News

The International Sustainability Standards Board (ISSB) recently released new standards set to take effect from January 1st, 2024, aiming to establish a universal baseline for sustainable development reporting. These standards are expected to significantly impact Environmental, Social, and Governance (ESG) disclosure practices worldwide, including in China.

ISSB Standards Framework and Content

The ISSB introduced two key standards: International Financial Reporting Sustainability Disclosure Standard 1 (IFRS S1) and International Financial Reporting Sustainability Disclosure Standard 2 (IFRS S2).

IFRS S1 establishes a framework for sustainability-related financial disclosure, requiring companies to report all significant sustainable-related risks and opportunities that could impact their prospects, not limited to climate-related information.

IFRS S2 complements IFRS S1 by specifying disclosure requirements for climate-related risks and opportunities, including greenhouse gas emissions, climate-related transition and physical risks, and opportunities.

Background and Significance

Existing ESG reporting standards, such as GRI, TCFD, SASB, and IIRC, lack uniformity, making it challenging for investors and stakeholders to assess the sustainability impact, risks, and opportunities of companies. The ISSB's new standards aim to address this issue by providing a universal framework for ESG reporting.

Impact on China's ESG Disclosure

The release of ISSB standards has already influenced international policy directions, stock exchanges, and regulatory bodies, indicating an inevitable global adoption of these standards. China, as one of the ISSB's five jurisdictional working groups, contributed to the development of these standards.

The standards will directly affect ESG disclosure for companies listed on the Hong Kong Stock Exchange and are expected to gradually extend to the A-share market. While mainland Chinese companies are not yet required to comply with ISSB standards, the dominance of mainland companies in the Hong Kong market implies a significant impact. Additionally, companies with overseas operations or aiming to enter international markets will face higher disclosure requirements, particularly regarding Scope 3 greenhouse gas emissions, reflecting international demands.

Domestic companies in China will also face challenges due to ISSB standards, including the need to provide information about related entities and the integration of sustainable governance systems. The standards' emphasis on Scope 3 emissions disclosure presents a significant challenge, along with additional disclosure costs related to climate scenario analysis.

Conclusion

Despite China not yet adopting ISSB standards, the global momentum towards their widespread adoption leaves little time for preparation. Chinese companies should align with ISSB's minimum standards, utilize the provided transition period, enhance governance capabilities, and gradually produce compliant ESG reports. Simultaneously, efforts should be made to develop unified ESG disclosure standards tailored to China's economic and social context, reflecting the country's unique characteristics while contributing to global governance solutions.