Introduction
Environmental, Social and Governance (ESG) investing has gained significant attention in recent years as more investors are becoming aware of the importance of considering companies’ environmental, social, and governance practices in their investment decisions. This is particularly true in the context of China, where the country is shifting from its original economic models, such as energy production and export-oriented model, to a consumption-driven model that is also moving towards a low-carbon model. As a result, sustainable assets are proliferating in China, and there is a growing interest in green finance in China, both in the domestic and overseas markets (Chen & Xie, 2022). Socially responsible investing, ESG investing, and other investment concepts are gaining more and more attention from investors. As the length of sustainable investments continues to expand, so does the attention of companies. At the same time, companies are paying more attention to long-term sustainable development, placing great importance on realizing the corporate social value and potential economic growth rate. ESG investment requires companies to disclose non-financial information from three perspectives: environmental, social, and corporate governance. However, multiple evaluation criteria have led to misleading disclosure of corporate information, doubts among stakeholders about the credibility of non-financial information published by companies, and other ESG-related disclosure issues. The quality of the information in the Chinese market and the potential lack of transparency in ESG information also increase the probability of market mispricing.
In the face of the expanding and maturing ESG investment market overseas, the Chinese capital market will have to change in the face of this trend. One of the fundamental aspects is how companies can systematically disclose relevant information to obtain fair ESG evaluation. For China, where ESG investment has just emerged, it is a significant challenge to establish a systematic ESG information disclosure system for Chinese companies in the face of different investment and market environments from those in Europe and the US. This study addresses this issue by comparing and analyzing the existing ESG information disclosure systems in China and abroad, specifically in Europe, America, and Asia. The purpose of this study is to identify the key factors affecting the disclosure of ESG-related information by Chinese companies and to discuss how to plan the disclosure content systematically and how to enhance the credibility of the information to obtain ESG investment. By understanding the current state of ESG disclosure in China and abroad, people can gain insight into the challenges and potential solutions for improving ESG disclosure in China.
Background and Literature Review
ESG investing has been around for several decades, with the first socially responsible investment funds being established in the 1970s (Liang & Renneboog, 2020). However, it was not until recently that ESG investing gained significant attention and became mainstream. In Europe and the US, ESG investing has been a ground for several years, with investors and asset managers incorporating ESG considerations into their investment processes. Kreuzer (2022) states that In the US, for example, the number of assets under management (AUM) in sustainable funds has grown from $8.7 trillion in 2016 to $17.1 trillion in 2020, which is expected to continue to grow in the coming years.
The trend of ESG investing has been slower to develop in Asia compared to other regions (Mascotto, 2020). However, it has begun to gain momentum in recent years. Japan has been a leader in this area, with the government and the financial industry actively promoting ESG investing. The Government Pension Investment Fund, the world’s largest pension fund, has been a pioneer in integrating ESG considerations into its investment process, and other Japanese institutional investors have followed suit. In China, ESG investing is still a relatively new concept. However, it is gaining traction as the government and the financial industry are beginning to recognize the importance of considering environmental, social and governance issues in investment decisions. This is evident with the increasing number of Chinese companies disclosing ESG information, and the government is also developing regulations and guidelines on ESG investing. Chinese institutional investors and asset managers are also starting to integrate ESG considerations into their investment processes (Patil et al., 2021).
There has been significant research on ESG investing and disclosure in Europe, the US, and Japan (Murata& Hamori, 2021). Researchers have studied the impact of ESG investing on financial performance and have found that companies adopting practices tend to have better financial performance. They have also studied the factors influencing the companies’ option of ESG practices, ch as regulations, investor pressure, and consumer demand. Additionally, they have examined the challenges and opportunities of ESG investing in different countries and regions. There is a growing body of literature on the topic in China, but it still needs to be improved. Researchers have studied the current state of ESG disclosure in China. They have found that many companies still need to disclose information about their environmental and social performance (Ruan & Liu, 2021). They have also identified challenges such as clearer regulations and a lack of investor demand for ESG information. However, they have also identified opportunities for growth in ESG investing in China, such as the increasing awareness of the importance of sustainability and the potential for government support for ESG practices. The research on ESG investing and disclosure in Europe, the US, Japan, and China highlights the importance of understanding the unique challenges and opportunities in each region in order to effectively implement ESG practices and promote sustainable investing.
One of the critical challenges of ESG investing in China is the lack of a systematic and consistent approach to ESG disclosure (Ruan & Liu, 2021). There are established guidelines and frameworks for ESG disclosure in Europe and the US, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). However, in China, there is no standardized approach to ESG disclosure. This makes it difficult for investors to compare companies and assess their environmental, social, and governance practices. Additionally, the quality of ESG information disclosed by Chinese companies is often questionable, as companies may disclose information that is not relevant or not accurate.
