Insights

In May 2024, the European Financial Reporting Advisory Group (EFRAG) released three documents: "Guidelines for the Implementation of Materiality Assessment", "Guidelines for the Implementation of the Value Chain", and "List of ESRS Data Points". EFRAG aims to support enterprises and other stakeholders in implementing ESRS by issuing implementation guidelines, helping enterprises to focus on the standard content related to them, and explaining the reporting requirements through frequently asked questions. Among them, the "Guidelines for the Implementation of the Value Chain" (hereinafter referred to as the "Guidelines") defines the boundaries of the value chain in the sustainable development report, explains the participation of the value chain in materiality assessment to policies, actions and goals, and outlines the disclosure requirements for the impact of each dimension of ESRS on the value chain.   1. Definition of value chain In the Guidelines, the value chain is defined as the various activities, resources and relationships related to a company's business activities and its external operating environment. The activities, resources and relationships refer to: the personnel involved in the company's own operations, namely human capital; supply, marketing and distribution channels, procurement of materials and services, sales and delivery of products and services; the financing, geographic, geopolitical and regulatory environment of the company's operations, etc.   In addition, the Guidelines define business relationships as relationships between a company and its business partners, entities in the value chain, and entities directly related to its business operations, products, or services. Business relationships are not limited to contractual relationships, but also include indirect business relationships outside the first layer of the company's value chain and equity-invested companies. Whether a company has influence, risks, and opportunities on an investment company is not affected by its shareholding ratio and control ability; however, the company's shareholding ratio affects its ability to obtain information on equity-invested companies.   The following decision diagram summarizes the content that needs to be paid attention to in ESRS E1 "Climate Change" greenhouse gas emissions and ESRS E2 "Pollutants", and this approach is also applicable to the disclosure of information on important sites in ESRS E4 "Biodiversity and Ecosystems".   Figure 2 Value Chain Environmental Dimension Information Disclosure Decision Diagram   2. Importance of the value chain The material impact of the value chain refers to the impact caused or contributed to by the company's operations, products or services. Value chain participants that are not related to the company's operations, products and services are not considered to be material impacts. Material impacts are not limited by neighboring or contractual relationships, but are generated by processes at various stages in the value chain and are mainly related to business activities. In addition to the material impacts, risks and opportunities generated by its own upstream and downstream value chains, companies should provide personalized entity information based on their own circumstances to further reflect the material impacts, risks and opportunities.   3. Materiality Assessment: Obtaining the Materiality, Impact, Risks and Opportunities of the Value Chain Companies should design a reasonable assessment process based on the specific circumstances and comprehensively consider the results of the materiality assessment and the content that needs to be disclosed. Considering that no process is suitable for all companies' economic activities, locations, business relationships or value chains, ESRS does not stipulate how companies should conduct materiality assessments or how to design the process, but provides several aspects that companies should consider when designing a materiality assessment process: Assess the company’s involvement in the value chainCompanies need to distinguish between direct and indirect business relationships to determine the type of impact on the value chain. A company's direct business relationships may have a value chain impact. For example, the company's procurement and payment policies and practices may violate labor standards, or even purchase from suppliers with labor rights violations. Indirect business relationships can also have a value chain impact. If a company purchases products or services produced by suppliers with negative information, it may indirectly lead to significant systemic impacts. Materiality Assessment:Step A: Understand the environment in which your company operates(a) Companies need to understand the business actors, size, industry or nature of activities, geographic locations and processes involved in their value chain; (b) The company's strategy affects its business model, which affects all aspects of its operations and its upstream and downstream value chains. Companies need to understand how their strategy and business model are linked to impacts, risks and opportunities; (c) Companies can identify which parts of the value chain are in high-risk areas by tracking the actors in their value chain activities. In particular, if a company does not have reliable information about the geographic location of its value chain, it can assess the significant global value chain impacts, risks and opportunities related to the materials, products and services it uses or produces.Step B: Identify actual and potential impacts, risks and opportunities; Step C: Assess and determine significant impacts, risks and opportunitiesIdentifying and assessing the impact of the value chain is challenging for companies. Companies should collect reliable data from value chain participants. If reliable data cannot be collected after making reasonable efforts, they may use secondary data as appropriate. Secondary data includes public reports and research, data from local or national official agencies, newspaper articles, databases, etc. Companies can use secondary data to estimate significant impacts, risks and opportunities. Assessment of the importance of environmental dimensions: When companies conduct importance assessments on environmental dimensions, they can introduce the “life cycle” concept to conduct product life cycle assessments. The Value Chain Implementation Guide provides the following two feasible paths:   (a) Companies may consider using an environmental footprint approach to measure and communicate the life cycle environmental performance of their products; (b) Companies may rely on primary, secondary or simulated data collection or other relevant approaches to assess significant impacts, dependencies, risks and opportunities.   4. Disclosure of value chain information involved in the materiality assessment process From a disclosure perspective, companies need to disclose the materiality assessment process and materiality assessment results. The Guidelines also require companies to disclose the extent and scope of coverage of the upstream and downstream value chains as the basis for preparing sustainable development reports.   Disclose the links between market position, strategy, business model and value chainTo help companies understand where significant impacts, risks and opportunities may occur in the value chain, companies should describe the value chain as follows:(a) The main characteristics of the company's upstream and downstream value chains; (b) The company's position in the value chain; (c) A description of the relationship between the main business participants and the company, including suppliers, distributors, consumers and end customers. The specific situation of the company's value chain is reflected by judging the key participants, taking into account the impact and financial importance.Companies should use sustainability due diligence processes to assess impacts along their value chain wherever possible and identify potential “tipping points” by cross-referencing material origins with social and environmental risk databases. Disclosure of value chain considerations in materiality assessmentThe company should describe the materiality assessment process that includes the value chain, as well as the information provided by due diligence, outlining the company's process for identifying, evaluating, prioritizing and monitoring risks and opportunities that may have financial impacts through its own operations or business relationships. The disclosure can be structured as follows:(a) Types of value chain relationships considered in the materiality assessment; (b) Methodology used by the company; (c) Sustainability issues identified.For significant impacts, the company should focus on areas where impacts may occur or are potential, reflecting areas where negative impacts are already severe or may be severe; for risks and opportunities, the materiality assessment process should consider other factors in the value chain that can generate risks and opportunities, including dependence on natural and social resources.During the materiality assessment process, the company should first determine the key sustainability issues for different types of business relationships and value chain links; secondly, identify areas with higher risks of adverse impacts and rank the key sustainability issues based on stakeholder involvement and the severity of the impact. Disclosure of materiality assessment method and its assumptionsThe company should provide information on the methods and assumptions used in the materiality assessment, taking into account the value chain, including the thresholds for determining materiality, and describe the limitations of the materiality assessment procedure with respect to the value chain. Disclosure of the results of the materiality assessmentWhen a company provides information on significant impacts, risks and opportunities or policies, actions or targets, it should focus on disclosing the following:(a) The areas in which significant impacts, risks and opportunities are concentrated in the company’s business model, its own operations and its upstream and downstream value chains;(b) describe the company's involvement in the activities or business relationships and determine whether its activities or business relationships involve significant influence;(c) the current and expected impacts of material influences, risks and opportunities on its business model, value chain, strategy and decision-making, how the company expects to respond to those impacts, and the changes it has made to address them;(d) When key points of strategic and material impact on the value chain are identified, the Guidelines require disclosure of discussions of the company’s management or governance bodies on those impacts;(e) the information disclosed should be consistent with the information taken into account in the materiality assessment along the value chain;(f) The information disclosed should enable people to understand the company’s significant impacts on itself and the external environment, risks and opportunities, as well as the potential impact on the company’s future.At the same time, quantitative information can serve as a useful supplement to qualitative information. Companies disclosing quantitative information can help stakeholders understand the severity of the impact and track the effectiveness of subsequent management actions. 5. Disclosure of policies, actions or targets including value chain information Companies should disclose information related to value chain participants when they have an influence on the formulation of policies, actions or targets. For example:   (a) Policies developed by value chain participants to prevent and control pollution; (b) the company’s anti-bribery and anti-corruption policies and training for value chain participants; (c) the company’s actions and resource commitments related to pollution and its targets to reduce pollution generated by suppliers; (d) clauses in the company’s contracts with value chain participants on respect for fundamental human rights; (e) the company’s audits of high-risk suppliers; (f) the company’s selection criteria for new suppliers, such as the existence of an effective grievance mechanism or measures to protect human rights and freedoms; and (g) the suppliers’ own targets for sustainable material use.   To comply, companies can disclose why they have not yet developed targets, policies and actions related to sustainability matters, and can report when they expect to develop such policies and take actions. In addition, ESRS4 Biodiversity and Ecosystems contains specific requirements for corporate value chain information disclosure:   (a) Set transition plans and targets for biodiversity and ecosystems in corporate strategies and business models; (b) Disclose the process for identifying and assessing significant biodiversity and ecosystem-related impacts, risks, dependencies and opportunities, and setting targets related to biodiversity and ecosystems.   6. Disclosure of indicators including value chain information Companies not only need to disclose indicators covering their own business, but also need to measure and determine whether to disclose indicators related to the value chain. The ESRS lists the following indicators that need to disclose information related to the value chain:   (a) Scope 1, 2, 3 and total GHG emissions; (b) Support for GHG removal and GHG mitigation projects through the purchase of carbon credits ; (c) When companies disclose the materials used in the production of products and services, it is generally only related to their own operations, but they also need to determine whether to provide additional value chain information on an entity-specific basis; (d) Companies should describe the use of resources in the upstream value chain. Although specific value chain information indicators are not specified, the impact of the upstream value chain is covered by the company's procurement information.   Note: Companies may also disclose their land use based on a life cycle assessment if they have determined that they have significant impacts on land use, or on the extent and condition of surrounding ecosystems. The Guidelines provide additional special instructions on the social dimension: employees, consumers and end users are all included in the value chain; at the same time, community impact includes not only the social impact caused by the company, but also the impact caused by value chain participants. Based on the results of the materiality assessment, the company should determine whether it needs to provide additional value chain information indicators from its own perspective or integrate value chain data into its indicators so that stakeholders can understand the impact of the company's actions or track the effectiveness of the company's initiatives. For example:   (a) When companies are involved in upstream value chain activities that have a greater dependence on and impact on the environment, reporting indicators should include supplier impact data; (b) the proportion of workers covered by social security programs in high-risk industry value chains; (c) the percentage reduction in health and safety accidents compared to the previous period.   7. Conclusion The "Value Chain Implementation Guidelines" are of great significance to understanding the CSRD and ESRS frameworks, and provide companies with a complete set of systematic methods to understand and report on their sustainability performance in the value chain. The release of the "Value Chain Implementation Guidelines" will not only help improve the transparency and consistency of corporate sustainable development information disclosure, but also guide companies to better manage their sustainable development factors in the value chain; companies can use this to more comprehensively understand the impact of their operations and upstream and downstream value chains on ESG factors, and formulate more effective sustainable development strategies, goals and action plans, thereby promoting green and low-carbon transformation and the realization of sustainable development goals.

