ESG Special Series (No. 42): Regulatory Framework for ESG Disclosure by Chinese Companies and Greenwashing Risk Mitigation

I. ESG Disclosure Framework for Listed Companies and Key Greenwashing Risks

In recent years, ESG disclosure for companies listed on China’s A-share markets has continued to evolve, gradually developing into a regulatory framework consisting of the laws, regulations and rules issued by the China Securities Regulatory Commission (CSRC) as well as the self-regulatory rules of the stock exchanges. The PRC Securities Law and the Measures for the Administration of Law-Based Disclosure of Enterprise Environmental Information, among others, provide the basic regulatory framework for information disclosure. The Shanghai Stock Exchange, the Shenzhen Stock Exchange and the Beijing Stock Exchange have also issued guidelines relating to sustainability reporting. These set out specific requirements in areas including governance, strategy, risk management, metrics and targets, among others.

For companies listed in Hong Kong, Appendix C2 to the HKEX Listing Rules, the Environmental, Social and Governance Reporting Code, also sets out specific requirements for ESG disclosure. The Code establishes a tiered disclosure system comprising mandatory disclosure requirements and ‘comply or explain’ provisions, and further strengthens the requirements for climate-related disclosure. Accordingly, companies that are listed or contemplating a listing in both the A-share and Hong Kong markets should determine the scope and standards for ESG disclosure by referring to their place of listing and the rules applicable to them.

As ESG disclosure requirements become increasingly detailed, companies are also facing heightened greenwashing risks in relation to the accuracy, completeness and consistency of their disclosure. Common greenwashing risks include highlighting achievements from green or environmental upgrades while omitting adverse information such as environmental penalties; announcing carbon neutrality or emissions reduction targets without continuous and complete data support; inconsistencies in data or reporting methodologies among annual reports, prospectuses and ESG reports; claiming to have implemented green supply chain initiatives without corresponding substantive management measures; and setting long-term targets without clear implementation pathways or funding arrangements. Such issues may trigger regulatory inquiries and adversely affect a company’s financing, valuation and capital markets transactions.

II. ESG Disclosure by Unlisted Companies and Their Specific Risks

Compared with listed companies, unlisted companies are not generally directly subject to mandatory disclosure requirements imposed by stock exchanges. Nevertheless, their ESG-related representations and communications remain subject to environmental regulatory requirements, contractual obligations and general requirements regarding the truthfulness and accuracy of their information. At present, the standards relating to corporate sustainability disclosure generally remain voluntary in application, while certain key pollutant-discharging enterprises are required to disclose environmental information in accordance with the requirements imposed by the competent ecology and environment authorities.

In practice, ESG risks for unlisted companies arise more frequently in scenarios involving green financing and supply chain audits conducted by overseas customers. Examples include overstating emissions reduction achievements in order to obtain green financing, providing environmental or supply chain data to satisfy customer requirements without adequate verification, or publicly claiming to operate a ‘zero-carbon factory’ without having established complete internal records for energy consumption and carbon emissions. We have also encountered cases where companies have provided overseas counterparties with documentation concerning their social responsibility management systems that were not implemented in practice.

III. Recommendations for ESG Disclosure and Greenwashing Risk Mitigation

Based on our experience advising companies contemplating an IPO on ESG disclosure in their prospectuses, as well as preparing ESG reports and conducting ESG compliance reviews, we recommend that companies focus on the following areas:

First, establish a compliance risk prevention framework. Companies should conduct a comprehensive assessment of their existing management practices across departments and identify the applicable compliance obligations, including not only the legal requirements but also the applicable standards. Based on this information, companies should optimize their existing compliance management systems, including their internal policies and procedures, so as to adequately address greenwashing risks and the risks of inaccurate or misleading ESG disclosure.

Second, establish a differentiated disclosure framework. Listed companies should refer to the internationally recognized reporting frameworks and standards, such as the GRI Standards and the ISSB Standards, while adhering to the rules of the relevant stock exchanges. Unlisted companies should determine the appropriate scope of disclosure based on their actual needs, including financing and supply chain audits, and exercise particular caution when using absolute or unqualified environmental claims.

Third, strengthen the verification of underlying data. Before preparing an ESG report, companies should compile and review the information relating to the implementation of material ESG matters, adopt consistent methodologies for data concerning carbon emissions, energy consumption, water consumption and waste, and retain complete records and supporting documentation.

Fourth, exercise caution in setting environmental targets and making cross-border disclosures. Targets relating to carbon neutrality, SBTi-aligned science-based targets, zero-carbon factories and similar commitments should be supported by corresponding implementation pathways, technical upgrade plans and funding arrangements. When making disclosures, companies should also consider data security requirements and the protection of trade secrets.

Fifth, establish a cross-functional review mechanism. Companies should conduct consistency reviews among ESG reports, annual reports, prospectuses, financing documents and other disclosures, so as to avoid greenwashing or misrepresentation risks arising from conflicting data, inaccurate statements or exaggerated claims.

If you have any questions or needs relating to ESG management systems or ESG disclosures, please contact us at ecoenvpro@junhe.com.

JunHe's ESG and EHS Team: JunHe is one of China’s leading full-service law firms. We are internationally recognized for providing high-quality legal services and have a professional team of over 1,000 members. JunHe is a pioneer in the development of China’s ESG legal practice and maintains a dedicated team of EHS lawyers, offering clients comprehensive legal services in EHS and ESG. JunHe’s ESG team comprises members with multidisciplinary backgrounds, including those with expertise in EHS, product quality, labor and employment, anti-corruption, data and tax compliance, as well as a thorough understanding of corporate governance. Leveraging the expertise of other specialized compliance teams within the firm’s compliance practice group - such as antitrust, unfair competition, intellectual property, trade compliance and criminal compliance - the team has a sustainability approach to provide tailored legal services to enterprises across various industries. Our services include EHS compliance audits, ESG due diligence in supply chain management and M&A transactions, drafting ESG reports for disclosure purposes and conducting specialized legal and compliance assessments relating to ESG. We also assist investors and enterprises in establishing and enhancing their ESG management systems, identifying their ESG compliance obligations and providing staff training - all as part of a comprehensive service package. 

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