Another challenge of ESG investing in China is the lack of transparency in the market (Ruan & Liu, 2021). In Europe and the US, cherished regulations and oversight mechanisms in pare place to ensure that companies disclose accurate and relevant information. However, in China, the regulatory environment is still developing, and there is a lack of oversight and enforcement of disclosure requirements. This lack of transparency can lead to market mispricing and makes it difficult for investors to make informed investment decisions. Additionally, this lack of transparency also increases the risk of investing in companies that may not meet ESG standards. This is a concern for investors who are looking to align their investments with their values and promote sustainable development. Therefore, it is important for investors to thoroughly research companies and use independent third-party rating agencies to evaluate the environmental, social and governance performance of the companies in which they invest.
Given the challenges in the area of ESG disclosure by companies in China, it is important for researchers to conduct studies to gain a better understanding of the current state of ESG disclosure in China. This research can help identify the key factors influencing Chinese companies’ disclosure of ESG-related information. Additionally, by gaining insight into how to plan the disclosure content systematically and enhance the information’s credibility, researchers can provide guidance on how to improve the quality of ESG-related information and make it more useful for investors. This, in turn, can help promote the growth of ESG investing in China.
Methodology
This study employed a combination of secondary data analysis and primary data collection to compare and analyze the existing ESG information disclosure systems in China and abroad. The first step in the methodology was to compile and analyze the ESG information disclosures of European, American, and Japanese companies. This was done by conducting a comprehensive review of the literature on ESG investing and disclosure in these countries, including academic studies, reports by consulting firms, and guidelines and frameworks for ESG disclosure. This provided a comprehensive understanding of the current state of ESG disclosure in these countries and the key characteristics of companies implementing ESG information disclosure.
Next, information was used to classify and categorize the disclosure content in these countries. This involved identifying the key elements of ESG information disclosure, such as the types of information, the frequency of disclosure, and the level of detail provided. This provided a basis for comparison with the Chinese companies’sting ESG information disclosure content of comparing and analyzing the existing ESG information disclosure content of Chinese companies; a sample of ESG reports from Chinese companies listed on the Shanghai and Shenzhen stock exchanges was collected and analyzed. This involved reviewing the ESG reports of a sample of companies from different sectors and stages of development. The content of these reports was analyzed to identify the key elements of ESG information disclosure and compare them to those in Europe, America, and Japan.
In addition to the secondary data analysis, there was primary data collection by interviewing Chinese companies that have already conducted ESG intelligence disclosure. The purpose of these interviews was to gather insights into the challenges and opportunities of ESG disclosure in China and to develop hypotheses about the key factors that affect the disclosure of ESG-related information by Chinese companies. The interviews were conducted with representatives from companies from different sectors and stages of development. The data collected and analyzed in this study were analyzed using qualitative and quantitative methods. The data were coded, categorized, and then analyzed using descriptive statistics and content analysis. The findings were then discussed and interpreted in the context of the existing literature on ESG investing and disclosure in China and abroad.
In terms of limitations, one limitation of this study is that the sample of companies used in this study is not representative of all companies in China. However, it should be noted that the sample was selected based on data availability and companies’ willingness to participate in the study. Additionally, the study is focused on the disclosure of ESG-related information. It does not consider other factors that may affect companies’ adoption of ESG practices, such as the regulatory environment and corporate culture. Despite these limitations, this study provides valuable insights into the current state of ESG disclosure in China and the key factors that affect the disclosure of ESG-related information by Chinese companies.
Results and Discussion
The data collected and analyzed in this study revealed several key findings and insights into the current state of ESG disclosure in China and the key factors that affect the disclosure of ESG-related information by Chinese companies.
One of the key findings of this study is that the existing ESG information disclosure systems in China are not as developed as those in Europe, America, and Japan (Ciu, 2022). This is evident in the types of information disclosed by companies, the frequency of disclosure, and the level of detail provided. In Europe, America, and Japan, companies are required to disclose a wide range of information on environmental, social, and governance issues, and they typically do so annually (Xie et al., 2019). In contrast, Chinese companies tend to disclose less information and do so less frequently. Another key finding of this study is that the quality of ESG information disclosed by Chinese companies is often questionable. This is due to the lack of a systematic and consistent approach to ESG disclosure in China and the lack of oversight and enforcement of disclosure requirements. This makes it difficult for investors to compare companies and assess their environmental, social, and governance practices. Additionally, the potential lack of transparency in the market in China increases the risk of market mispricing and makes it difficult for investors to make informed investment decisions.
Despite these challenges, the companies reported several opportunities for ESG disclosure in China. One opportunity identified was the ability to gain a competitive advantage through ESG disclosure, as consumers and investors are increasingly interested in and willing to pay a premium for products and services that are environmentally and socially responsible. Additionally, companies that are transparent and accountable in their ESG practices are more likely to attract and retain top talent. Another opportunity identified was the ability to improve internal processes and operations through ESG disclosure. By publicly disclosing their ESG performance, companies are incentivized to identify and address any gaps or inefficiencies in their environmental, social, and governance practices. This is not of their performance in these areas but leads to cost savings and increased efficiency. Furthermore, companies also reported that ESG disclosure could help them to better understand and manage their risks and opportunities. By identifying potential risks such as climate change, water scarcity, and human rights violations, companies can take steps to mitigate those risks and capitalize on opportunities such as the shift to a low-carbon economy.