On May 31, 2024, the European Financial Reporting Advisory Group (EFRAG) published the first implementation guidelines to assist in the application of the EU Sustainability Reporting Standards (ESRS), providing guidance for the disclosure of sustainable development information required by the Corporate Sustainability Reporting Directive (CSRD).   This article aims to enhance companies' understanding of the dual materiality concept and the application of the materiality assessment process through an in-depth interpretation of the first of the first batch of implementation guidelines, the Materiality Assessment Implementation Guidance (MAIG), so as to improve their cognition and practical ability on sustainable issues.   The meaning and explanation of dual importance   01The meaning of dual importance Double Materiality (also translated as double materiality) includes impact materiality and financial materiality.   Impact significance refers to the actual or potential, positive or negative, significant impact of sustainability issues on people and the environment in the short, medium or long term, covering the company's own operations and the upstream and downstream value chains (generated through products and services or business relationships);   Financial materiality refers to the actual or expected significant financial impact of the risks and opportunities brought about by sustainability issues on the company, including significant impact on the company's development, financial status, financial performance, cash flow, financing availability, capital cost, etc. in the short/medium/long term.   02 Development of dual importance The concept of dual materiality was first proposed by the European Union in 2017 in the Guidelines on non-financial reporting: Supplement on reporting climate-related information, which requires companies to disclose information related to sustainable development that affects financial performance, as well as information on the impact of corporate production and operations on people and the environment. ESRS follows the principle of dual materiality in this guideline and proposes more detailed and standardized information disclosure requirements for important ESG issues. In addition, ESRS also requires companies to verify the ESG information they disclose and be responsible for the authenticity of the content.   As an application guide for ESRS, the "Guide to Implementation of Materiality Assessment" explains the operation methods and practical cases of dual materiality in more detail, which helps companies better understand the connotation of dual materiality in ESRS. For ESG issues that are confirmed to be of dual materiality after assessment, companies need to further disclose the impacts, risks and opportunities (IROs, hereinafter referred to as "IROs") brought about by the issue, which is also the key content of the EU sustainability statement.   03 Explanation of “Importance” Impact materiality and financial materiality are closely related and interdependent. Risks or opportunities may arise from a company's strategic changes, investments, and management decisions on its impact on people and the environment. Important risks and opportunities often arise from the company's external impacts and its dependence on nature, human resources, etc. (for example, a law firm may lose employees due to higher salaries offered by local peers under the same circumstances, resulting in a decrease in the firm's income), and most important impacts will generate important risks or opportunities over time (for example, an oil and gas company may fail to reach an agreement with local residents on land extraction and use and resident relocation, causing local residents to launch protests and stop extraction production, resulting in actual economic losses due to delayed delivery or abandoned extraction projects).   In addition, if an enterprise omits, misreports or conceals information on risks or opportunities in its sustainable development report and affects the decision-making behavior of users of financial reports, then these risks and opportunities will be considered financially material. The sources of financially material risks or opportunities are not limited to the parent and subsidiary companies within the scope of the enterprise's consolidated financial statements, but extend to related companies in the entire upstream and downstream value chain, including suppliers, customers and partners.   Figure 1 Important sources of risks and opportunities   The time frame covered by financial materiality often exceeds the time frame defined by a company's single financial reporting cycle and management's explanation. When evaluating the financial materiality of an ESG topic, companies should consider the cumulative changes that may occur in financial effects such as revenue and costs over a longer period of time. Similarly, the probability of occurrence of risks or opportunities related to these topics may also change cumulatively over time. Companies' assessments of financial materiality should not be limited to the scope of traditional financial accounting indicators, but should expand their focus to financial impacts related to reliance on natural and social resources, which are often not fully reflected in current accounting recognition standards. Companies' proactive consideration of such financial impacts will help to more comprehensively assess financial materiality.   Materiality Assessment Process The "Guidelines for the Implementation of Materiality Assessment" provides a basic step reference for the materiality assessment process (see Figure 2). Enterprises can make adjustments based on actual conditions to compensate for differences in the industry, country, organizational structure, business operations, and upstream and downstream value chains in which the enterprise is located. Enterprises should establish materiality assessment standards and materiality comparison thresholds that are in line with their own characteristics.   Figure 2 Example of materiality assessment process   The materiality assessment process consists of four steps:   Step A: Understand the background information of the company and its main stakeholders Corporate background information includes corporate economic activities, products/services, and geographic locations where business is conducted. Analyzing corporate business plans, strategies, financial statements, and other information provided to investors, as well as upstream and downstream value chains, types and attributes of business relationships can help companies understand IROs; understanding corporate-specific IROs can be obtained by analyzing corporate-related laws and regulations, regulatory background, and sources of public information such as media, peer analysis, current industry benchmarks, and scientific research reports.   The main stakeholders of an enterprise refer to the entities affected by the business development and upstream and downstream value chains of the enterprise. The situation and demands of the main stakeholders are understood by analyzing the existing stakeholder communication mechanisms (such as dialogue, investor relations, business management, sales and procurement), and the stakeholders are sorted out in accordance with the business activities/relationships, products or services of the enterprise (the corresponding relationship of stakeholders in step A may need to be revised after step B).   Step B: Identify current/potential IROs related to ESG factors   Figure 3 ESRS 1 Appendix A AR 16 List   ESRS 1 Appendix A AR 16 list clearly divides the three-level classification of ESG topics (Topic/Sub-topic/Sub-sub-topics). Enterprises can refer to this list to sort out ESG factors to ensure that there are no omissions. At the same time, they should also consider enterprise-specific ESG factors other than the appendix list. At present, the EU has not yet issued industry ESRS standards, so industry-specific ESG factors can be disclosed according to enterprise-specific ESG factors. Enterprises can use other disclosure frameworks and standards to identify their own unique ESG factors, such as IFRS "International Financial Reporting Standard S2-Climate-related Disclosures" Industry Implementation Guide, GRI "Sustainability Reporting Standards-Industry Standards" , etc. In addition, enterprises can also refer to the "ESRS Data Point List" issued by the European Financial Reporting Advisory Group (EFRAG) to identify ESG factors and important IROs in more detail, although the purpose of the list is to provide data structure support for the digital management of sustainable development reports, rather than for corporate ESG information collection and verification.   Implement the identification methods recommended by the guidelines   Method 1: Companies can first sort out and identify potential ESG factors according to the ESRS 1 Appendix A AR 16 list, and then supplement the company's unique ESG factors according to internal processes (such as due diligence, risk management, and complaint mechanisms) or external processes (such as stakeholder communication and the methods mentioned in step A) to improve them, and finally form a list of corporate ESG factors.   Method 2: Enterprises can directly establish a list of IROs related to their own business model and upstream and downstream value chains in accordance with the reporting process of the GRI Sustainability Reporting Standards and their own internal processes (such as due diligence and risk management), and then check and integrate the three-level ESG themes in the ESRS 1 Appendix A AR 16 list to avoid omissions, and finally form a list of corporate ESG factors. In addition, it is recommended that enterprises refer to the ESRS Data Point List to assist in identifying ESG factors, especially enterprises that disclose sustainability reports for the first time.   Step C: Evaluate and identify significant IROs related to ESG factors   The materiality assessment process starts with the impact of the enterprise on people and the environment, assessing whether these impacts pose risks or opportunities to the enterprise, and then assessing the risks and opportunities caused by the enterprise's resource dependence (for example, the enterprise relies on people and natural resources to conduct its business but the enterprise has no impact on them).   When conducting assessments, companies need to consider the correlation between impact materiality and financial materiality and carry out appropriate and reasonable assessment processes. For example, whether impact materiality assessment and financial materiality assessment should be divided into two independent processes, in principle, it is recommended to integrate the two processes to avoid missing important IROs. The ESRS ESG Theme Standard (i.e., ESRS 1 Appendix A AR 16 Checklist) can provide companies with directions and angles for identifying ESG factors (see Figure 4).   Figure 4 Dual importance assessment   Implement the assessment methods recommended by the guideline   1) Assess the importance of impact The impacts of corporate ESG factors are divided into positive/negative, currently occurring/likely to occur, and the "materiality" judgment value applicable to the company is determined according to the type of impact (see Figure 5). If the severity of a certain impact has a recognized scientific basis, the company can determine that the impact is "material" without further analysis. Communication with stakeholders who are mainly affected can help companies understand the transmission path of the impact, assess the severity of the impact and the possibility of occurrence. Internal communication between companies and functional departments and employees, and communication with report users and relevant experts can help evaluate , verify and ensure the integrity of the materiality assessment results. The "Guidelines for the Implementation of Materiality Assessment" provides a schematic diagram of the judgment process for determining the materiality of impacts for reference by companies (see Figure 5).   Figure 5: Assessment of impact importance   Figure 6 Judging whether the impact is significant   The severity of the negative impact requires the determination of three factors: level, scope, and whether it is remediable. Level refers to the severity of the impact, such as the degree of infringement on the acquisition of basic necessities of life, the degree of infringement on the freedom of education and the freedom to make a living; scope refers to the affected area, such as the number of people affected and the degree of environmental damage; whether the impact is remediable, such as whether the affected people can regain their rights through return or compensation, or whether the ability to repair the environment is limited and cannot be restored to the time before the impact occurred. Any factor may cause the impact to become serious, and the three factors interact with each other. Whether it is remediable will increase the severity as the level of the impact increases. Conversely, the increase in the level of the impact or the expansion of the scope will make it difficult to remedy. Enterprises can use due diligence procedures or risk management procedures to obtain materiality thresholds, analyze the severity of negative impacts and risk priorities, and determine which impacts are important. Enterprises should give priority to supporting evidence that can draw more objective conclusions and set materiality thresholds based on these evidences.   2) Assessing financial materiality   Significant opportunities and risks are usually generated by impacts, dependencies and other factors (such as climate risk exposure and regulatory changes to address systemic risks). Assessing whether opportunities and risks are significant requires the use of reasonable quantitative or qualitative thresholds (such as financial status, financial performance, cash flow, financing availability, capital costs and other financial impacts). The full text of ESRS discusses risks and opportunities as a whole combination when explaining the reporting disclosure requirements. However, it is worth noting that in certain specific situations, ESG factors only trigger a single aspect of risk or opportunity, rather than necessarily both at the same time.   Figure 7 Assessing financial materiality   When evaluating the opportunities and risks brought by ESG factors, companies need to consider the possibility of opportunities and risks, and the possible financial impact in the short, medium and long term. Companies need to establish objective thresholds for possibility, financial impact and the nature of financial impact, and then judge the possible important opportunities and risks identified in step B one by one; they also need to evaluate whether the impact of ESG factors identified in step B has produced important financial impacts; if the risk management established within the company covers sustainable development risks, the possibility of opportunities and risks and the corresponding financial impact can be further evaluated. Communication with functional departments within the company, corporate investors, and other financial partners (such as banks) can help evaluate, verify, and ensure the integrity of the materiality assessment results.   Enterprises can set an absolute or relative value of the monetary limit (such as the percentage change of a certain indicator in the financial report, such as the income, cost, total assets or net assets), which is close to the importance threshold used to evaluate a certain indicator when preparing financial reports. If an ESG factor is financially important but the financial impact it causes cannot be accurately measured when the report is issued, the enterprise can refer more to qualitative factors and factors of the probability of occurrence to determine the importance threshold. In addition, the qualitative assessment of the importance threshold also includes the following situations: Enterprises may have reputation risks that investors are concerned about because they are engaged in multiple industries or have unique business models. Although the financial impact on cash flow cannot be quantified, reputation risks will cause changes in financing costs and financing methods, which will also be deemed to be financially important.   3) Integrate the evaluation results   The company integrates the results of the assessment process from step A to step C to form a list of important IROs to prepare for the disclosure of the sustainable development report. Analyze the important three-level (theme-sub-theme-sub-theme) ESG issues to ensure that they are all converted into IROs. The individual impacts, risks, and opportunities assessed by the company based on appropriate materiality thresholds and methods need to be appropriately integrated in accordance with the relevant requirements for report disclosure, and the results of the integration must be confirmed with the company's management, in order to fully reflect the company's important IROs.   Step D: Disclose the evaluation process and results of important IROs in accordance with ESRS requirements   ESRS 2 is the disclosure requirement for the EU CSRD sustainable development report, which is divided into the following four parts: basis for report preparation, governance, strategy, and management of impacts, risks and opportunities (see Figure 8).   