Chinese Firms Pioneer Nature-Related Disclosures Under Global Biodiversity Framework

3 Key takeaways from the article:

  1. Global Leadership in Nature Disclosures: Chinese companies are at the forefront of integrating nature-related disclosures into their sustainability frameworks, aligning with the Global Biodiversity Framework’s targets. This leadership underscores China’s commitment to environmental transparency and sustainability, setting an example for global counterparts.
  • Evolution of Sustainability Reporting: The adoption of nature-related disclosures represents a significant evolution in sustainability reporting beyond traditional climate-focused frameworks. This shift acknowledges the broader impact of business activities on biodiversity and ecosystems, emphasizing comprehensive environmental stewardship.
  • Regulatory and Market Implications: China’s initiatives signal a forthcoming regulatory landscape where ESG (Environmental, Social, and Governance) disclosures will become mandatory by 2030. This move not only enhances corporate transparency but also prepares Chinese companies for alignment with international standards set by bodies like the International Sustainability Standards Board (ISSB).

At the Davos World Economic Forum in January, 320 businesses and investment institutions from 46 countries announced their commitment to disclosing their environmental impacts. This initiative aligns with the recommendations of the Taskforce on Nature-related Financial Disclosures (TNFD), which released its framework for nature-related corporate disclosures last year.

Research indicates that over half of global GDP (USD 58 trillion) is moderately or highly dependent on nature. Deforestation and biodiversity loss pose significant risks to this economic value. In response, China’s finance ministry released the “Corporate Sustainability Disclosure – General Requirements (Exposure Draft)” last Monday. This is China’s most comprehensive document on sustainability disclosure to date. The authorities are seeking public feedback on the draft guidelines, aiming to elevate sustainability reporting standards.

Market analysts believe that Beijing’s recent directives, a critical force in driving corporate sustainable development in China’s private sector, signal a new era. These directives may also indicate that the International Sustainability Standards Board (ISSB) guidelines, released in June 2023, are poised for implementation in China’s mainland market. ISSB standards are already gaining traction globally, including in markets like Singapore.

Guo Peiyuan, chairman of independent consultancy Syntao Green Finance, described the new guidelines as a “significant step” towards a comprehensive framework for nationwide sustainability disclosure. He noted that the draft heavily incorporates ISSB standards, ensuring high-quality and consistent information disclosure. Additionally, the guidelines advocate for a phased approach, initially targeting listed companies and larger enterprises, and aim to transition from voluntary to mandatory disclosure, with preliminary ESG rules in place by 2027.

“This initiative underscores China’s commitment to enhancing corporate transparency and aligning with global sustainability practices,” he said.

Evolving Sustainability Practices

Nature-related disclosures have emerged as a natural progression from climate disclosures. In 2017, the Task Force on Climate-Related Financial Disclosures (TCFD), which has since been disbanded, introduced a framework built on four pillars: governance, strategy, risk management, and metrics and targets. This framework was designed to help companies assess the impact of climate change on their operations comprehensively.

The TCFD framework had a profound influence, setting the stage for the International Sustainability Standards Board’s (ISSB) comprehensive sustainability disclosure framework. The ISSB framework, endorsed by the International Organization of Securities Commissions (IOSCO), is now being adopted in 130 jurisdictions, covering 95 percent of the world’s financial markets.

Building on TCFD’s success, the Taskforce on Nature-related Financial Disclosures (TNFD) has developed a similar framework. Sylvaine Rols, senior specialist for nature at the UN’s Principles for Responsible Investment (PRI), notes, “TNFD uses a very similar methodology to TCFD, with four pillars. Even the suggested language for disclosures is very similar.” However, TNFD modifies the third pillar to “risk and impact management” to better address the broader scope of nature compared to climate.

To establish a clear framework for nature-related disclosures, TNFD defined nature as the natural world, emphasizing the diversity of living organisms, including humans, and their interactions with each other and their environment. Biodiversity, comprising species, habitats, and ecological services, is central to these disclosures. According to Yang Fangyi, China senior program officer for the International Union for Conservation of Nature, ecological services include carbon absorption, water conservation, and cultural value, making them challenging for companies to quantify.

TNFD’s recommendations aim to address these challenges by encouraging companies to engage with Indigenous peoples and local communities. Additionally, companies are advised to disclose the locations of their assets since their activities impact nature in specific areas. The framework also adopts a flexible approach to “materiality,” encouraging firms to consider a “double materiality” perspective, though it is not mandatory.

Closing Data Gaps and Combating Greenwashing

Recent guidelines from the Shanghai, Shenzhen, and Beijing stock exchanges are pushing Chinese companies towards better sustainability reporting. Guo Peiyuan, who tracks ESG and sustainable finance trends in China, highlighted that top-listed companies are urged to align with the new national guidelines within the current financial year. This move is expected to accelerate progress in sustainability disclosures among Chinese firms.