Despite these challenges, the companies interviewed also reported several opportunities for ESG disclosure in China. For example, they reported that the growing awareness of ESG issues among stakeholders presents an opportunity for companies to communicate their environmental, social, and governance practices and to build trust with stakeholders. Additionally, they reported that the lack of a systematic and consistent approach to ESG disclosure presents an opportunity for companies to differentiate themselves and gain a competitive advantage. In light of these findings, it is clear that there is a significant opportunity to improve the existing ESG information disclosure systems in China. To do so, it is necessary to establish a systematic and consistent approach to ESG disclosure, to improve the quality of the information disclosed, and increase market it is important to increase awareness of ESG issues among stakeholders and to provide guidance and support to companies to help them disclose relevant and accurate information. By doing so, there can be an increase in the credibility of the information and obtain a fair ESG evaluation.
In terms of policy recommendations, the research suggests that there is a need for the Chinese government to establish a standardized approach to ESG disclosure. This could include adopting international guidelines and frameworks, such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB), as well as providing oversight and enforcement of disclosure requirements. Additionally, it is important to educate companies and investors about the importance of ESG issues and to provide them with the tools and resources needed to understand and disclose ESG-related information. Furthermore, there is a need for the Chinese government to establish a clear and consistent framework for ESG reporting that aligns with international standards and guidelines. This would help to ensure that companies and investors have access to comparable and reliable information on ESG performance. Additionally, it is important to provide companies and investors with the necessary training and resources to analyze and use ESG information in their decision-making processes. Overall, there is a need for a comprehensive approach to ESG disclosure that includes both regulatory measures and educational initiatives to promote greater understanding and adoption of ESG practices among companies and investors in China.
Conclusion
The study found that the existing ESG information disclosure systems in China are not as developed as those in Europe, America, and Japan, with Chinese companies disclosing less information and doing so less frequently. Additionally, the quality of ESG information disclosed by Chinese companies is often questionable due to the lack of a systematic and consistent approach to ESG disclosure in China and the lack of oversight and enforcement of disclosure requirements. However, the study also revealed opportunities to improve China’s ESG information disclosure systems. By establishing a systematic and consistent approach to ESG disclosure, improving the quality of the information disclosed, and increasing the transparency of the market, there can be an increase in the credibility of the information and obtain a fair ESG evaluation. Additionally, increasing the awareness of ESG issues among stakeholders and providing guidance and support to companies can help them to disclose relevant and accurate information.
In summary, this study provides valuable insights into the current state of ESG disclosure in China and the key factors that affect the disclosure of ESG-related information by Chinese companies. It highlights the need for improvement in the existing ESG information disclosure systems in China and the importance of implementing a standardized approach to ESG disclosure, providing oversight and enforcement of disclosure requirements and educating companies and investors about the importance of ESG issues. This research can help policymakers, companies and investors.
References
Chen, Z., & Xie, G. (2022). ESG disclosure and financial performance: Moderating role of ESG investors. International Review of Financial Analysis, 83, 102291.
Cui, C. (2022, December). Status, Challenges and Strategic Direction of the ESG Development in China. In 2022 International Conference on Economics, Smart Finance and Contemporary Trade (ESFCT 2022) (pp. 96–104). Atlantis Press.
Kreuzer, C. (2022). Financial aspects of sustainability: Drivers and consequences of corporate social responsibility and irresponsibility (Doctoral dissertation).
Liang, H., & Renneboog, L. (2020). Corporate social responsibility and sustainable finance: A review of the literature. European Corporate Governance Institute–Finance Working Paper, (701).
Mascotto, G. (2020). ESG Outlook: Five Key Trends Are Driving Momentum in 2020. American Century Investors—Institutional, March.
Murata, R., & Hamori, S. (2021). ESG disclosures and stock price crash risk. Journal of Risk and Financial Management, 14(2), 70.
Patil, R. A., Ghisellini, P., & Ramakrishna, S. (2021). Towards sustainable business strategies for a circular economy: Environmental, social and governance (ESG) performance and evaluation. In An introduction to a circular economy (pp. 527–554). Springer, Singapore.
Ruan, L., & Liu, H. (2021). Environmental, social, governance activities and firm performance: Evidence from China. Sustainability, 13(2), 767.
Xie, J., Nozawa, W., Yagi, M., Fujii, H., & Managi, S. (2019). Do environmental, social, and governance activities improve corporate financial performance? Business Strategy and the Environment, 28(2), 286-300.
write