Figure 8 ESRS 2 content   Among them, there are three disclosure requirements involving dual importance (the bold part in Figure 8), namely, the disclosure of the identification process and evaluation process of important IROs (IRO-1), the relationship between important IROs and corporate strategy and business model (SBM-3), and the explanation of the disclosure of important IROs, including the selection criteria and the importance assessment threshold (IRO-2). ESRS requires companies to disclose the importance assessment method used, the assumptions adopted, the focus and original information of the assessment process, as well as the judgment methods of quantitative/qualitative thresholds, reference standards, etc. ESRS 1 Appendix D provides the ESRS sustainable development reporting framework, while Appendix F provides specific cases for companies to understand how to disclose (see Figure 9).   Figure 9 ESRS 1 Appendix F   Other key points of the Implementation Guide   In addition to explaining how the EU ESRS defines importance, how the importance assessment process is carried out, and how to use other standards and frameworks, the "Guidelines for the Implementation of Importance Assessment" also answers common questions that companies may ask. In addition, the EFRAG website has set up a special ESRS Q&A platform to help collect and answer technical questions raised by stakeholders that have not yet been answered. On July 25, the EFRAG website published the latest version of the explanation of technical issues, and currently has a total of 93 explanations. Other key points raised in the frequently asked questions of the "Implementation Guidelines" are summarized as follows:   01Impact Importance Points [Impacts caused by related activities and business relationships] The related activities of enterprises have an impact on stakeholders. "Related activities" include various forms. The impact caused by the operation and products/services of the enterprise should be the sole responsibility of the enterprise, such as employees working in a dangerous environment without safety measures; the impact caused by the participation of the enterprise, the enterprise's single action and no longer participating cannot reduce the impact, such as multiple factories polluting the local air environment, but the harmful gas emissions of a single factory are all below the harmful limit; the impact caused by the business relationship of the enterprise, the business relationship is not limited to contractual relationships and partners, but also includes the entire upstream and downstream value chain of first-tier suppliers and beyond, such as suppliers outsourcing the embroidery process of textiles to child labor. The negative impact caused by the business relationship of the enterprise is not necessarily "unimportant", but depends on the severity of the impact.   [Impacts cannot be offset by positive or negative impacts] ① Positive and negative impacts cannot be offset and need to be evaluated separately. They cannot be integrated due to the different nature and types of impacts; ② The time ranges corresponding to the impacts are different (for example, in the case of the same type of nature, the actual negative impacts of the current period cannot be offset by the positive impacts of the next few years), and the impacts of their own operations and the impacts of the upstream and downstream value chains cannot be offset; ③ Compensation/offsetting and netting are different concepts, but compensation/offsetting is not included in the impact significance assessment. There are some specific requirements for compensation/offsetting in the thematic ESRS. Please refer to the specific requirements of "ESRS E1 Climate Change" and "ESRS E4 Biodiversity and Ecosystems" for the disclosure of carbon credits and biodiversity credits for important topics.   02 Key points of financial importance [Comparison of similarities and differences between financial materiality and financial reporting materiality] The materiality information in financial reports is different from the financial materiality information in sustainability reports, but the goal of information disclosure is the same. Decision makers who provide or may provide resources to the company in the future determine whether the information is financially material. The scope of financial materiality in sustainability reports is to further expand the scope of "material information" in corporate financial reports. The "European Union Sustainability Reporting Standards (ESRS)" and the "Financial Reporting Standards" have no difference in the concept of "materiality", but the definition of "materiality" information in the standards is different, and the threshold of financial materiality can refer to the recognition standards of accounting elements such as assets and income in financial reports.   Figure 10 Comparison of disclosures in financial reports and sustainable development reports   [Financial materiality is more proactive] Risks and opportunities that have not yet been identified as material in the financial report may be evaluated as material and displayed in the sustainable development report. This is because the recognition of resources/opportunities and risks is earlier than the recognition of assets and liabilities in the financial report.   [Risk Information] Potential future events may lead to the disclosure of expected risks and opportunities in the current sustainable development report, but financial reports generally only record risks that have occurred in the past period. Therefore, prospective information (such as expected financial impact) may be disclosed as important information in the sustainable development report.   [Relationship between financial materiality and financial impact in financial reports] The financial materiality (financial impact) of a sustainability report is not limited to the content disclosed in the financial report. According to the definition of financial impact in Annex 2 of the European Sustainability Reporting Standards (ESRS), it is divided into short-term financial impact (specified and confirmed in the financial report) and expected financial impact (not meeting the confirmation criteria and not included in the current financial report). The financial impact of certain ESG factors in the sustainability report has exceeded the information required to be confirmed and measured in the financial report and the notes to the financial statements.   03Other points [Continuity of materiality assessment] The Corporate Sustainability Reporting Directive (CSRD) requires companies to publish sustainability reports every year. Companies can continue to use previous materiality assessment conclusions if they determine that there are no major organizational and operational changes and no changes in external factors (external factor changes refer to the generation of new or revised old IROs or the impact on certain disclosed information). Major changes include mergers and acquisitions, business/industry changes, major changes in the supply chain, the establishment of major new business relationships, the opening/closing of business lines or business areas, and changes in the definition of severity.   【Materiality Assessment and Information Integration of Group Companies】 ① If the group (parent company) is the disclosing party, it can adopt two methods or a combination of the two methods to conduct the materiality assessment process, from top to bottom ( assessment at the group level , communication with subsidiaries to obtain useful information) and from bottom to top (assessment at the subsidiary level, and aggregation of assessment results at the group level), and reasonably set the materiality threshold of IROs on a cross-industry/business basis to ensure the consistency of the methods used. ② If the group (parent company) is the disclosing party, it can appropriately integrate information based on relevant facts and circumstances on the premise that the content of important IROs is not confused. Enterprises should use separate integration standards for all IROs to reflect important information truthfully, fairly and accurately. For example, if the important IROs of different business regions/assets have a strong correlation with the business region/asset, enterprises should not integrate according to a higher-level integration dimension such as country to prevent enterprises from concealing important information or misleading report users in their judgment of materiality.   [Application order of important IROs] If an enterprise identifies a large number of IROs, it can prioritize them from the perspective of corporate management. From the perspective of report disclosure, the enterprise needs to disclose all important IROs, especially if the enterprise has not yet established a sound system, goals, and action plans to deal with these IROs.   [Data retention and subsequent application] The Corporate Sustainability Reporting Directive (CSRD) requires companies to conduct sustainability report attestation. Companies should retain information on the materiality assessment process of IROs to facilitate inquiries and use by attestation agencies and internal corporate management.   Comparison of relevant standards on ESG information disclosure   From the perspective of standards and criteria for ESG information disclosure, the dual materiality principle has been clearly adopted in the EU and my country (including Hong Kong). In contrast, the United States has not yet issued official sustainable development reporting standards. Its exchanges encourage flexibility in corporate assessments in terms of sustainable development reporting and allow companies to voluntarily disclose ESG information they deem important. The U.S. Securities and Exchange Commission (SEC) has always emphasized the disclosure of "important" information that investors are concerned about from a financial perspective in order to protect the rights and interests of investors. It only involves a small amount of ESG content. For example, the "Rules for Strengthening and Regulating Disclosure of Climate-Related Information to Investors" issued in March 2024 clearly stated the content that listed companies should disclose on climate change issues, which is a milestone.   Figure 11 Comparison of materiality principles adopted by multiple ESG information disclosure standards   summary At present, although my country's three major exchanges and the Ministry of Finance have proposed the use of the "dual materiality" principle in the disclosure of sustainable development information, detailed operational rules have not yet been issued. The "Guidelines for the Implementation of Materiality Assessment" can provide valuable reference and guidance for Chinese companies in implementing this principle, helping them to better understand and apply it.   The "Corporate Sustainable Disclosure Standards - Basic Standards (Draft for Comments)" issued by my country's Ministry of Finance mentioned that the complete "Corporate Sustainable Disclosure Standards" will consist of basic standards, specific standards and application guidelines. Among them, the specific standards are similar to the "EU Sustainability Reporting Standards (ESRS)", which will include information disclosure requirements for sustainable topics in the environment, society and governance of enterprises; unlike the EU, industry information disclosure requirements will serve as the industry application guidelines of the Ministry of Finance, and the standard application guidelines are similar to the three "Implementation Guidelines" issued by EFRAG, which will explain, refine and provide examples for the basic standards and specific standards, and make operational provisions for key and difficult issues. In response to problems encountered by enterprises in the implementation of sustainable disclosure standards, the Ministry of Finance will provide Q&A on the implementation of the standards when necessary, and it is expected to jointly provide guidance for the release of sustainable development reports by listed companies on the three major exchanges.   The disclosure requirements of the EU ESRS standard and the first batch of EFRAG implementation guidelines are more detailed and practical than the Non-Financial Reporting Directive (NFRD), providing a normative reference for EU companies to use dual materiality as the ESG information disclosure principle, laying a solid foundation for the implementation of CSRD. At the same time, the implementation guidelines also provide ideas for ESG supervision and information disclosure in other countries and regions, and provide an effective reference for companies to optimize ESG management.

  Mao Zhenhua is the founder of China Chengxin Group, the chief economist of China Chengxin International, a professor at the School of Business and Economics of the University of Hong Kong, a member of the expert group of the Chief Executive's Policy Unit of the Hong Kong Special Administrative Region Government, a co-director and professor of the Institute of Economics of Renmin University of China, the dean of the Dong Furong Institute of Economic and Social Development of Wuhan University, and the co-chairman of the China Macroeconomic Forum (CMF).   The following views are compiled from Mao Zhenhua’s speech at the CMF Macroeconomic Hot Issues Seminar (No. 88)   Since the beginning of this year, China's exports have maintained a good growth momentum against the backdrop of an increasingly severe international situation, frequent geopolitical conflicts, and the intensifying Sino-US game. This fully reflects China's strong production capacity, as well as the supply chain advantages, innovation advantages, and comparative cost advantages behind exports. However, from a medium- to long-term perspective, China's foreign trade and external environment will be increasingly affected by changes in the global geopolitical and economic landscape, especially the Sino-US game. I would like to discuss two aspects of this.   1. “De-risking” is not “de-cold war”, but rather a “new cold war”   The goal of the United States in instigating the current game with China is to achieve a "Cold War state". In recent years, the impact of geopolitical evolution has surpassed many conventional economic factors, especially the game between China and the United States has become the dominant force affecting global economic and political stability. In this context, we should first see the basic framework of the US strategy toward China. Looking back at the so-called "US-Soviet Cold War" that lasted for more than 40 years from 1945 to 1991, the United States adopted a long-term confrontation and competition strategy that was neither war nor peace against the former Soviet Union and its allies by establishing an alliance system including politics, military and diplomacy, and finally defeated the former Soviet Union. On the issue of China, trying to replicate past successes is also the basic idea of the current US strategy toward China, which is why I call it the "new Cold War". In 2017, Trump signed an executive memorandum authorizing the Office of the United States Trade Representative to conduct a "301 investigation" against China, taking the lead in initiating a trade conflict. But Trump is not a traditional American establishment. While launching a trade war against China, he also fought a trade war with his military and political allies, and did not form a situation of group confrontation. Biden made major adjustments to Trump's strategy after taking office. First, he continued the traditional American diplomatic thinking and re-established the core alliance pattern of NATO and the European Union, including a few developed countries in the Asia-Pacific region such as Japan and South Korea, trying to isolate China by winning over allies and forming alliances. Second, he expanded the Sino-US trade conflict to other levels such as science and technology, military, and personnel exchanges, trying to achieve decoupling from China. Looking back on this process, it fully reflects the characteristics of the new Cold War: first, do not fight a hot war, second, aim to divide or even isolate each other, and third, comprehensive competition and confrontation in economy, politics, diplomacy, and system. Judging from the current situation, the situation is also evolving towards the "trilogy" of Sino-US game that I predicted before.   From "decoupling" to "de-risking", the new Cold War pattern has basically taken shape. Biden, as an establishment politician, has tried to win over Europe and China to decouple, but China and Europe are each other's second largest trading partners, which means that Europe will bear huge economic costs. During the World Economic Forum Annual Meeting in early 2023, European Commission President von der Leyen first proposed the EU's "de-risking" of China. Biden made concessions to Europe and finally accepted this concept, thus reaching a consensus between the United States and Europe on the China issue. Since then, I have publicly stated many times that the adjustment of the US strategy toward China from "decoupling" to "de-risking" does not mean that the competition and game between China and the United States have eased, but that the new Cold War pattern has basically taken shape, which marks that the United States and its allies have reached a unified understanding and strategy toward China. The "de-risking" framework maintains the exchanges between Europe and the United States and China in general trade, energy, capital and other ordinary fields, but adjusts the content covered by "risks", not only involving the high-tech, military and other fields that we generally think of, but also some new fields. We should note that the content and degree of tightness of these new areas are dynamically adjusted - as long as they are considered not in the interests of Europe and the United States, they will be included in the scope of "risk". Among them, new energy vehicles are a very realistic example. New energy vehicles do not belong to the field of high technology and military, but because China has advantages in technology and cost, and threatens the relevant interests of Europe and the United States, they are included in the content of "risk". The United States and Europe have also reached a consensus on this strategic measure. Therefore, the change from "decoupling" to "de-risking" is a very important change in Sino-US relations, and it is also a new environment that China will face in the long term in the global geopolitical and economic evolution. This is also an important reason why I believe that the new Cold War pattern has been formed.   