Guo emphasized that the guidelines focus on the quality of ESG reports, discouraging companies from treating sustainability reporting as a mere box-ticking exercise. By 2026, more than 400 companies, including those in key stock indexes, are mandated to publish sustainability reports, collectively representing over half of the market value of the exchanges.

However, recent research shows that Chinese companies have lagged behind their Asia-Pacific peers in the credibility of their environmental targets and the disclosure of greenhouse gas emissions from their supply chains. A spokesperson for Greenpeace East Asia pointed out that unified disclosure standards could be transformative for China. Yuan Yuan, the organization’s Beijing-based climate and energy campaigner, stressed that transparency is crucial for sustainability leadership. However, obtaining insights into companies’ responses to climate change remains challenging.

Yuan noted that the lack of standards and poor data visibility hinder Chinese financial institutions from assessing climate risk and developing transition plans. Improved corporate disclosure will significantly benefit these institutions. Yuan also called for better disclosure of climate-related risks by asset managers to avoid greenwashing high-emissions assets or companies.

In 2022, Greenpeace East Asia analyzed China’s leading asset managers and related mutual funds, revealing a reluctance to disclose the climate impact of assets under management. Eleven out of fifteen firms had not provided any emissions information.

Experts believe that the new rules will drive investments into high-emitting sectors like steel and agriculture, funding their transition to cleaner production processes. As the world’s largest emitter of greenhouse gases, China’s improved sustainability practices are crucial for global environmental health.

Skyline of Shenzhen city, showcasing modern skyscrapers and urban development, symbolizing economic growth and urbanization in China.

Global Frameworks and China’s Strategic Initiatives

Nature-related disclosures are rapidly progressing worldwide, driven by insights from other sustainability efforts and the Global Biodiversity Framework. This movement traces back to the 1992 Rio Earth Summit, where the UN biodiversity convention was signed by 150 governments. At the COP15 UN biodiversity conference in 2022, the Global Biodiversity Framework was adopted, setting ambitious goals to protect 30% of land and ocean areas by 2030, with all parties responsible for action.

Target 15 of this framework calls for “large and transnational companies and financial institutions to disclose their nature-related impacts, dependencies, and risks,” establishing a global requirement for governments to incorporate these disclosures into their regulations. Sylvaine Rols, senior specialist for nature at the UN’s Principles for Responsible Investment (PRI), highlights that this target has spurred rapid development in nature-related disclosures.

China has been proactive in aligning with these global targets. In January, China submitted its China Biodiversity Conservation Strategy and Action Plan (2023-2030), emphasizing the development of green finance and enhanced disclosures of nature-related information. The plan mandates that companies incorporate biodiversity information into their existing environmental and sustainability reports.

In May, China’s new sustainability reporting guidelines for A-share listed companies (those trading in yuan on the Shanghai, Shenzhen, or Beijing stock exchanges) took effect. These guidelines require large companies to publish sustainability reports starting in 2026, with Article 32 mandating the disclosure of activities significantly impacting ecosystems and biodiversity. This includes breaches of ecological redlines and measures to conserve or restore habitats.

Mengniu Dairy Group, listed on the Hong Kong stock exchange, became China’s first company to publish a TNFD-compliant nature report. According to Huang Changtong, China specialist for the Farm Animal Investment Risk and Return initiative, Mengniu’s report followed TNFD’s four-pillar framework, addressing risk and impact management, and setting ambitious climate and nature-related goals, such as achieving carbon neutrality by 2050 and zero deforestation by 2030.

Despite the progress, nature-related disclosures are still in their infancy. Yang Fangyi, China senior program officer for the International Union for Conservation of Nature, emphasizes the need for a widely accepted and quantifiable methodology for these disclosures to become mainstream. Unlike climate change mitigation, which can be measured through emissions data, the impact on nature requires different metrics.

Initiatives like the Science-Based Targets Network can help companies set nature-related targets, take action, and track results. Rols suggests starting with the TNFD guide, even if full disclosure isn’t achieved initially, and gradually working towards comprehensive reporting.

While Mengniu’s report was an excellent start, Huang notes it lacked some details. Many agricultural firms still view nature-related risks primarily as compliance issues, with limited understanding of the broader implications. Huang hopes to see more specific data and expanded disclosures in the future, especially in areas like fodder growing and processing.

Although the TNFD framework is currently voluntary, Yang believes nature-related disclosures will likely become mandatory globally, similar to climate-related disclosures. He hopes Chinese organizations will play a significant role in this process, contributing their expertise and reducing barriers to international market entry.

Challenges and Paths Forward

Nature-related disclosures are off to a promising start, but significant challenges remain. Establishing a standardized methodology for quantifying impacts on nature is crucial for these disclosures to gain mainstream acceptance. International initiatives and major institutions are pushing this process forward, but local involvement is essential for global success.

Rols and Huang both emphasize the importance of starting the disclosure journey, even if initial reports are incomplete. Over time, as companies build their capabilities and understanding, the quality and comprehensiveness of nature-related disclosures will improve, driving better environmental outcomes and aligning with global sustainability goals.