Is the Chinese market prepared for the impact of changes in the EU ESG Regulations in 2023?

Background Introduction

2023 is a significant year for sustainable finance and ESG investing: a number of key ESG-related policies, regulations, frameworks and initiatives will be activated in succession this year, aiming to facilitate ESG lens as an important yardstick for the global capital market.

The year 2023 is also a key milestone for the European Union’s ESG regulations, which has put into effect a set of provisions under the European Green Deal and EU Sustainable Finance Agenda, such as the EU Taxonomy, the second phase of the EU Sustainable Financial Disclosure Regulation (SFDR), and the EU Corporate Sustainability Reporting Directive (CSRD), to name a few.

Key Findings and Implications for the Chinese Market

Under the EU Sustainable Finance Agenda, regulatory tools such as the EU Taxonomy, SFDR, CSRD, and the European Sustainability Reporting Standards (ESRS) aim to provide norms for enterprises and financial institutions in terms of curbing “greenwashing” practices.

Apart from impacting EU member states, the EU ESG regulations are expected to have extraterritorial effects, including influence on the Chinese capital market. Institutions impacted by the developments in the aforementioned EU regulations include Chinese companies that raise funds in EU capital markets, obtain business revenues in EU markets, and/or provide goods and services to EU entities, as well as Chinese financial institutions that provide financial products and services to EU investors.

Among 1261 Chinese listed companies with $2Bn+ revenue in 2020, 622 companies held more than 75% of their revenue as Taxonomy-eligible (although not necessarily aligned).

151 EU subsidiaries of Chinese parent companies have been brought under the direct supervision of CSRD as of 2021 financial results. Corresponding parent companies in China shall report relevant ESG information in accordance with the EU ESRS framework starting from 2029 at the latest.

Chinese asset management institutions that are marketing financial products in the EU market (for example, Chinese public mutual funds launching UCITS products in the EU) are required to comply with SFDR Principal Adverse Impact (PAI) reporting requirement and disclose their portfolio’s Taxonomy alignment status starting from June 2023.

Methodology and Approach

In order to help Chinese enterprises and financial institutions understand and tackle relevant implications, the Sustainability Solutions team at S&P Global Market Intelligence is reviewing and interpreting the EU’s ESG regulations within this article.

We have conducted analysis of the EU Sustainable Finance Agenda by thoroughly analyzing official regulation documents, legislations, and press releases, as well as leveraging our proprietary ESG data (e.g. S&P Global SFDR PAI dataset, Taxonomy Alignment dataset, and our Capital IQ Pro database).

How S&P Global can help

In short, the fundamental reason for paying attention to the influence of the EU's ESG regulation is not only to comply with the EU's regulatory requirements, but also because ESG is destined to become a field that China's entire capital market and even the whole society must pay attention to. Promoting ESG practice can therefore contribute to the high-quality development of various industries in China, and to stay ahead of the curve, Chinese institutions must invest in the right data, tools and resources now, in order to reap the benefits later.