ESG Litigation Guide

China

Governance

Corporate governance policy

In force

Companies listed on the STAR Board (Sci-Tech Innovation Board)

Under the Guidelines introduced by the Shanghai Stock Exchange on 7 January 2022, companies listed on the Sci-Tech Innovation Board are required to put greater resources into investor relations management and are encouraged to make public communications to investors.

Environmental

Environmental policy

In force

Government and business, key pollutant-discharging companies (as defined in the legislation).

The EPL is the cornerstone environmental law in China, setting out requirements for business and government when conducting their activities in order to protect the environment, prevent pollution, and promote greener industry.  The stated aim is to “ensure the rational use of the natural environment, the prevention and elimination of environmental pollution and damage to ecosystems, in order to create a clean and favourable living and working environment, protect the health of the people and promote economic development”.

The EPL contains wide ranging provisions designed to protect the natural environment, including:

  • requirements for entities to consider and prevent pollution and damage to the environment when selecting sites for, and methods of, construction, industrial planning, and other development;
  • the right of citizens to bring civil actions against other individuals or entities for breaching the EPL;
  • the principle that “the polluter pays”, ie whoever created or caused pollution or damage to the environment is required to minimise and mitigate its impacts, and fund reparatory action if necessary; and
  • the requirement to mitigate atmospheric pollution, including carbon emissions, in any way reasonably possible.

The provisions are general, and enforcement is generally carried out on a “common sense approach”, ie on a case by case, subjective basis. 

As part of China’s drive towards a greener economy, the original law was amended and significantly strengthened, first in 2012 and then in 2014 (coming into force in 2015).  The 2014 amendment introduces a number of disclosure and participation requirements for “key pollutant discharging companies”.

These are defined as enterprises and institutions that discharge significant quantities of pollutants1, including but not limited to: organic water pollutants, ammonium nitrate, phosphorus or atmospheric pollutants such as sulphur dioxide, nitrogen oxides, particulate matter and volatile organic compounds, that would have a material impact on regional or national ecological environmental quality.

Article 55 of the EPL mandates key pollutant-discharging companies must provide open disclosure of the emissions and discharge of the pollutants in question, the emission concentration(s) and total volume, whether the emissions exceed relevant limits, as well as the company's construction and operation of pollution prevention and control facilities. Relevant companies are also required to accept social supervision, which comprises criticism, complaint and comment by the media, and other non-state actors2 with regard to the above.

Key provisions include the imposition of non-capped daily penalties on entities infringing the Law, coupled with financial and other incentives for entities complying with or exceeding the targets set out under the EPL.

The level and extent of enforcement of and compliance with the EPL is relatively unclear, but studies such as this have measured a marked drop in the concentrations of key pollutants addressed under the Law.

 

1 See Article 3 of Key Emissions and Environmental Risk Control Unit List Management Regulations (Draft for Comment) issued by Ministry of Ecology and Environment.

2 Social supervision refers to the supervision of the legality of various legal activities by social organizations (e.g. the media) and citizens other than state organs, which does not have direct legal effect. Forms of social supervision mainly include criticism, suggestion, prosecution, denunciation, complaint, accusation, etc..

Environmental

Environmental policy 

In force

Entities producing air pollution

The LAPPC, which came into force on 26 October 2018, is the most important overarching law regulating air pollution in China.  Air pollution is a significant issue in China, and has been identified as causing hundreds of thousands of premature deaths every year, and the law is designed to mitigate these impacts, and to address the underlying causes.

The LAPPC requires heavily polluting industries, such as coal power generation, mining, and heavy industry to reduce and control pollution levels, as well as setting targets for future pollution reductions, and to formulate air quality and emissions standards nationally and regionally.

The Law directs the Ministry of Environment, as well as the relevant environmental agencies on a local and national scale, to produce air quality and emissions standards on a national and regional scale, and requires all in scope entities to conduct environmental impact assessments when embarking on the construction of “major projects or infrastructure”. 

Penalties for breach of the law include financial sanctions, which can be levied for fences such as:

  • the “excess” emission of gases harmful to the environment, above government or industry targets/caps;
  • failure to recycle or reuse flammable gases produced by industrial processes;
  • failure to maintain and construct equipment and infrastructure necessary to prevent the emission of harmful gases; and
  • discharging air pollutants without obtaining a valid permit from the local government for doing so.