The prelude of the new Cold War has been opened, but the "iron curtain" has not yet formed, and China still has a certain window of adjustment. On the one hand, China's general goods trade with the United States and European countries and related personnel and capital exchanges can still continue. Although affected by "de-risking", from the foreign trade in the first half of the year, we can still feel China's advantages in the underlying goods and basic goods of the entire world trade, especially the supply chain advantages we have established in recent years. China's exports have remained resilient since the beginning of this year; and the exports of private enterprises are also recovering, which deserves our further attention and thinking in the process of formulating "stable foreign trade" policies in the future. Secondly, under the framework of "de-risking", various countries still have different interests, thus forming further game space. Although the current new Cold War pattern has been formed, it is not a monolithic block. For example, for the export restrictions on China's new energy vehicles, German companies and the German government have been expressing goodwill and opposing Europe's practices such as imposing tariffs. From this perspective, we have a lot to do in geopolitics , and it is necessary for foreign trade-related policies to be closely coordinated with national security and foreign policy. In recent years, China has made many policy adjustments and taken the initiative to ease the tense foreign relations that had formed in the past. In particular, in the first half of this year, China resumed talks with Europe, Australia, New Zealand, Japan, South Korea and other countries, and unilaterally opened visas to some countries, which caused a great response internationally. This demonstrated our flexibility in the field of opening up and foreign relations. At the same time, it will also help break the encirclement of China established by the United States.   From "decoupling" to "de-risking", "security" and "interests" are growing and declining, and are in dynamic balance. The impact of geopolitical evolution on the global economy and trade is fermenting, and companies, especially multinational companies, have to pay more attention to "security". In April this year, I attended the China-US Business Leaders Roundtable held in the United States. The theme of the meeting was "Balance between Security and Economic Interests". At the meeting, American entrepreneurs proposed that in the face of national security, the interests of enterprises, entrepreneurs and investors are not worth talking about, and there is no room for game at all. Therefore, it is very important to establish a national security concept in the economic field and to establish a balance between national security and economic interests. I think it is necessary to summarize the good work done in this regard in recent times and some good results achieved, and use it as a basis to provide a good guide for China's future foreign economic and trade work.   2. Eliminate misconceptions about foreign investment and combine the introduction of foreign investment with enterprises going overseas   The background of foreign direct investment has changed, but its positive significance for the Chinese economy has not changed. Under the background of deglobalization and anti-globalization, some foreign-invested enterprises are currently under geopolitical pressure, especially the "de-sinicization" led by the United States, and their own competitiveness has weakened. The momentum of direct investment in China has slowed down. At the same time, some enterprises have withdrawn and reduced their capital. Looking back, foreign-invested enterprises have played a vital role in China's reform and opening up, the improvement of China's total factor productivity, the improvement of China's product competitiveness, and China's modernization process. We need to correctly understand their historical role. Looking to the future, although history is advancing and the background of foreign investment in China has changed, the positive role played by foreign-invested enterprises has not changed. For example, from the perspective of technology spillover, the introduction and utilization of foreign cutting-edge technologies, whether in terms of time or efficiency, the foreign direct investment method is obviously better than the import or self-development method. Protecting the interests of foreign-invested enterprises in China and achieving a state of "you have me, I have you" is a necessary path to maximize China's interests. China's current policies clearly express this attitude and have done some solid work. Regardless of the final effect, this atmosphere of public opinion itself is a good solution and a defense of the basic principles of free trade.   We cannot associate foreign investment with being unpatriotic, and there is still room for further improvement in the business environment for foreign investment. At present, there are some noises in the society regarding the understanding and attitude towards foreign-funded enterprises, and many views and opinions are not very calm. Some views simply associate working in foreign companies or buying foreign goods with being unpatriotic. In addition, there are some views that mistakenly interpret exports as a favor to other countries, especially China's favor to the United States, and believe that without China's cheap and good products, other countries will have no choice. As a major trading country, China's exports are still an important support for driving economic growth. Exports themselves are based on reciprocity, and it is necessary to strengthen the public's correct understanding of exports. From the perspective of export companies, orders are the source of all competitiveness and the basis for the survival of enterprises. All customers who form demand for products and services should be treated with a friendly attitude. Recently, there have been some attacks on foreigners in some places. Although these are extreme cases, we need to guide public opinion and social trends to further establish and optimize the business environment for foreign-funded enterprises in China.   Correctly understand the background and reasons for enterprises to go overseas, and avoid being labeled as "capital flight". From the perspective of the types of enterprises going overseas, they can be divided into two categories: "passive going overseas" and "active going overseas". For passive going overseas, it is mainly affected by the current US-led decoupling and "de-risking". Under the pressure of the US government, many foreign-funded enterprises have gradually reduced their investment in China and even rebuilt their production capacity in other countries. Among them, some core foreign-funded enterprises that are in a dominant position in the industrial chain require Chinese upstream and downstream enterprises to transfer production capacity, mainly involving enterprises in related fields such as mobile phones and automobiles. In addition, there are many excellent manufacturing enterprises in China that take the initiative to go overseas. By investing and building factories overseas, they can get closer to overseas markets and bypass irrational and unfair trade barriers. At the same time, the destination countries for Chinese enterprises to go overseas are generally selected in countries with relatively low production factors and labor costs, which helps to reduce production and operating costs. Regardless of the type of enterprise going overseas, we need to correctly understand and view it, and we need to make it clear that enterprises going overseas does not mean capital flight. From the development trajectory of the international economy, enterprises going overseas is also an inevitable trend. If we do not correctly view companies going overseas, then we will not be able to correctly understand foreign direct investment, because foreign direct investment is essentially a manifestation of foreign companies investing in China.   It is of great significance for companies to go overseas, which will help consolidate my country's supply chain advantages and stabilize my country's economic growth. Although China's current trade volume with the United States has dropped to third place, behind ASEAN and the EU, our exports to ASEAN and Mexico through re-export trade have increased significantly. This shows that China still has advantages in the supply chain, but it also reflects that Chinese companies are also facing greater potential threats, that is, European and American countries are gradually reducing their dependence on China's supply chain and promoting the so-called "China+" strategy in other countries. , if Chinese companies do not follow up and go overseas in time, the original market share will be slowly filled by companies from other countries. In addition, only Chinese companies that have been active within the global supply chain system can share the dividends of the upgrading and development of the global industrial chain. Going overseas is also a move that can rise to the level of national interests. Take Japan as an example. In the 1980s, Japan experienced a long period of slow and low growth after the bubble economy burst. In the past three decades, Japan’s real per capita GDP growth rate was less than 1% per year. However, Japanese companies have accumulated a lot of wealth through overseas investment and operations. The scale of overseas assets continues to expand, GNP (gross national product) continues to rise, and Japan's global investment income plays an important role in stabilizing corporate development and stabilizing the Japanese economy. It can be said that the current significance of Chinese companies going overseas is greater than usual. I suggest that companies should be encouraged and supported in the field of macro policies to go overseas, and at the same time, correct guidance should be given in terms of public opinion. Relevant scholars should speak out to society objectively and rationally to avoid the spread of wrong thoughts and constantly strive for China's foreign trade and economy. Better external environment.

Li Yongquan Director and Senior Advisor of China Chengxin (Asia Pacific) Credit Rating Co., Ltd.   China's credit rating agency breakthrough   In 2012, Director Li Yongquan assisted China Chengxin International Credit Rating Co., Ltd. (CCXI, headquartered in Beijing) in establishing a credit rating agency (CRA) in Hong Kong, named China Chengxin (Asia Pacific) Credit Rating Co., Ltd. (CCXAP).     After nearly 12 years of hard work, CCXI was recognized as an approved CRA by the Mandatory Provident Fund Schemes Authority (MPFA) of Hong Kong on March 31, 2023, and was recognized as an approved CRA under the Qualifying Debt Instrument Scheme (QDI Scheme) by the Hong Kong Monetary Authority (HKMA) on Wednesday. CCXI is the first Chinese CRA to [go global] through CCXAP and enter the international market with Hong Kong as its base. There are currently five CRAs recognized by MPFA, including CCXAP, Fitch, Moody's, R&I, and S&P. The MPF can use the minimum credit rating requirements set by any one or more of the above CRAs as investments in long-term bonds and short-term debt instruments (hereinafter collectively referred to as debt instruments) in accordance with the MPF guidelines issued by MPFA.   The CRAs approved by HKMA are the same as the five approved by MPFA. Before 1996, Hong Kong institutional investors, such as banks and enterprises, had to pay Hong Kong profits tax on the interest and profits they earned from investing in debt instruments issued in Hong Kong. In 1996, the Hong Kong government launched the QDI program to attract overseas issuers to issue bonds in Hong Kong and better develop the Hong Kong bond market.   QDI Program Under the QDI program, institutional investors holding eligible debt instruments can enjoy a 50% tax reduction or tax exemption. For newly issued eligible debt instruments held after April 1, 2018, interest and profits are all exempted from tax. In addition, under the Green and Sustainable Finance Funding Program, debt instruments rated by an approved CRA recognized by HKMA can be subsidized for issuance costs.   Global CRA Institutional Market The development of Hong Kong's bond market can help stabilize the financial market, allow companies and institutions to raise funds, and provide investors with a variety of investment options. Before the outbreak of the Asian financial crisis, former HKMA President Joseph Yam had already made efforts to promote the development of Hong Kong's bond market. In a speech, he proposed that the development of the debt instrument market requires four conditions, including: interest rate benchmark (Benchmark), underwriter (Intermediary), credit rating (Rating), and demand (Demand). He referred to these four conditions as BIRD (bird). He may not have realized at the time that a bird does not build a nest, but a group of birds need to build a nest to reproduce offspring. If bonds lack a settlement system (Settlement), it is difficult for the bond market to develop effectively. In fact, before he gave his speech, HKMA had already accepted the suggestion of the Hong Kong Capital Market Association (HKCMA) in 1990 to establish the Central Uniting and Clearing System for Debt Instruments (CMU System). Therefore, BIRD should be written as the plural BIRDS.   Undoubtedly, credit rating is an important part of the development of the bond market. Therefore, China, Japan, South Korea, Thailand, Indonesia, Portugal, Russia, Argentina, etc. all have their own local CRAs. International financial centers such as New York, London, Hong Kong, and Singapore all have international CRAs stationed there. Although, in the future, debt instruments are not required to be rated before they can be issued. However, in order to expand the investor base, bond issuers are willing to entrust CRAs with ratings.   Each country's local CRA uses a local rating scale to assess the credit status of its own currency bonds. CRA rates the country's government bonds as AAA, the highest level, and rates other rated entities in order of credit status.   When an issuer "goes out" to an international financial center to issue international debt instruments in foreign or domestic currencies, they are rated by international CRAs using an international rating scale. In the absence of explicit market consensus, the country or international financial organization with the strongest debt repayment capacity, such as the United States and the World Bank, is rated as the highest level of AAA, and the credit status of other rated entities is rated from AAA to default level. An issuer and its debt instruments that receive an AAA rating under the local rating scale may only receive a BBB rating under the international rating scale. Therefore, when investors buy bonds, they must be clear whether the bond's credit rating is international or local.   Does the difference between local ratings and international ratings mean that local ratings are inflated and untrustworthy? Not necessarily. Local debt instruments are issued in the country's currency, and the government has policies or window guidance to prevent debt instrument defaults to a certain extent and protect investors. International bonds that "go global" may lack the above-mentioned special features.     There are currently 9 CRAs licensed by the SFC in Hong Kong, 4 in China, 4 in the US and 1 in Hong Kong, all of which use international rating scales to assess the rated entities (issuers, debt instruments). The three with the longest history, Moody's, S&P and Fitch, have the largest market share in Hong Kong, and CCXAP is already catching up very closely. There are many rating agencies in Europe, and there are 28 credit rating agencies that have obtained licenses or certificates from the European Securities and Markets Authority (ESMA). The large number of rating agencies reflects the active European debt instrument market on the one hand, and the different licensing regulations for CRAs in European countries on the other hand.   The increase in the number of credit ratings in Hong Kong reflects, to a certain extent, that the development of Hong Kong's debt market has risen to a new level. In particular, since 2012, the entry of Chinese CRAs has reflected that more and more Chinese companies and institutions are going to the international market to issue bonds. In addition, when the US Federal Reserve implemented QE, the extremely low US dollar interest rate attracted many mainland companies and local financing platforms to come to Hong Kong to issue US dollar bonds. Investors who are greedy for high interest rates and forget about risks have suffered heavy losses in the domino-like default of Chinese real estate companies' bonds. Even if they are willing to reach a debt restructuring agreement with the issuer, the restructuring will take a long time. After the restructuring, whether the issuer can sell assets at a reasonable price and other risks that the issuer will face in the future may not allow investors to get back the interest and principal they deserve.   Therefore, when investing in debt instruments, it is advisable to buy investment-grade ones; when investing in unrated or low-rated ones, you need to be more aware of your risk tolerance.  

