Recognizing the differences in ESG regulations around the world

The regulatory differences in ESG between China and other countries reflect the divergent expectations for corporate ESG practices in different regions.

European Union: A Top-Down Approach to ESG

The European Union (EU) takes a systematic approach to promote ESG practices from the top down. The ESG regulatory standards of the EU are considered world leading. From a legislative standpoint, the EU has supported setting ESG disclosure norms in three aspects: corporate disclosure, financial institution disclosure, and ESG economic activity classification. In November 2022, the European Council adopted the Corporate Sustainability Reporting Directive (CSRD), which requires EU companies that meet certain size requirements to disclose information in accordance with the European Sustainability Reporting Standards.

U.S.: Internal Variations in ESG Policies and Practices Due to Diverse Cultures and Political Positions

The US has significant internal variations in ESG policies and practices due to its diverse cultural and political landscape. Between different states and between the federal and state governments, there are varying stances on promoting ESG investments and corporate disclosures. There is legislation strongly supporting low-carbon and sustainable development, such as the Inflation Reduction Act signed by President Biden in August 2022, which requires the US government to invest US$369 billion over the next decade to reduce the country's greenhouse gas emissions by approximately 40%. However, there have also been efforts led by the Republican Party to propose the anti-ESG bills, aiming to abolish government provisions that allow investors to consider ESG factors in retirement investment plans. The diverse attitudes towards ESG reflect the multicultural society and distinct political positions in the US.

China: Emphasis on Industry Characteristics and Pragmatic Progress

Compared to the one-size-fits-all ESG regulatory standards in other countries, China's ESG regulatory standards have a stronger emphasis on industry and enterprise characteristics. In recent years, China has successively introduced regulatory guidelines, such as the Green Finance Evaluation Scheme for Banking and Financial Institutions and the Green Finance Guidelines for the Banking and Insurance Industry. These guidelines, compared to broad voluntary disclosures that apply across all industries, can better guide enterprises towards green development in terms of business strategic planning and resource allocation. Additionally, ESG regulation in China places a greater emphasis on benchmarking and exemplary roles. For example, the State-owned Assets Supervision and Administration Commission (SASAC) issued the Work Plan to Improve the Quality of Listed Companies Controlled by Central SOEs (state-owned enterprises). The plan requires central SOEs to participate in creating China's ESG information disclosure rules, evaluation, and investment guidelines. It mandates that listed companies controlled by a central SOE should have full ESG special report disclosures by 2023. The Shanghai Stock Exchange also requires companies listed in the STAR 50 Index to disclose their social responsibility reports alongside their annual reports.

Against the backdrop of these existing differences, there are also differences in the definition of the same ESG topics in China and other countries. This is influenced by the divergent expectations of regulators regarding ESG practices and differences in each market’s economic development, its social and cultural background, and the policy and regulatory environment.

First, in the environmental dimension, there are differences by country in the target date for achieving carbon neutrality or net-zero emissions. Since The Paris Agreement came into effect in 2015, the international community has reached a consensus in addressing climate change. However, the publicly declared target dates for achieving carbon neutrality or net-zero emissions vary among countries. Some Nordic countries have set early target dates, such as 2035 for Finland and 2045 for Sweden. This can be attributed to factors such as their early industrialization, low population density, abundant renewable energy resources like wind power, widespread environmental awareness among their population, and vulnerability to physical risks of climate change due to their geographical locations. China's commitment to strive for carbon peak by 2030 and carbon neutrality by 2060 is an important guarantee for improving the living standards of Chinese people and advancing the Chinese path to modernization. In terms of ESG investing, an increasing number of investment institutions from China are calling for a regional green and transition investment standard based on the carbon neutrality roadmaps of emerging countries, rather than relying solely on the so-called global standards that may not be appropriate for all.

Second, in the social dimension, there are differences in the perspective of "community" and the underlying historical and cultural factors. When evaluating Chinese companies, overseas analysts often believe that Chinese companies lack sufficient mechanisms to maintain community relationships, thereby increasing community relationship risks. The issue lies in the assessment of corporate social value being influenced by the social environment in which they operate. Compared to international community perspectives such as "diverse ethnic communities" or "indigenous communities", the villages in China that have achieved poverty alleviation and implemented rural revitalization strategies also belong to the broader definition of "community". The poverty alleviation and rural revitalization strategies in China consider not only mitigating the impact of commercial activities on vulnerable communities but also building and supporting sustainable industries to alleviate poverty for a large population and achieve common prosperity. The participation and contributions of Chinese companies also have a positive impact at a larger scale and on a broader population level within the "community", thus responding to the expectations of a wider range of stakeholders. This is a direct manifestation of the primary goal of the United Nations Sustainable Development Goals – "no poverty". As Chinese companies continue to communicate about their efforts, overseas institutions are gradually paying attention to and understanding the social benefits brought by Chinese companies' involvement in poverty alleviation and rural revitalization, incorporating them into the scope of "community" evaluation. Bridging the global ESG evaluation system requires not only the localization of international standards but also on international institutions recognizing and incorporating regional considerations.

Third, in the governance dimension, there are differences in laws and regulatory policies in different regions. The differences in ESG standards in the governance dimension (G) among China and other countries are primarily reflected in the evaluation criteria used by international investment institutions and ESG rating agencies. To improve the comparability of investment targets from different countries, institutions often integrate corporate governance guidelines from various jurisdictions to form unified evaluation standards to apply across the board. They also adopt the most stringent standard among all jurisdictions for the same issue, aiming to establish an ideal benchmark of "global best practices in governance". However, applying an idealized global benchmark is inappropriate, given that different countries’ regulations and practices in corporate governance are products of their own legal systems. Not only are there differences between China and other countries, but there are significant variations among developed countries. For example, the US Securities and Exchange Commission requires listed companies to have independent directors representing over 50% of the board, while Japan requires companies to appoint two independent directors. Meanwhile, France requires listed companies to adopt a dual audit system, making it the only country in the world with such a mandatory requirement. China requires listed companies to have a proportion of independent directors of no less than 30%. However, in China's corporate governance supervision system, independent directors are not the sole supervisors; there are also supervisory committees. Therefore, simply extracting the most stringent governance requirements of each country, and combining it into a uniform international ESG standard, makes it difficult for listed companies to meet those requirements.

Keep reading the article in the following sections 

- Part 1: Richard Sheng, Ping An Secretary of the Board of Directors: The "Global Perspectives, Chinese Approach" to ESG

- Part 3: Identifying Commonalities in ESG Values 

- Part 4: ESG Practice and Reflective from Ping An 

This article was published in the 16th edition of the "Peking University Finance Review."