A number of the provisions are subjective, and are assessed on a case by case basis, with sanctions often administered behind closed doors. 

Environmental

Environmental policy

In force

Companies that discharge poisonous and harmful water pollutants described in the directory published by the Ministry of Environmental Protection.

The law, as amended in 2017 and which came into force in 2018, stipulates that companies discharging poisonous and harmful water pollutants into water resources shall publicly disclose information on the poisonous and harmful water pollutants.

Environmental

Environmental policy

Draft law to be finalised

Companies on the list of “key energy-consuming companies” as published by the energy administration.

The Draft Energy Law, published by the National Energy Administration in April 2020, sets mandatory requirements for “key energy-consuming companies” to disclose information on energy-consuming efficiency and per-unit energy consumption. The Draft Energy Law has yet to be finalised. 

Environmental

Environmental policy / Disclosure Guidance / non-financial reporting

In force

(1) Key pollutant-discharging entities; (2) enterprises implementing mandatory cleaner production; (3) listed companies and their subsidiaries falling within the scope of consolidated financial statements (collectively “Listed Companies” for the purpose of this Administrative Measures); (4) enterprises issuing enterprise bonds, corporate bonds, non-financial enterprises that issue debt financing instrument (collectively, the “Bond-Issuance Enterprises” for the purpose of this Administrative Measures)1; and (5) other enterprises required to disclose environmental information according to laws and regulations.

1 For the purpose of this Administrative Measures, the Listed Companies and Bond-Issuance Enterprises refer to those (i) being held for criminal liabilities for violation of violation of ecology and environment laws; (ii) being imposed of a fine of more than RMB 100,000 for violation of violation of ecology and environment laws; (iii) being imposed of consecutive fines on daily-basis for violation of violation of ecology and environment laws; (iv) being imposed with restrictions on production and ordered to suspend production for rectification for violation of ecology and environment laws; (v) whose ecology and environment-related permits are revoked for violation of ecology and environment laws; and (vi) whose legal representative, person in charge and person in direct charge or other persons who are directly responsible have been held for administrative custody for violation of ecology and environment laws.

The Administrative Measures issued by the Ministry of Ecology and Environment, came into force on 8 February 2022.

Under the Administrative Measures, the disclosing party (i) shall compile an annual mandatory disclosure report on environmental information and an interim mandatory disclosure report on environmental information according to the Guidelines on Form of Mandatory Disclosure, as amended by the ecology and environment authority from time to time; and upload such a report to the system for mandatory disclosure of environmental information by enterprises.2

In accordance with the Administrative Measures, the disclosure report must include basic information on an enterprise’s production and environmental protection circumstances, an enterprise’s environmental administration information, pollutant generation, governance and discharge information, carbon emission information, ecological and environmental emergency information (e.g. air pollution index), information in respect of violation of ecology and environmental laws, and in particular, listed companies and bond-Issuance companies are additionally required to disclose any nexus between their investment or any other financial/financing activities and climate change and environmental protection.

2 The disclosure system is established and published by local ecological and environmental authorities.

Environmental

Environmental policy

In force

The Guiding Opinions, issued by the Ministry of Environmental Protection on 9 January 2021, outline the goals and initiatives for promoting emissions targets by, for example,  constructing the national trading market for emissions and encouraging companies to disclose their information on emissions.

Environmental

Environmental policy

In force

All companies incorporated in China

The Circular was issued by the State Council on 27 October 2016.

It sets out the main goals for controlling GHG emissions and also the roles of companies in reducing emissions, as well as detailing the roles of different regional bodies and local government in implementing targets.

Specifically, the national Emission Trading System (ETS) was launched in 2021, and the disclosure mechanism in respect of  information on emissions has been established for the provincial and municipal level climate change response departments.1

1 This is mentioned in Article 6 of Measures for the Administration of Carbon Emissions Trading (for Trial Implementation), which provides “The provincial ecology and environment departments shall be responsible for organizing within their respective administrative areas such activities as the allocation and surrender of emissions allowances and the reporting and verification of GHG emissions, and supervise and administer them. The ecology and environment department at the districted city level shall be responsible for cooperating with the provincial ecology and environment department in implementing the relevant specific work, and carry out supervision and administration in accordance with the relevant provisions of these Measures.”.