  Yan Yan , Chairman of China Chengxin International Credit Rating Co., Ltd. and Chairman of China Chengxin (Asia Pacific) Credit Rating Co., Ltd.   The internationalization path of Chinese credit rating agencies should not be limited to bond rating business in the capital market. It should help domestic market operators better understand and grasp various overseas financial risks, help overseas market operators better understand the essential connotation of China's new development pattern, and cultivate new advantages for my country to participate in international cooperation and competition under the new situation. It should accelerate research capacity building and enrich and innovate financial service models.   In recent years, my country's high-quality financial development and opening-up have been steadily advancing, fruitful results have been achieved, and its global influence has continued to increase. Credit rating is an important basic institutional arrangement in the financial market and one of the hubs of the international monetary and financial system. In the process of continuous high-level financial opening-up, my country's rating industry must also keep up with the pace of opening-up, accelerate the process of "going out", enhance international voice, and contribute to maintaining the stability and security of my country's economy and finance in an open environment and promoting the smooth development of cross-border investment, financing and economic and trade cooperation. In recent years, with the strong support of national policies and regulatory authorities, my country's rating industry has accumulated certain practical experience in the international development, laying a solid foundation for subsequent exploration of international business layout. In the future, based on the high-level opening-up of finance, China's rating industry needs to improve both internally and externally, strengthen its own "hard power", accelerate the process of internationalization, enhance international competitiveness and voice, and help the overall situation of the country's opening-up.   The high-level opening-up of finance has been steadily expanded.   It is time for the rating industry to “go global”   Promoting high-level financial opening-up is one of the core issues in building a financial power. In recent years, under the leadership of the CPC Central Committee, China's financial opening-up has continued to advance with remarkable achievements, which has also put forward higher requirements for the international development of credit ratings. Especially in the context of an increasingly complex external environment, it is even more necessary to take the initiative in ratings to maintain the stability of China's sovereign ratings and ensure China's continued high-level opening-up.   The high level of financial opening requires Chinese rating agencies to provide international credit rating services to match it   High-level financial opening up to the outside world is an important driving force for the reform and development of my country's financial industry and an inevitable requirement for building a financial power. Under the leadership of the Party Central Committee, China's high-level financial opening up to the outside world has made steady progress, forming a new pattern of comprehensive opening up with a larger scope, wider fields and deeper levels. In October 2023, the Central Financial Work Conference emphasized the need to "strive to promote high-level financial opening up and ensure national financial and economic security." my country's financial market has made remarkable achievements in opening up to the outside world, and its influence in the international financial market has increased significantly. So far, China's capital market has grown into the second largest capital market in the world. As of the end of 2023, the scale of domestic bonds held by overseas institutions and individuals accounted for about 2.4% of the bond market stock, and the cumulative issuance scale of panda bonds was close to 800 billion yuan. Deepening financial opening up to the outside world is the general trend, and credit rating, as an important infrastructure in the financial market, also needs to accelerate "going global" and provide matching international credit rating services. On the one hand, as China's financial market becomes more open, it is necessary for Chinese rating agencies to provide internationally recognized rating results to provide reference for pricing financial products and avoid turbulence in the financial market caused by the loss of pricing power. On the other hand, in the process of financial opening up, , Chinese-funded rating agencies are required to timely communicate changes in bond and entity credit qualifications to market participants through initial rating, regular tracking, irregular tracking and other rating actions, to help global investors correctly understand the domestic financial market, and to provide regulatory authorities with Cross-border risk management provides reference.   The reconstruction of the global financial governance structure requires taking the initiative in rating to safeguard national financial security As the core of the international credit rating system, sovereign ratings not only directly affect the debt-raising capacity of sovereign countries, but also affect the financing costs of a country's financial institutions and enterprises and the stability of the foreign exchange market through the "ceiling effect". Against the background of my country's continued financial opening-up, the reconstruction of the global financial governance structure, the intensification of the game between major powers, and the increasingly complex external environment, it is of great significance to take the initiative in ratings to maintain the country's financial stability and financial security. In December 2023 and April 2024, Moody's and Fitch successively downgraded my country's sovereign rating outlook, which had a certain impact on market confidence. However, from the actual performance of China's economy, foreign rating agencies obviously underestimated the strong resilience of China's economy, the effectiveness of policies and fiscal sustainability, and failed to fully objectively and scientifically evaluate my country's sovereign credit, which may have a negative impact on the international financing of Chinese companies and national financial security. Although from a historical perspective, the impact of the three major international rating agencies' downgrade of China's sovereign rating on China's economy is very limited, but international experience such as the European debt crisis and the Russia-Ukraine conflict shows that frequent downgrades of sovereign ratings during economic downturns can easily trigger debt crises or impact the stability and financial security of the rated countries' financial markets. Therefore, we need Chinese rating agencies to actively voice the "Chinese voice" and guide the international capital market to correctly, comprehensively and objectively view the Chinese economy. In the context of opening up, my country's rating industry needs to continue to promote internationalization and output rating opinions that are more in line with the country's interests, so as to seize the initiative in rating, get rid of the constraints of the three major international rating agencies and other Western rating agencies on my country in the financial field, and better maintain the country's financial stability and financial security.   The national level and regulatory authorities attach great importance to the international development of the rating industry   In recent years, the national level and regulatory authorities have attached great importance to the international development of the rating industry, and have repeatedly encouraged domestic rating agencies to expand their international business in important international conferences and documents. In June 2022, General Secretary Xi Jinping proposed at the 14th BRICS Leaders’ Meeting that “the BRICS countries should expand cross-border payment and credit rating cooperation and improve the level of trade, investment and financing facilitation”, which will help Developing countries represented by the BRICS countries have established credit rating cooperation and exported views that are more in line with the interests of emerging market countries; in the same month, the Business Management Department of the People's Bank of China issued the "Action Plan to Comprehensively Promote the High-Quality Development of Beijing's Credit Information System and Promote the Formation of a New Development Pattern" 》, encourage issuers to hire at least one local rating agency in the registration process of Chinese-funded US dollar bonds, and gradually increase the voice of local rating agencies in the international capital market. Under the guidance of regulatory authorities and relying on the unique advantages of credit rating agencies as capital market infrastructure, Chinese rating agencies have actively carried out international business practices and achieved remarkable results, laying a solid foundation for further international development. Since 2012, mainstream Chinese-funded rating agencies have successively set up subsidiaries or branches in Hong Kong as windows to the international market, actively speaking out in the global capital market. On March 31, 2023, CCXAP was recognized by the Hong Kong Mandatory Provident Fund Schemes Authority as the first Chinese-funded credit rating agency to carry out relevant business. The application scenarios of international bond ratings of Chinese-funded rating agencies have been further expanded, and the application scenarios of Chinese-funded rating agencies have been further expanded. The "going out" strategy of credit rating agencies is of far-reaching significance. At the same time, Chinese-funded rating agencies are actively improving the global rating series, carrying out sovereign rating business, and promoting the reshaping of my country's voice in global governance. On May 25, 2023, China Chengxin International downgraded the sovereign credit rating of the United States from AAA g to AA + g , and continued to be included in the watch list for possible downgrades, which had a huge impact on the international financial market and highlighted the sovereign ratings of Chinese-funded rating agencies. international influence. In addition, Chinese rating agencies have also extensively participated in global financial governance by publishing credit risk reports on countries along the “Belt and Road” and establishing international credit rating alliances with Russia, Pakistan and other countries, increasing the influence of my country’s financial institutions in the global capital market.   International development of the rating industry   Complementary to financial opening up   Under the general trend of open development, the international development of the rating industry and the opening up of finance complement each other. The continuous advancement of financial opening up creates opportunities for Chinese rating agencies to expand the international rating market, and the "going out" of the rating industry will also help further promote the opening up of finance to a higher level.   The accelerated opening-up of the financial sector provides opportunities for the international development of the rating industry   After more than thirty years, with the leap-forward development of China's capital market, China's rating industry has grown rapidly. Currently, there are 15 Chinese-funded rating agencies, which have entrusted more than 8,000 rated bond issuers, and some mainstream rating agencies have begun international business. Explore and have some experience in international rating. With the significant improvement in the level of internationalization of China's financial market, the global influence of RMB assets is increasing day by day. While a large number of overseas investment and financing institutions have entered the domestic capital market, more and more Chinese-funded enterprises have gone overseas for financing, which has contributed to the internationalization of Chinese-funded rating agencies. Development creates broad market space. First, the continued deepening of capital market cooperation and interconnection, encouraging domestic companies to actively utilize foreign capital, and the development of the panda bond market will help expand the market demand for ratings. For example, in March 2024, in order to support high-quality enterprises to utilize foreign debt efficiently and conveniently, the National Development and Reform Commission issued the "Notice on Supporting High-quality Enterprises to Borrow Medium and Long-term Foreign Debts to Promote the High-Quality Development of the Real Economy (Draft for Comment)", which set the international credit rating to Investment grade (BBB - and above) or domestic credit rating AAA is one of the criteria for defining high-quality companies. Secondly, with the widespread development of international investment and financing cooperation, the demand for risk assessment and management is increasing, which will help drive the increase in demand for rating services and the output of rating opinions of Chinese-funded rating agencies. In the future, the rating industry's "going out" will steadily advance along with my country's high-level financial opening-up process.   The internationalization of the rating industry is beneficial to enhancing the international voice of rating and better participation in global governance   Credit rating is an important indicator for measuring credit risk in current international trade and financial rules. Improving my country's international voice in rating will help to participate more deeply in international rule consultation and formulation, international economic and financial policy coordination and other practices, and exert influence in global financial governance that is equivalent to my country's economic strength. At the same time, credit rating is also the most commonly used pricing reference in the financial market, and the pricing power of financial products is an important indicator for measuring a country's voice in the international financial market. The three major international rating agencies have always occupied a dominant position in the overseas capital market and have the pricing power of the overseas capital market. In addition, since the credit ratings given to Chinese companies by the three major international rating agencies in the overseas capital market are generally low, Chinese companies often bear relatively high financing costs. Against the background of the continuous advancement of financial opening up, the international influence and recognition of the rating results of Chinese rating agencies will be enhanced, which will help Chinese companies obtain fair pricing in overseas financing, improve financing efficiency, and make more full use of international financial resources. In addition, improving the voice and influence of ratings will also help avoid the impact of international rating agency rating adjustments on cross-border capital flows and RMB exchange rate fluctuations in my country's capital market, and help achieve the RMB internationalization strategy of seeking progress while maintaining stability.   The internationalization of the rating industry will help improve the efficiency of cross-border investment and financing and promote high-level two-way opening of finance.   The decision-making and behavior of relevant entities in the capital market must be based on information. At present, my country's two-way opening of the capital market has achieved fruitful results, but the poor cross-border information flow has, to a certain extent, restricted the pace of opening up of the capital market. The "going out" of the rating industry will help break the barriers to cross-border credit information flow and promote the capital market to a higher level of opening up. On the one hand, Chinese rating agencies have a better understanding of China's national conditions and risk characteristics, and can more accurately reveal the credit status of Chinese companies, which will help foreign investors better understand domestic market entities, promote fair pricing for domestic issuers' overseas financing, and improve the ability of domestic companies to utilize international resources. At the same time, Chinese rating agencies convey more views to foreign investors, which can help global investors correctly understand the domestic capital market. On the other hand, by expanding overseas rating business, rating agencies actively communicate with foreign companies, investors and rating agencies, and strengthen the understanding and analysis of overseas credit risks, which can provide more channels for domestic investors to understand overseas market risks and subject credit characteristics, and help domestic investment institutions improve their overseas asset allocation capabilities.   