas ISSB prefers to disclose the relevant information in different locations of the financial report, rather than reporting it separately.

?

IV. Comparison with A-share Guidelines

A comparison of the General Requirements and the A-share Sustainability Guidelines issued by the Shanghai and Shenzhen Stock Exchanges shows that both emphasise the importance of international alignment while highlighting Chinese characteristics. International alignment is reflected in the fact that both documents follow the IFRS S1 four-factor framework of "governance, strategy, risk and opportunity management, indicators and targets". The Chinese characteristics are reflected in the fact that both documents place sustainability disclosure in the context of high-quality development and the new development concept, and that the users of sustainability information include not only investors, but also other stakeholders, such as employees, consumers, customers, suppliers, communities, and the enterprise's business and social partners.

?

The biggest difference between the General Requirements and the A-share Sustainability Reporting Guidelines is the difference in content structure; the A-share Sustainability Reporting Guidelines is a complete guidance document for listed companies, which includes general requirements as well as 21 specific topics related to environmental, social and corporate governance, and listed companies can prepare their reports in accordance with the Guidelines. The General Requirements, on the other hand, is a general requirement for sustainability disclosure for all enterprises, with a very detailed explanation of the four-factor framework, but without mentioning any of the specific topics, which are expected to be reflected one by one in the specific standards to be issued in the future. It can be seen that there is no substitution between the Basic Standard and the A-share sustainability reporting guidelines, and listed companies should still follow the guidelines in preparing their reports and refer to the Basic Standard at the same time.

?

IV. Implications

Firstly, the release of the EGeneral Requirements marks the beginning of the construction of China's sustainable disclosure standards system. The General Requirements reveals the basic structure and overall route of the sustainable disclosure standard system, and depicts the work tasks from now to 2030. In the process of building the guideline system, the Ministry of Finance has to participate together with other departments, which mainly include the Ministry of Foreign Affairs, the National Development and Reform Commission, the Ministry of Industry and Information Technology, the Ministry of Ecology and Environment, the Ministry of Commerce, the People's Bank of China, the State-owned Assets Supervision and Administration Commission of the State Council, the General Administration of Financial Supervision and Regulation, and the China Securities Regulatory Commission, etc., as mentioned in the drafting instructions of the General Requirements. These departments either already have a foundation in sustainability disclosure work or have related functions. The drafting instructions suggest that the relevant departments may "first formulate disclosure guidelines and regulatory regimes for specific industries or fields according to actual needs", and then gradually adjust and improve them in the future.

?

Secondly, the release of the General Requirements also signals that the ISSB Guidelines are ready to be applied in China's mainland market. since the official release of the ISSB Guidelines in June 2023, the focus has been on promoting the application of the Guidelines in various jurisdictions, and they have already begun to be applied in markets such as Singapore. The drafting instructions for the General Requirements also describe the relevance of the General Requirements to the ISSB Guidelines: prior to the drafting of the Guidelines, the Ministry of Finance (MOF) organised a technical assessment of the applicability of the ISSB in China, which concluded that "most of the requirements of the ISSB have applicability in our country", and proposed to develop sustainable disclosure guidelines on the basis of the ISSB; during the drafting process of the Guidelines, MOF organised a technical assessment of the ISSB Guidelines in China. In the process of drafting the guidelines, the Ministry of Finance followed the idea of maintaining convergence and reflecting characteristics to facilitate the convergence of China's sustainable disclosure guidelines with ISSB guidelines.

?

Thirdly, the General Requirements and the A-share guideline together form a number of consensus points on sustainability disclosure for enterprises in China. The consensus can be summarised as follows: adhering to the multi-stakeholder perspective and the principle of double materiality; following the four-factor framework of "governance, strategy, risk and opportunity management, and indicators and targets"; encouraging the publication of a separate sustainability report on a calendar year basis, which can be cross-referenced to the financial report (statement); progressing step by step and adhering to the principle of voluntary to mandatory disclosure, with large enterprises and listed companies taking the first step; and taking steps within the limits of capacity, emphasising the importance of disclosure by enterprises in China. (b) Gradual progress, adhering to the principle of moving from voluntary to mandatory, with large enterprises and listed companies being allowed to take the lead; and (c) Adhering to the principle of keeping within one's means, emphasising the need for enterprises to take into account the affordability of costs when making disclosures.

?

Fourthly, at the initial stage, enterprises may take the General Requirements as a principled reference and focus on following the specific requirements of the relevant departments regarding sustainable disclosure. The drafting instructions for the General Requirements clearly state that in the initial stage after the release of the General Requirements, enterprises will first implement it voluntarily in conjunction with their own actual practice; after the conditions in all aspects are relatively mature, the Ministry of Finance will work with the relevant departments to make targeted arrangements for the scope of implementation, mitigation measures, the applicability of relevant provisions, and specific articulation provisions. Moreover, the General Requirements only provides general disclosure requirements and does not cover specific topics. Therefore, at this stage, enterprises should still primarily follow the specific requirements of the relevant departments, i.e. listed companies should disclose in accordance with the requirements of the exchanges, financial institutions should disclose in accordance with the requirements of the People's Bank of China and other departments, and state-owned enterprises should disclose in accordance with the requirements of the State-owned Assets Supervision and Administration Commission. With the gradual improvement of the construction of the sustainable disclosure standards system, the synergy of the disclosure requirements of different sectors is expected to gradually increase.

?

Fifthly, in the medium to long term, enterprises should establish and improve systems for data collection, validation, analysis, utilisation and reporting in relation to sustainable information disclosure. This point is clearly mentioned in Article 8 of the General Requirements, which we believe is very important. According to the current trend, sustainability information disclosure will gradually depart from the original social responsibility information disclosure logic of "storytelling and branding" and move more towards the logic of "management and value"; the importance of quantitative information will also gradually increase. Under this trend, enterprises are bound to gradually establish disclosure indicator manuals and information collection and management systems that suit their own characteristics.

Chinese version of the General Requirements can be found here: 企业可持续披露准则--基本准则（征求意见稿）