Environmental

Environmental policy

In force

Listed companies and bond issuer

The Guiding Opinions, issued and enforced on 31 August 2016, set forward the key principles of the Green Financial System.
The key principles are:

  • Listed companies and bond issuers are required to put in place systems of step by step environmental disclosure.
  • Listed companies identified as  key pollutant dischargers shall strictly comply with specific information disclosure requirements on the emission of major pollutants, the status of the construction and operation of the company’s environmental protection facilities, and major environmental incidents.
  • Higher penalties will be imposed upon listed companies and bond issuers for disclosing/submitting falsified environmental information.
  • Third party organisations that provide environmental disclosure advice shall enhance their capabilities to offer such advice to listed companies.
  • Third-party professional organisations are encouraged to participate in collecting, researching and publishing corporate environmental information and analysis reports.
Environmental

Environmental policy

In force (1 May 2024)

Entities emitting more than 26kt of carbon dioxide annually, and operating in in scope sectors, including electricity generation, mining and extraction, and heavy industries.

The Regulations, which are an expansion of previous regulations that came into effect on 1 February 2021, govern China’s carbon emissions trading regime, under which entities are allowed to purchase or sell “carbon quotas” on a market strictly regulated by the Ministry of Ecology and Environment.

The Regulations stipulate that to participate in the scheme, in scope companies must report their emissions and disclose relevant trading information to provincial level environmental authorities in the area in which the company’s primary production and business premise is located.

These emissions reports are then verified and confirmed by the relevant authorities, along with regular inspections by independent technical inspectors, at which point entities are allowed to participate in the Certified Emissions Reduction scheme (CCER), under which entities can buy and sell carbon credits on the Emissions Trading System, which is the largest such system in the world.  The system is currently mainly employed by the energy generation sector, but there is gradual uptake from other industries as the market adapts to the Regulations.

For more information on Hogan Lovells’ carbon trading practice generally, please see here.

Environmental

Environmental policy

In force

Companies that discharged greenhouse gas up to 26 thousand tons of carbon dioxide in any year from 2013 to 2020 and are in the electricity generation, chemical engineering, paper production, aeroplane and other discharging industries (“Key Greenhouse Gas Discharging Companies”)

Key Greenhouse Gas Discharging Companies are required to disclose their greenhouse gas emissions through an online submission process under the management of departments of environmental protection at the province level.

Environmental
Social

Disclosure Guidance / non-financial reporting

In force

Listed companies and their major subsidiaries

There is a standalone chapter (Chapter 5) outlining the environmental and social responsibilities of listed companies in the Standards published by the CSRC on 28 June 2021.

Article 41 of Chapter 5 of the Standards stipulates that listed companies or their major subsidiaries that have been listed as key pollutant discharging entities shall disclose the following environmental information in their annual reports: (i) pollutant discharge information; (ii) information relating to construction and operation of pollution prevention and control facilities; (iii) environmental impact assessments of the construction projects and other administrative approvals for environmental protection; (iv) contingency plans for  environmental emergencies; (v) environmental self-monitoring plans; (vi)  details of any administrative penalties imposed due to environmental issues during the reporting period; and (vii) other information that should be publicly disclosed. Article 42 of Chapter 5 of the Standards encourages listed companies to “actively disclose their active fulfilment of social responsibilities in consideration of industrial characteristics, including but not limited to the purposes and concept of the company's fulfilment of social responsibilities, protection of the rights and interests of shareholders and creditors, protection of employees' rights and interests, protection of the rights and interests of suppliers, clients and consumers, environmental protection and sustainable development, public relations, public welfare undertakings, etc.” 

Environmental

Environmental policy

In force

Banking and financial institutions

Pursuant to the Plan introduced by the People’s Bank of China (the “PBOC”) on 1 July 2021, the PBOC shall comprehensively evaluate the green finance business (including green loans, green securities, green equity investments, green leasing, green trusts, and green wealth management) of banking financial institutions, and decide whether to provide incentives or impose restrictions on financial banking institutions based on the evaluation results, and such evaluation results will be incorporated into the PBOC's policies and prudential management tools.