Supervision and guidance and internal and external improvement of institutions, Continue to enhance my country's international rating influence and voice   Based on the goal of high-level financial opening-up, my country's credit rating industry still needs to accelerate its pace of international development. On the one hand, this requires the rating agencies themselves to continuously enhance their "hard power", actively plan international development paths, and enhance their international competitiveness; on the other hand, it also requires regulatory authorities to provide standardized guidance and accelerate the cultivation of Chinese credit rating agencies with international influence.   It is a national strategy to enhance the international voice of my country's rating agencies and cultivate influential Chinese rating agencies.   Credit ratings may affect the financial stability and financial security of a country or even the global financial market. Therefore, we should pay more attention to credit ratings at the national level and elevate the international voice of Chinese rating agencies to a national strategy, so as to master a powerful weapon to maintain domestic financial stability in the future when the financial market is more deeply open. At the same time, through policy support and guidance, we should focus on cultivating influential Chinese rating agencies and enhance their international voice. First, we should accelerate the cultivation of leading rating agencies with international competitiveness and strive to accumulate the good reputation of our rating agencies. We can rely on the large domestic market to cultivate effective market demand and encourage credit rating agencies to become bigger and stronger. At the same time, we should strengthen the supervision and management of the credit rating industry, and on this basis encourage internal integration of the industry, accelerate the cultivation of leading rating agencies with industry dominance and international competitiveness, and enhance the credibility of China's rating industry. Second, we should adapt to the needs of the international market, promote more competitive rating agencies to participate in international business, and enhance their international voice. We can further actively promote the rating services of Chinese rating agencies in the international market and promote Chinese rating agencies to "go global". It is recommended that the Chinese government or government-supported institutions, such as the National Development and Reform Commission, the Ministry of Finance, state-owned enterprises, policy banks, China Railway Corporation, etc., actively use the rating results of domestic rating agencies when raising funds in overseas markets, support the accumulation of market data by local institutions, and expand the international visibility of Chinese rating agencies.   Keep up with national strategies and accelerate the international development of the rating industry   The rating industry can "go global" by relying on the national strategy of opening up to the outside world and exploring feasible paths for international development. In the early stage of the development of my country's rating industry "going global", Chinese rating agencies can accumulate international rating experience and resources by deepening the Hong Kong offshore bond market, open up the international financial market, and gradually enhance the influence of rating results, laying the foundation for a wider layout of international business in the future. Relying on the deepening China-ASEAN economic and trade cooperation, the continuously expanding "circle of friends" of the "Belt and Road" initiative, and the increasingly sound BRICS cooperation mechanism, and taking into account the difficulty of business development and the basis for cooperation, the rating industry may expand its international business layout in steps according to the path of "ASEAN countries-'Belt and Road' countries-BRICS countries-European and American countries", and finally achieve a global business layout. In this process, the international cooperation model of rating agencies can be continuously innovated. First, give priority to promoting Chinese rating agencies with rich rating experience and certain market influence to carry out bilateral/multilateral cooperation, and promote Chinese rating agencies to "go global". Second, strengthen bilateral/multilateral rating mutual recognition under the promotion of government and supervision, and gradually cultivate the international influence and voice of Chinese rating agencies. The third is to explore the establishment of a credit rating alliance, strengthen the exchange of rating methods and systems among alliance countries, promote the establishment of a regional credit rating system, and rely on international cooperation to enhance the international influence and competitiveness of Chinese rating agencies.   Establish a rating system that is different from the three major international rating agencies and maintain my country's rating initiative   Considering the importance of sovereign rating stability to maintaining financial and economic stability, it is crucial for Chinese rating agencies to establish a rating system that can represent China and emerging market countries. Based on the existing sovereign rating practice experience, Chinese credit rating agencies can fully combine the systems and national conditions of different countries to establish a sovereign rating system that conforms to the new global financial market development and governance system, improve independence and credibility, and strengthen risk early warning capabilities. At the same time, promote the expansion of the sovereign rating scope of Chinese rating agencies and further improve the recognition and influence of sovereign rating results. In addition to sovereign ratings, Chinese credit rating agencies can also continuously improve the global rating sequence standards that are in line with the international market, provide subject credit ratings from an international perspective, cover more industries, securities, and currencies, and help the financing of partner countries and the realization of my country's major strategic goals.   Improve the "hard power" of rating agencies and enhance the international competitiveness of my country's rating agencies   The most important factor that determines the international development prospects of the rating industry is still the quality of rating services. In the future, rating agencies need to continue to strengthen their own capacity building and enhance their ability to serve domestic and foreign investors. On the one hand, rating agencies need to seize the policy window period, focus on changing rating concepts, optimize rating methods, technologies and systems, gradually increase the differentiation of rating results, and better play the risk disclosure and early warning functions of credit ratings. In addition, rating agencies can also increase technology investment, use digital technology as a means to integrate financial technology into credit risk assessment and rating early warning, and enhance rating early warning capabilities. On the other hand, Chinese credit rating agencies should also increase their efforts to promote business diversification, innovation and transformation development, and better serve the diversified risk assessment needs of domestic and foreign investors. The internationalization path of Chinese credit rating agencies should not be limited to bond rating business in the capital market. It should start from helping domestic market operators better understand and grasp various overseas financial risks, helping overseas market operators better understand the essential connotation of China's new development pattern, and cultivating new advantages for my country to participate in international cooperation and competition under the new situation. It should accelerate research capacity building, enrich and innovate financial service models, gradually form a diversified business structure, better play the basic role of credit in financial risk identification, monitoring, analysis, management, and disposal, and meet the needs of domestic and foreign investors for diversified comprehensive risk management services.

On May 31, 2024, the European Financial Reporting Advisory Group (EFRAG) released the first batch of implementation guidelines to assist the application of the European Sustainability Reporting Standards (ESRS), including the Materiality Assessment Implementation Guide (MAIG), the Value Chain Implementation Guide (VCIG), and the ESRS Data Point Checklist, a total of three items. The implementation guidelines provide detailed guidance for companies required by the Corporate Sustainability Reporting Directive (CSRD) to disclose sustainable development information for the 2024 fiscal year, to ensure that companies improve their understanding of the requirements of the European Sustainability Reporting Standards (ESRS), conduct disclosure work more effectively, and promote the transparency and consistency of sustainable development information disclosure.     Background and development of ESG information disclosure in the EU Since the release of the European Green Deal in 2019, the EU has gradually built a detailed sustainable finance policy system to "achieve the 2030 Sustainable Development Plan and the 2050 Carbon Neutrality Vision", guiding a large amount of funds to flow into sustainable fields and industrial activities, and promoting the transformation of member states' economies towards a greener, low-carbon and sustainable direction. ESG information disclosure policy is an important part of the EU's sustainable finance policy system, currently mainly based on the EU Sustainable Finance Taxonomy Act, the Corporate Sustainability Reporting Directive (CSRD) and the Sustainable Finance Disclosure Regulation (SFDR).     Development and application of ESRS The European Sustainability Reporting Standards (ESRS) took a long time from proposal to final adoption. Before the Corporate Sustainability Reporting Directive (CSRD), the EU's regulatory requirements for ESG-related information disclosure were based on the Non-Financial Reporting Directive (NFRD) adopted in 2014. As the name of the directive suggests, reports a few years ago only required the disclosure of non-financial information, including environmental matters, social and employee-related matters, compliance with human rights, anti-corruption and anti-bribery matters, and board diversity, and the companies required to disclose were only about 11,700 large listed companies in the EU.   In 2020, the EU conducted a survey on the use of the Non-Financial Reporting Directive (NFRD) standards and found that investors and social organizations felt that the level of detail in the disclosed information was still insufficient to meet their needs, and there was no set of unified standards for comparison, lacking credibility and relevance. As a result, the European Commission proposed to revise the reporting directive and to authorize the European Financial Reporting Advisory Group (EFRAG) to develop a complete set of ESG disclosure standards in conjunction with the ESG reporting directive, namely the first 12 European Sustainability Reporting Standards (ESRS) adopted in July 2023.     NFRD, CSRD and ESRS Timeline Starting from 2024, in compliance with the EU Corporate Sustainability Reporting Directive (CSRD), nearly 50,000 companies registered in the EU or non-EU regions will disclose sustainability reports in stages according to the European Sustainability Reporting Standards (ESRS) based on company size, number of employees, etc.   Purpose and core content of the implementation guide In order to help companies better understand and apply the European Sustainability Reporting Standards (ESRS), the European Financial Reporting Advisory Group (EFRAG) released three draft implementation guidelines in December 2023, solicited market feedback from December 22, 2023 to February 2, 2024, and released the official version of the implementation guidelines at the end of May this year. It is worth noting that the three implementation guidelines themselves are not authorized regulatory documents.     EFRAG continues to promote sustainable development information disclosure   The European Financial Reporting Advisory Group (EFRAG) is a private association established in 2001 with the support of the European Commission to serve the public interest. In 2022, the European Union's Corporate Sustainability Reporting Directive (CSRD) gave EFRAG new responsibilities, and EFRAG expanded its mission to provide technical advice on the draft sustainability reporting standards issued by the EU or on draft amendments to the standards.   The work of the European Financial Reporting Advisory Group (EFRAG) is mainly divided into two pillars. The first is the financial reporting pillar, which influences the development of the International Financial Reporting Standards (IFRS) from a European perspective and provides the European Commission with recommendations on the endorsement of the International Financial Reporting Standards (IFRS) (amendments); the second is the sustainable development reporting pillar, which prepares the draft EU sustainable development reporting standards and related amendments for the European Commission.   In terms of sustainable development reporting, the European Financial Reporting Advisory Group (EFRAG) has set up a project working group to develop the draft of the EU Sustainability Reporting Standards (ESRS), which is responsible for collecting and responding to feedback on the draft and providing relevant training resources. In December 2023, the EU Sustainability Reporting Standards (ESRS) were officially published in the EU Gazette and became EU law. The European Financial Reporting Advisory Group (EFRAG) has established a question-and-answer platform for the EU Sustainability Reporting Standards (ESRS), and its current focus is to assist in the practical application of the reporting standards.   In 2024, the European Financial Reporting Advisory Group (EFRAG) will continue to advance the EU's work on sustainability reporting:   In January, the first edition of the "Sustainability Reporting Standards for Listed SMEs (ESRS LSME)" and the "Voluntary Sustainability Reporting Standards for Non-listed SMEs (ESRS VSME)" were released, and comments were solicited before May. At the same time, some SMEs will test the disclosure reports in accordance with the requirements of the standards, and the enterprise partners such as banks, investors, and purchasers will evaluate whether they meet their sustainable development information needs;   In February, the first draft of the ESRS XBRL digital taxonomy and the draft of the digital taxonomy for Chapter 8 of Regulation (EU) 2020/852 were released for public comments for two months, namely, to carry out the digitization of sustainable development reports, mark the data points disclosed in sustainable development reports with XBRL (eXtensible Business Reporting Language), achieve machine-readable, and improve the accuracy and efficiency of the disclosed information transmission;   The preparation of industry-specific reporting standards has been initiated, but the initial version of the industry-specific standards has not yet been released.     summary The EU is the region with the most complete legislation and related guidelines for sustainable finance in the world. With the release and implementation of the Corporate Sustainability Reporting Directive (CSRD), the disclosure of sustainable development information by EU companies will enter a more complete stage. ESG (sustainable development) information disclosure is the next step after establishing a classification of green and sustainable economic activities. It will also be a routine step for integrating sustainable development into financial markets and corporate management in the future. Market exchanges and cooperation need to be based on information disclosure. The release of the implementation guidelines will provide comprehensive guidance and practical support for companies to apply the European Sustainability Reporting Standards (ESRS), and effectively help the EU Corporate Sustainability Reporting Directive (CSRD) to be steadily implemented. In 2024, with the release of more sustainable information disclosure details and specific industry standards around the world, and the joint efforts of market participants such as regulators, companies, financial institutions, and investors, the ESG market is expected to reach a higher level.

