(Bloomberg) -- China is planning to make ESG disclosures compulsory as part of efforts to shift to a lower-carbon economy, according to people familiar with the matter.

Regulators are working with advisory bodies and rating agencies to formulate a framework for mandatory environmental, social and governance-related disclosures for companies listed in China, the people said, asking not to be identified because the matter is private. 

The first step would be to design a standard that is recognized by the international community and applicable to the local market, the people said. China may introduce the requirements first on a “comply or explain” basis before transitioning to a full-scale compulsory framework, one of the people said. Chinese state-owned public enterprises are expected to take the lead on compliance by as early as the end of the year, the person added.

As the world’s biggest polluter, China is trying to catch up with global peers on reporting standards and meet a net zero target by 2060. China Securities Regulatory Commission Vice Chairman Fang Xinghai said last year that coming up with mandatory ESG reporting requirements was the “next step.”

That said, Chinese regulators last year voiced concerns about the “inclusiveness” of International Sustainability Standards Board requirements for developing countries, saying they were “high standards” that have not “fully considered” the differences in economic development of countries and their disclosure capabilities.

Deliberations are preliminary and could be subject to change, the people said. The Ministry of Finance didn’t immediately respond to a request seeking comment. 

Catching Up 

Some 89% of the top 100 Chinese firms issued ESG reports last year, up from 78% in 2020, according to a January report by KPMG. However, there were gaps: more than a third of firms made disclosures without first performing so-called “materiality assessments” to determine whether the indicators they were reporting on were relevant to their companies and industries.

To catch up, the country rolled out a set of voluntary guidelines for Chinese companies to report ESG metrics last year. The standards listed more than 100 points that generally align with global designs. The differences are they’re more simplistic and add “Chinese characteristics” that measure things like corporate charity.

China also agreed to let the IFRS Foundation set up an office in Beijing, according to an announcement in December. The office will focus on promoting the sustainability disclosure standards of the ISSB in China.

--With assistance from Sheryl Tian Tong Lee and Josh Zhang.

©2023 Bloomberg L.P.