Environmental

Environmental policy

In force

Banks and insurance institutions

In accordance with the Circular published by the CBIRC on 1 June 2022, banks and insurance institutions shall establish client-specific ESG assessments standards and make ESG assessments of clients from time to time, and shall take the ESG assessment results into consideration when determining clients’ ratings and the granting of loans. Articles 18 to 22 of the Circular require banks and insurance institutions to strengthen due diligence on ESG risks of clients when they contemplate granting bank credits or when managing investment approvals, to urge clients to strengthen ESG risk management through contracts (e.g. ESG risk reports shall be included in the body text/appendices of the contract, where the subject client and investment projects involve material ESG risks) and release bank credits and investment funds based on the ESG risk status of their clients.

Environmental
Governance

Environmental policy / Disclosure Guidance / non-financial reporting

In force

(i) Key pollutant-discharging enterprises; (ii) enterprises that are subject to mandatory review for cleaner production; (iii) listed companies and their subsidiaries at all levels; (iv) enterprises that issue enterprise bonds, corporate bonds, and debt financing instruments for non-financial enterprises; and (v) other enterprises that should disclose environmental information under laws and regulations.

These Measures (as defined in the Environmental Protection Law) were made in accordance with Environmental Protection Law and other relevant regulations, which came into force on 8 February 2022, require the five categories of enterprises to disclose their environmental-related information. 

Environmental

Non-financial reporting / Disclosure Guidance

Chinese financial institutions and enterprises

This Initiative was jointly established by seven industry self-regulatory associations on 5 September 2017.

In making overseas investments, banks are encouraged to refer to relevant international sustainability standards, and institutional investors should refer to the UN Principles for Responsible Investment. 
Entities engaged in overseas investment are encouraged to take steps to improve the disclosure of ESG information.

Governance

Disclosure guidance

In force

Companies listed on the Main Board of the Shanghai Stock Exchange

The Guidelines that came into force on 7 January 2022 include several measures related to social responsibility. The January version has now expired as it has renewed on 29 July 2022, but the July version still contains such articles (see Article 2.2.1(11) and Attachment 1).

Under the Guidelines, “Shenzhen 100 index” companies shall disclose their social responsibility reports, at the time of disclosing their annual reports, whilst other listed companies are only required to disclose their social responsibility reports.

According to the Guidelines, the social responsibilities report disclosed by listed companies shall at minimum, include the  (i) circumstances of  establishment and implementation of social responsibility systems for  employee protection, environmental pollution, product quality and community relationships; (ii) issues and deficiencies in performance of their social responsibilities, and the gaps between requirements under the Guidelines and their performance and the reasons behind these gaps; and (iii) proposed improvement measures and the specific timeline for them.

Environmental
Governance

Environmental policy, Corporate governance policy

In force

Listed companies on the Main Board of the Shanghai Stock Exchange

Standard No.1 came into force on January 7, 2022.There is a standalone chapter in the Guidelines outlining the social responsibilities of companies.

Article 8.5 of the Guidelines regulates that (1) "SSE Corporate Governance Panel" sample companies, (2) companies dual-listed in China and offshore, and (3) financial-related companies are obliged to disclose their social responsibility measures in their  annual reports, whilst other companies are encouraged (but not required) to do so.  

According to the Guidelines, the social responsibility report disclosed by listed companies shall include at least (i) circumstances of  establishment and implementation of social responsibility systems for employee protection, environmental pollution, product qualities and community relationships; (ii) issues and deficiencies in performance of their social responsibilities, and the gaps between requirements under the Guidelines and their performance and the reasons behind these gaps; and (iii) improvement measures and the specific timeline for them. 

Environmental
Social
Governance

Environmental policy, Social policy, Corporate governance policy

In force

Listed companies in the petroleum and chemical industry

The Guidelines introduced on 18 November 2020 by the China Chemical Industry Information Association are the first ESG evaluation guidelines in China.