  Xue Dongyang   Chief Human Resources Officer of China Chengxin International and President of CCXGF   In order to thoroughly implement the spirit of the Central Financial Work Conference and the "Several Opinions of the State Council on Strengthening Supervision to Prevent Risks and Promote High-quality Development of the Capital Market", implement the requirements of the "Opinions on Strengthening Supervision of Listed Companies (Trial)" and other policy documents of the China Securities Regulatory Commission, promote the high-quality development of listed companies and enhance investment value, and standardize the disclosure of information related to the sustainable development of listed companies, under the guidance of the China Securities Regulatory Commission, on April 12, 2024, the three major exchanges officially issued the "Guidelines for Self-discipline/Continuous Supervision of Listed Companies - Sustainable Development Report (Trial)" (hereinafter referred to as the "Guidelines"), which will take effect on May 1, 2024. The release of the "Guidelines" has made clear regulations on the disclosure of sustainable information such as environmental, social and governance (ESG) by listed companies in China, filling the gap in the ESG information disclosure standards at the regulatory level of listed companies in China.   The standardization, consistency, comparability and authenticity of listed companies in the disclosure of sustainable development information not only lays the foundation for the credibility of ESG ratings, but is also a key factor in effectively attracting long-term investment capital. Through a comprehensive analysis of the sample companies of the SSE 180, Science and Technology Innovation 50, Shenzhen 100, and ChiNext indices that are included in the mandatory disclosure of the Guidelines, as well as companies listed at home and abroad (hereinafter referred to as "mandatory disclosure sample companies"), it is found that the disclosure ratio of mandatory disclosure sample companies has steadily increased in the past three years, and the overall disclosure ratio in 2024 is nearly 91%; ESG ratings have steadily improved, and the proportion of A (inclusive) and above has remained at around 63% in the past two years.   The ESG disclosure and rating performance of the mandatory sample companies has played a good social demonstration effect, which will further enhance the standardization and enthusiasm of information disclosure by listed companies and even relevant corporate entities in the entire market. In particular, with the release of the "Corporate Sustainability Disclosure Standards - Basic Standards" (Draft for Comments) (hereinafter referred to as the "Basic Standards") by the Ministry of Finance on May 27, 2024, the "dual importance" principle has increasingly higher substantive requirements for ESG information disclosure, and companies should make preparations and plans in advance to cope with more stringent regulatory requirements.   1. The impact of strong regulatory ESG information disclosure policies on corporate sustainable development   International ESG developed earlier, and there are relatively more ESG information disclosure standards. In recent years, they have gradually become integrated. Faced with many international disclosure standards, companies are at a loss. Domestic ESG information disclosure standards are mostly presented in the form of group standards and research projects, which pose certain challenges in terms of authority and applicability. The introduction of ESG information disclosure standards at the regulatory level in my country has always been the expectation of various organizations and companies, and has injected a shot in the arm for Chinese companies. After years of exploration, sedimentation and accumulation, my country's ESG information disclosure has gradually evolved from exploration to standardized development. The three major exchanges under the guidance of the State-owned Assets Supervision and Administration Commission of the State Council and the China Securities Regulatory Commission and the Ministry of Finance have respectively issued ESG supervision and promotion policies at different levels from 2022 to 2024. As of now, my country has formed a framework for mandatory ESG information disclosure at the national and regulatory levels. The effective implementation of the "Guidelines" of the three major exchanges, as an important document officially issued at the regulatory level with practical guidance value for ESG information disclosure, is also a focus of attention for listed companies in the capital market and other social enterprises.   1. It fills the gap in ESG information disclosure standards at the regulatory level of listed companies in my country and contributes to the normalization and standardization of ESG information disclosure   As the first domestic ESG information disclosure standard document at the regulatory level, the "Guidelines" have six chapters and 63 articles. They provide detailed descriptions of the four core content disclosure frameworks, including the scope of application of the "Guidelines", implementation time, disclosure requirements, transitional arrangements, "governance - strategy - impact, risk and opportunity management - indicators and targets", as well as disclosure information on 21 topics including climate change response, pollutant emissions, ecosystem and biodiversity protection, rural revitalization, innovation-driven, employees, etc. It provides a comprehensive reference for companies to conduct ESG information disclosure, and is both practical and normative.   (II) Complying with the “dual importance” principle, higher requirements are placed on corporate ESG information disclosure. The first batch of sample companies that are required to disclose ESG information face higher challenges.   Both the Guidelines and the Basic Standards set forth regulations and requirements for the ESG information disclosure of enterprises from the perspectives of "financial importance" and "impact importance", combining dual importance with the actual development of enterprises, and differentiating the content of enterprise disclosure, which is more scientific and reasonable. However, from the essence of "dual importance", enterprises are not only required to combine ESG issues with their own financial indicators, but also pay attention to the impact of enterprise development on the external environment. How to measure, evaluate and disclose in a quantitative way has become a key and difficult point in enterprise information disclosure. For the sample companies of the SSE 180, Science and Technology Innovation 50, Shenzhen 100, and ChiNext indices that are included in the mandatory disclosure of the Guidelines, as well as domestic and overseas listed companies, how to effectively implement the disclosure requirements in 2026 is an important challenge.   (III) Regulatory guidelines promote the healthy and sustainable development of the ESG ecosystem, including ESG ratings   As an important participant in the development of the ESG ecosystem, the regulatory body provides a standardized standard for the development of the ecosystem through policy formulation, which helps promote other participants to better apply ESG disclosure information. Enterprises are the main body of information disclosure. Information transparency and the substance of disclosed information are the basis for ESG rating of enterprises. The dual importance principle is consistent with the connotation and essence of ESG rating. Good information disclosure is conducive to providing more effective and comparable information for ESG rating, promoting the improvement of rating quality, and then helping investment decisions, thereby guiding capital to enterprises with good ESG performance, encouraging enterprises to improve ESG governance, and forming a positive cycle.   II. Analysis of ESG information disclosure and rating performance of mandatory disclosure sample companies CCXGF uses the sample companies within the mandatory disclosure scope of the "Guidelines" of the three major exchanges as the statistical scope, and based on its own ESG rating model, analyzes the current status of ESG information disclosure and ESG rating performance of the mandatory disclosure sample companies. It more intuitively displays the current ESG development of my country's listed companies and the practical basis for the implementation of the guidelines, and provides a reference for future listed companies and even other corporate entities to carry out ESG information disclosure and ESG system construction.   According to Wind data statistics, as of the end of June 2024, there are a total of 454 sample companies that are required to disclose during the reporting period (excluding duplicate companies within the scope of mandatory disclosure). These 454 companies belong to 30 industries (Shenwan industry classification) sectors, and the top five industries such as pharmaceuticals and biology, electronics, power equipment, non-bank finance and computer industries account for 46.92%, and the top ten industries account for more than two-thirds of all sample companies; in addition, among the 454 listed companies, central enterprises, local state-owned enterprises and private enterprises account for the highest proportion, of which central enterprises and local state-owned enterprises account for a total of 42.51%, and private enterprises account for 40.75%, which is equivalent. See the figure below for details.   Figure 1: Industry distribution of sample companies with mandatory disclosure   Figure 2: Distribution of attributes of sample companies subject to mandatory disclosure   (I) The proportion of ESG information disclosure is much higher than the average level of listed companies, and ESG reports are still the mainstream disclosure form   Driven by the "dual carbon" goals, listed companies' awareness of sustainable development continues to improve. Driven by both the market and regulation, more and more listed companies have taken the initiative to increase their willingness to release sustainability information. As of the end of June 2024, 45 companies in the mandatory disclosure sample have not yet published their 2024 sustainable development reports (including ESG reports, sustainable development reports, social responsibility reports, etc.), with a disclosure ratio of 90.09%, more than twice the average level of A-share listed companies. See the figure below for details.   Figure 3 Comparison of the disclosure ratio of sustainability-related reports by mandatory disclosure sample companies and A-share listed companies   From the perspective of each sample type, in 2024, the Shenzhen Component 100 Index and companies listed simultaneously at home and abroad achieved a sustainable development report disclosure rate of 100.00%, the disclosure rate of listed companies in the Science and Technology Innovation 50 Index and the Shanghai 180 Index exceeded 90.00%, and the disclosure rate of ChiNext Index samples was nearly 70%. The mandatory disclosure sample companies showed a good understanding and practice of ESG.   Judging from the disclosure report situation, the mandatory disclosure sample companies have undergone a major change in the form of sustainable information disclosure in 2024. In 2023, social responsibility reports accounted for 48.98%, while in 2024, ESG reports climbed to 55.75%, becoming the preferred mode for companies to communicate sustainable development information to the outside world. See the figure below for details.   Figure 4: Disclosure forms of sustainability-related reports of sample companies with mandatory disclosure   (II) The overall ESG rating performance is at the leading level among listed companies, showing a good leading and exemplary role   CCXGF conducted ESG ratings on 454 mandatory disclosure sample companies based on the industry ESG rating model. In the past three years, the ESG rating performance of mandatory disclosure sample companies has steadily improved, from 79.03% in 2022 to 93.39% in 2024. Specifically, there are 136 BBB-rated companies, accounting for 29.96% of the total; and there are as many as 254 companies with A-rated ratings, accounting for as high as 55.95%, which is better than the overall performance of the A-share and Chinese Hong Kong-listed stocks in 2023 (A and above account for about 12.70%). The overall ESG risk and opportunity management level of the mandatory disclosure sample companies is showing a good trend.   Figure 5: ESG performance level distribution of sample companies subject to mandatory disclosure in 2024   Judging from the performance of ESG rating results, under the guidance of the country's "dual carbon" goals, the mandatory disclosure sample companies are actively responding to the call of the ESG (environment, society and governance) concept and entering a new stage of high-quality development. Companies not only internalize ESG principles as the core requirements of corporate management, but also demonstrate their profound sense of social responsibility through multi-dimensional actions such as regularly publishing ESG reports, strengthening information transparency, ensuring production safety, promoting technological innovation, actively participating in public welfare activities, and protecting the legitimate rights and interests of employees.   Looking at the dimensions, the environmental (E) dimension of the mandatory disclosure sample companies is concentrated in the BBB and BB levels, accounting for a total of 55.29%; the social (S) and governance (G) dimensions are mainly concentrated in the AA and A levels, accounting for 74.00% and 83.26% respectively. The performance of the environmental dimension is still the main direction that Chinese companies need to further improve at the current stage. Especially under the trend of mandatory regulatory information disclosure, the quantitative information disclosure of the environmental dimension needs to be further improved and also faces greater challenges.   Figure 6: ESG level distribution of sample companies subject to mandatory disclosure by dimension in 2024   III. Recommendations for corporate ESG information disclosure under a strong regulatory environment The official release of the "Guidelines" fills the gap in ESG information disclosure standards at the regulatory level for listed companies in my country. It will promote the comprehensiveness, completeness, comparability and accuracy of sustainable information disclosure by listed companies, and has important guiding significance for listed companies to practice sustainable development. It also lays the foundation for the subsequent expansion of the scope of mandatory disclosure and for relevant departments to do a good job in ESG rating, index development and investment.   1. ESG information disclosure is an important task for Chinese companies going global, and they should be actively prepared in advance   As a common topic of global dialogue, the development of ESG has attracted the attention of global institutions. For Chinese companies, especially those with global business layout, paying attention to ESG, understanding ESG and managing ESG have become an important task that affects the development of corporate business. The basic framework and logic of the "Guidelines" and "Basic Standards" are consistent with the international mainstream ESG information disclosure framework, providing companies with a set of internationally forward-looking ESG information disclosure frameworks, which will help Chinese companies connect with the international environment and expand their business. It has become a basic homework that must be done by overseas companies, and they should improve their ESG information disclosure capabilities under the guidance of the "Guidelines".   (II) Accelerate the process of ESG information disclosure by taking industry-leading benchmark companies as reference   The Guidelines clearly arrange the time and content of ESG information disclosure for sample companies that are subject to mandatory disclosure. From the above analysis, it can be seen that sample companies have achieved certain results in ESG awareness and practice, but information disclosure still faces new challenges under the requirements of the Guidelines, and it takes time to improve. Sample companies should fully learn from the experience of outstanding companies in the industry, accelerate their own construction in ESG management, and make arrangements as early as possible according to the disclosure schedule to calmly respond to the information disclosure requirements in 2026. At the same time, under the dual policy influence at the national and regulatory levels, combined with the national "dual carbon" strategic time node, sample companies that have not yet been included in the mandatory disclosure should also actively pay attention to the latest requirements for ESG information disclosure, and achieve valuable disclosure in both form and substance.   (III) Based on the actual development of the enterprise itself, gradually formulate a path for building an ESG system in accordance with the development stage of the enterprise   The construction of ESG management system is a long-term work. ESG information disclosure is the first step in the construction of ESG management system of enterprises, which reflects the norms and compliance of enterprises in internal management. It is recommended to follow the principle of "from simple to complex, from form to substance", combine the different development stages of enterprises, and gradually carry out in stages, while making good cost budgets. Through cultivating sustainable development culture, establishing and improving governance structure, building information collection system, integrating into enterprise development strategy and other series of work, it will be gradually carried out. Data collection is the first step in ESG information disclosure and management. Combined with the current shortcomings of Chinese enterprises in information collection, enterprises should give priority to it. Article 8 of the draft of the Ministry of Finance's "Basic Principles" for comments mentioned that "enterprises should establish and improve systems such as data collection, verification, analysis, utilization and reporting related to sustainable information disclosure, improve internal control of sustainable information disclosure, and ensure the quality of sustainable information disclosure". In the actual implementation process, data collection work can be fully considered in terms of enterprise scale and development stage. For large enterprises, due to complex organizational structure and extensive business coverage, manual information collection is difficult and difficult to trace back, so systematic construction is a necessary choice.   (IV) Strengthen communication among various entities in the ESG ecosystem, further integrate ESG development with the internal and external environment and the actual business strategy of enterprises, and build a good ESG development ecosystem   In the process of ESG management practice, enterprises should strengthen communication with investment institutions, ESG rating agencies and other institutions, pay attention to the ESG needs of stakeholders and their own ESG rating performance, and continue to attract the attention of financial institutions and outstanding investors. As an important link between enterprises and investors, ESG ratings can provide investors with more intuitive ESG rating performance through the professionalism of third parties, which is easy to use and manage. Under the guidance of strong regulatory policies, enterprises can more effectively benchmark the content of ESG ratings by strengthening their own ESG information disclosure, and then continue to obtain more objective and scientific evaluations from third-party rating agencies, which will help enterprises better demonstrate their strength to stakeholders, and promote the high-quality development of enterprises through a virtuous cycle of the ESG ecosystem.

Yue Zhigang, President of China Chengxin International, stated at the "China Chengxin International 2024 Mid-Year Credit Risk Outlook & Investor Service Summit" on May 28 that rating agencies have gradually incorporated ESG factors into the credit rating system at this stage. It is necessary and important to establish a localized ESG rating system with international influence in the next step.   Yue Zhigang introduced that the bond market, as an important part of the financial market, plays an important role in guiding funds to key areas such as science and technology innovation and green development, and in helping to cultivate new quality productivity. At the same time, new products continue to emerge to help direct financing of the real economy. The issuance of innovative products continues to rise this year, providing strong support for key areas such as scientific and technological innovation and green finance. It is worth noting that since the beginning of this year, regulatory authorities have strengthened the top-level design and standardized system construction of green finance market policies, and have successively introduced institutional measures to improve the green finance standard system, standardize ESG information disclosure of listed companies, strengthen financial support for green and low-carbon development, and strengthen green insurance protection in key areas.   Yue Zhigang believes that with the strengthening of policy support, the improvement of market mechanisms and the deepening of international cooperation, the future prospects for the development of green finance will be even broader. As an important tool to promote the development of green finance, ESG rating will also usher in greater development space. "At this stage, rating agencies have gradually incorporated ESG factors into the credit rating system, but my country's ESG rating business is still in its early stages of development. It is necessary and important to establish a localized ESG rating system with international influence in the next step," he said.   Yue Zhigang said that since the beginning of this year, my country's macroeconomic situation has started smoothly, with GDP growth exceeding market expectations, major production and demand indicators rising steadily, and employment and prices generally stable. In terms of bond market risks, default risks are generally controllable, and risk prevention and proper handling in key areas remain the focus of current attention.   Looking ahead, Yue Zhigang believes that considering the impact of favorable factors and dragging factors on economic growth, favorable factors supporting the stable operation of the economy will continue to play a role in the following quarters. The favorable factors mainly involve the continued improvement of external demand under the recovery of global manufacturing, the support brought by the accelerated issuance of special bonds and special treasury bonds to infrastructure investment, the service consumption may still have a certain resilience, and the monetary policy and fiscal policy still have room for improvement.   In Yue Zhigang's view, in order to better adapt to the new situation, implement new requirements, and develop new products, the rating industry needs to focus on "new credit", strive to change the traditional rating concept, optimize the rating method system, and innovate business products and services. At the same time, the rating industry should follow the general trend of digital financial development, use artificial intelligence and big data, continue to deepen the research and development of credit risk warning and rating system, strengthen the application of financial technology in credit risk assessment and rating warning, and improve rating warning capabilities. China Chengxin International launched the Qe rating system based on "default probability measurement", providing the market with a stable, reliable, unified and good default prediction effect of credit rating and default probability mapping standard, effectively improving rating warning capabilities, and better serving the credit risk management needs of investors and other market participants.

On May 27, 2024, the Ministry of Finance issued the "Corporate Sustainability Disclosure Guidelines - Basic Guidelines (Draft for Comments)" (hereinafter referred to as the "Basic Guidelines" Draft for Comments) and solicited public opinions, marking the beginning of the construction of a unified national sustainable disclosure standards system, which will guide and regulate corporate behavior and promote the comprehensive and sustainable development of the economy and society.   Drafting Background At present, environmental, social and governance (ESG) issues have become an indispensable part of corporate operations, investment decisions and regulatory policies around the world. At present, some regions and enterprises in my country have started sustainable information disclosure practices, but there is still a lack of unified standards internally. At the same time, relevant international standards have been introduced one after another. The dual pressures from both inside and outside have prompted my country to speed up the formulation of unified and comparable sustainable disclosure standards to adapt to international trends and strengthen China's positive role in global sustainable development governance.   The Ministry of Finance, together with relevant departments, organized experts to conduct a three-month assessment of the applicability of international standards in China, and carried out a series of research projects, exchanges and discussions. Adhering to the overall idea of "actively learning from, focusing on China, absorbing all, and highlighting characteristics", the draft of the Basic Standards for discussion and comments was formed. The draft of the Basic Standards for comments aims to propose a unified national sustainable disclosure standard that reflects the beneficial experience of international standards, conforms to China's national conditions and can highlight Chinese characteristics.   Main content The "Corporate Sustainability Disclosure Standards - Basic Standards (Draft for Comments)" released this time is based on the general requirements for disclosure of sustainable financial information (hereinafter referred to as "S1"), and proposes the framework of a unified national sustainable disclosure standard system. The unified national sustainable disclosure standard system consists of basic standards, specific standards and application guidelines. In terms of content, the draft for comments on the "Basic Standards" is generally consistent with the international standard S1 in terms of information quality characteristics, disclosure elements and related disclosure requirements; it makes provisions based on China's actual situation in terms of purpose, scope of application , disclosure objectives, materiality standards, format structure and some technical requirements.   The draft for soliciting opinions on the Basic Guidelines consists of six chapters and 33 articles. The main contents are as follows:     Key points     Green Gold Summary   (I) The draft of the Basic Standards has initially established the framework of a unified national sustainable disclosure standards system. In terms of the disclosure standards, the draft for comments on the Basic Standards, based on the conclusion of the previous assessment of the applicability of international standards in China, and considering that S1 is a general disclosure requirement, only provides for the disclosure of sustainable information in principle. This institutional arrangement is conducive to the formulation and implementation of specific standards, and is also conducive to the convergence of China's sustainable disclosure standards with international standards. The national unified sustainable disclosure standards system consists of basic standards, specific standards and application guidelines:     The basic guidelines regulate the basic concepts, principles, methods, objectives and general requirements for corporate sustainable information disclosure, and govern the formulation of specific guidelines and application guidelines.   The specific guidelines put forward specific requirements for the disclosure of information on sustainable themes in the environment, society and governance of enterprises. Environmental themes include climate, pollution, water and marine resources, biodiversity and ecosystems, resource utilization and circular economy, etc. Social themes include protection of rights and interests of employees, consumers and end users, community resources and relationship management, customer relationship management, supplier relationship management, rural revitalization, social contribution, etc. Governance themes include business behavior, etc.   Application guides include industry application guides and standard application guides. Industry application guides provide guidance on the application of basic standards and specific standards for specific industries, so as to guide enterprises in specific industries to identify and disclose important sustainable information. Standard application guides explain, refine and provide examples for basic standards and specific standards, and make operational provisions for key and difficult issues. In addition, in order to solve problems that arise in the process of enterprises implementing sustainable disclosure standards, standard implementation questions and answers are provided when necessary to improve the comparability and transparency of sustainable information and promote the application of sustainable disclosure standards.   (II) The draft of the Basic Standards puts forward clear planning objectives for the establishment of a sustainable disclosure standards system. The overall goal is that by 2027, China's basic sustainable disclosure standards and climate-related disclosure standards will be issued. By 2030, the country's unified sustainable disclosure standards system will be basically established. In view of the long construction cycle of the standards system, relevant departments can first formulate disclosure guidelines and regulatory systems for specific industries or fields according to actual needs, and gradually adjust and improve them in the future. In the future, China's corporate sustainable information disclosure system will move towards integration and standardization, provide strong support for China to establish a comprehensive and systematic ESG system, and help improve the international competitiveness and market influence of Chinese companies.   (III) The draft of the Basic Guidelines has established an information disclosure framework that complies with international trends and is in line with China's national conditions. In terms of following international trends, the draft of the Basic Standards integrates the internationally accepted four-element framework of "governance, strategy, risk and opportunity management, indicators and targets" to provide a clear structure for corporate sustainable information disclosure. In addition, the draft of the Basic Principles also continues the "dual importance principle" emphasized in the international and domestic sustainable development disclosure guidelines of the Shanghai, Shenzhen and North Stock Exchanges, requiring companies to assess whether sustainable risks and opportunities have important current or expected financial impacts on the company and whether corporate activities have important impacts on the economy, society and the environment in combination with the requirements of the specific applicable corporate sustainable disclosure standards.   In terms of adapting to China's national conditions, the draft of the Basic Standards also maintains a certain degree of flexibility and practicality, allowing companies to make appropriate disclosures based on their own resources and capabilities on the premise of complying with basic requirements, thereby reducing the disclosure burden and additional costs of companies; in terms of specific standards, the social issues clearly propose sustainable issues with more Chinese characteristics, such as "rural revitalization" and "social contribution", to make good international connections, reflect Chinese characteristics, and further facilitate the convergence of China's sustainable disclosure standards with the ISSB standards.   (IV) The draft of the Basic Guidelines pays more attention to the needs of diverse information users. In terms of paying attention to the needs of diversified information users, the draft of the Basic Standards clearly aims to meet the needs of diversified information users for sustainable information disclosure. It not only meets the needs of investors and creditors targeted by international standards, but also covers a wider range of information needs for the government, its relevant departments and other stakeholders.   (V) The draft Basic Guidelines require enterprises to standardize sustainable information data management and improve the quality of information disclosure. In terms of information collection and management, the draft of the Basic Guidelines requires companies to standardize systems for data collection, verification, analysis, utilization and reporting related to sustainable information disclosure. By promoting companies to establish and improve data management systems and indicator systems suitable for their own management and development, the transparency and effectiveness of companies in sustainable information disclosure will be further improved, thereby ensuring the quality of information disclosure.   (VI) When implementing the draft Basic Guidelines, my country's national conditions will be taken into consideration, and a strategy of classified implementation and gradual advancement will be adopted. In formulating implementation strategies, the draft for comments of the Basic Standards comprehensively considers the development stage and disclosure capabilities of Chinese enterprises, and clearly points out that a "one-size-fits-all" mandatory implementation requirement will not be adopted in the implementation strategy. In the future, a strategy of distinguishing priorities, piloting first, and advancing step by step will be adopted, expanding from listed companies to non-listed companies, from large enterprises to small and medium-sized enterprises, from qualitative requirements to quantitative requirements, and from voluntary disclosure to mandatory disclosure.   Especially in the initial stage after the release of the draft "Basic Guidelines" for comments, priority will be given to the actual voluntary implementation of enterprises. After all conditions are relatively mature, the Ministry of Finance will work with relevant departments to make targeted arrangements on the scope of implementation, mitigation measures, applicability of relevant clauses, and specific connection provisions.