The Guidelines provide an evaluation mechanism for listed companies in the petroleum and chemical industry and provide standards for ESG related disclosure. The environmental disclosure regime covers issues including discharging waste, resource usage, environmental management, sustainable business; the social disclosure regime covers factors including responsibilities to employees, customers, products, and the community; and the governance disclosure regime includes factors including governance structures and corporate behaviour. 

Environmental
Social
Governance

Environmental policy, Social policy, Corporate governance policy

In force

Listed companies

Article 7 of the Guidelines issued and published by the China Securities Regulatory Commission on 15 May 2022 stipulates that communications between listed companies and investors shall cover environmental, social responsibility and corporate governance information relating to the company. 

Environmental
Governance

Disclosure Guidance / non-financial reporting

In force

Green bond issuer

Pursuant to the PBOC Notice published by PBOC on 1 March 2018,  an issuer shall, in its annual report, disclose the information on the green projects to which funds are allocated during the reporting period, whilst withholding commercially sensitive information. Projects ranking among the top 10% in terms of allocated green financial bond funds, projects with an allocation of 50 million yuan or more and those  accounting for 1% or more of the size of existing green financial bonds shall be disclosed individually;  other projects may be summarised and disclosed by category.”.

Article 6 of the PBOC Notice stipulates that issuers shall disclose in their annual reports and quarterly reports  serious pollution incidents or other violations of environmental laws by the enterprise or projects financed by green finance bonds and other similar information. 

Governance

Disclosure Guidance

Enterprises

The Guidance jointly published by more than 80 ESG pioneers in China (including but not limited to sub-committees of government authorities (e.g. State-owned Asset Supervision and Administration Commission, National Development and Reform Commission, Ministry of Commerce); industry associations, enterprises (e.g. Ant Group, Ping An Bank, universities and so forth) on 1 June 2022, draws inspiration from international best practices, and heavily references the latest existing Chinese standards, laws, and regulations related to ESG issues, such as the country’s labour law, environmental protection law, and production safety law.

The Guidance includes a corporate ESG disclosure indicator system with three dimensions of each element of environmental, social and governance (ESG) and provides a basic framework for ESG disclosure.

The Guidance lists a total of 118 metrics, spanning 35 tertiary indicators and 10 secondary indicators under the 3 primary indicators of environmental, social, and governance

In addition, definitions within the Guidance are also adopted from official Chinese national standards, namely a set of GB and GB/T standards which stand for mandatory standards and recommended standards, respectively. ISO standards are referenced to fill the remaining gaps in Chinese standards, namely the ISO 14090:2019 on adaptation to climate change, and ISO 37301:2021 on compliance management systems. As a result, the final product is a set of ESG metrics coherent with the country’s existing regulatory framework.

The Guidance notably offers additions and adjustments to ESG issues within the Chinese context, such as the concept of “workers’ conference”, (a form of labour organization in China’s public enterprises) and social insurance and housing funds (which are features in China’s social welfare system).

Social

Non-financial reporting

In force

Enterprises

The law prohibits discrimination on the grounds of ethnicity, race, gender or religious belief for labourers seeking employment. Companies that have job positions to support the employment of the unemployed persons and the handicapped persons and that meet the relevant threshold requirements are eligible for certain tax incentives. The labourers are entitled to file a claim in front of the peoples' court if the company implements any employment discrimination in violation of this law.

Social

Non-financial reporting

In force

Enterprises

The law stipulates that a labourer shall enjoy the right to equal employment and to choose an occupation, the right to obtain labour remuneration, the right to rest and have holidays, the right to receive labour safety and hygiene protection, the right to receive vocational training, the right to enjoy social security and welfare, the right to request settlement of labour disputes and other labour rights stipulated by the law.

Women shall enjoy equal right to employment as men. When employees are recruited, women shall not be refused on the grounds of sex, nor shall the recruitment standards for women be raised, except for those types of work or positions unsuitable for women as stipulated by the State.

Employers are prohibited from recruiting minors under the age of sixteen (16). Entities of literature and art, sports and special arts and crafts that recruit minors under the age of sixteen (16) must comply with the relevant provisions of the State and guarantee their right to receive compulsory education.

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