The Development of Environmental Disclosure in China

The Development of Environmental Disclosure in China

China is facing immense pressure to meet environmental protection. For instance, during the period 1997 to 2004, over eight thousand Chinese companies were investigated and audited regarding their social business practices from their foreign partners. In 2001, there is still no standard or guidelines on corporate environmental reporting and disclosure in China. But the Chinese government has launched environmental policy due to several reasons. First, the Chinese leaders realized that environmental concerns might hamper China’s growth in the long run. Second, public discontent concerning pollution has been growing, which increasingly became a focus of domestic and foreign media. Finally, pressure from the international organization in China to adopt stricter environmental policies is increasing.

As stated by Welford 2005, the contents of the environmental policy can be divided into three kinds. First, the statement of corporate environmental policy and the impacts on the business of government environmental policy. Second, it is associated with the costs and benefits of environmental aspects of monetary values. Lastly, it is the introduction of principle pollutants and the solutions on how to deal with them. There are many ways to disclose corporate environmental details. Some companies have used the yearly financial report, the board of directors’ reports, corporate brochures, and some have used the local press and other media. Based on the survey conducted by the Japanese Institute in 2004 in China from 61 listed companies, the results show that one-third of the listed companies in China published a number of corporate environmental information but most of them only submit environmental information to the government when they are forced to do so.

As stated by Xiao (2006), before 2004, companies in China were required to prepare a mandatory corporate environmental report known as Format A to local environmental protection administration and local statistics bureau. And these companies were encouraged to publish their environmental reports online. However, Format A reporting did not lead to an increase of companies submitting environmental accounting since no financial information was required (Xiao 2006). So apart from Format A, there is another environmental report known as Format B, which is required to be prepared by companies who are identified as “dirty companies” by the China State Environmental Protection Administration.

In 2004, the Guangdong Environmental Protection Bureau (GEPB) released a list of 33 companies that use or produce harmful or poisonous materials. These companies were required to undergo cleaner production auditing. Companies who are not compliant with the Cleaner Production Promotion Act, Article 28, will be given a warning and should improve in a given period; otherwise, they will need to pay a fine of no more than 100,000RMB. Since 2004, the listed companies are required to report their environmental performance information of the previous year by March 31st every year. On the other hand, non-listed enterprises can report their environmental performances on a voluntary basis.

In December 2004, China’s primary environmental enforcer, State Environmental Protection Administration (SEPA), implemented stiffer procedures and punishment of 68 accredited Environmental Impact Assessment (EIA) organizations, eight of which were suspended. For example, in the case of Sichuan Chemistry Co. Ltd., a fertilizer plant discharged a large amount of chemicals into a local river, which was the local drinking source in early 2004. The company was fined 1,000,000RMB, which illustrates the importance of corporate ED.

From 2001 to 2005, Chinese authorities received more than 2.53 million letters and 430,000 visits by 597,000 petitioners seeking environmental redress. In response, the Chinese government proposed the ‘Harmonious Society’ as a vision for the country’s future socio-economic development. It highlighted some problems that required a long-term strategy such as environmental degradation, sustainability, energy consumption, and environmental conservation including the targets of the 11th five-year-plan from 2006 to 2010. In 2006, the Chinese government established a series of guidelines for enterprises to take significant steps as a follow through to the initiative. For example, guidelines of state-owned enterprises perform social responsibilities and guidelines about enhancing the supervision of listed companies’ social responsibilities. However, these guidelines are not mandatory to provide environmental reporting and disclosure.

In 2006, Shenzhen Stock Exchange published The Guide of Social Responsibility of the Public Company in Shenzhen Stock Exchange. In 2008, AEGON-Industrial Fund Management Co. Ltd., a sustainable investment pioneer in China, has offered the first socially responsible investment retail fund. In the same year, the Shanghai Stock Exchange (SSE) and China Securities Index Co., Ltd. issued the SSE Social Responsibility index. The diversified and inconsistent format and lack of guidelines on corporate environmental reporting and disclosure increase the freedom of the companies to choose what kind of information to disclose. As a result, companies often fail to provide the information which is critical to stakeholders and mostly provide information that of less importance. In 2007, SEPA issued the Measures on Open Environmental Information, which required mandatory disclosure for companies whose pollutants surpasses the standard of local, regional, and national governments. In 2008, the government launched the Green Securities Policy to increase and encourage sustainability practices among companies listed on stock markets. One of the integral components of the policy is the ED regulation in 14 highly polluting industries to report required environmental information.

In September 2010, SEPA established the Guide to the Disclosure of Environment Information in Listed Companies to increase the transparency in the disclosure of enterprise environment information. The Guide requires that 16 heavy polluting industries, such as the thermal power electricity industry, steel industry, cement industry, and the electrolysis aluminum industry to release an annual environment information report about the emission of pollutants and other environmental aspects. As stated by SynTao 2015, there are more than 2000 companies publishing CSR reports in China which is approximately 30% of the reports followed the international reporting standards such as GRI Guidelines and the UN Global Compact principles. In 2015, Environmental Protection Law (EPL) had been in effect. Compared to the past, local governments have given unprecedented attention to environmental issues brought by companies and have significantly strengthened environmental regulation enforcement in terms of government responsibility, corporate compliance, public participation, and environmental information disclosure.

Despite long-standing attempts of the government to control the situation through laws and regulations, the country’s environmental problem remains severe. Blacconiere and Patten suggest that the absence of proper EDs will be perceived as a negative signal from the stakeholders regarding companies’ exposure to future environmental challenges. Chinese firms can, in some cases, moderate the backlash through EDs. In general, firms are expected to be more willing to provide detailed information about these activities, especially when economic performance is good.

Based on the study of Teoh et al. (1998), firms with better prior financial performance make greater subsequent EDs. However, when the firms are experiencing hard times, they may fear stakeholders’ adverse reactions, so they are cautious in including EDs in their annual report. Also, firms’ EDs increase when environmental problems are the focus of media attention . Public media spreads faster and impacts the image of the companies, making them more cautious and active in protecting their firms’ bottom line. With this, firm ED is expected to be more constant over time.

Ullmann (1985) argues that when stakeholder power is high, companies with an active strategic posture make greater social responsibility disclosure. Chinese companies that bypass the importance of environment disclosure could incur a loss of stakeholders’ confidence, and these can affect the entire industry and extend to other countries. Most of the Chinese companies neglect the benefits of EDs in their financial performance (Yu et al. 2011). Expenses on being socially responsible will deteriorate profitability in the short-term but will lead to a competitive disadvantage in the long-run.

There were many discussions about environmental accounting (EA) and environment reporting (ER) theories among Chinese scholars and researchers since 1992. Based on the study of Xiao (2006), there is a total of 324 studies in China in the period from 1992 to 2003. Most of the studies on the ED of Chinese enterprises have been written in the Chinese language. With the increasing number of green initiatives taken by China to meet the environmental challenges of the country, research started expanding in 2006. Numerous studies have assessed the level, quality, and attribute of environmental information disclosed by Chinese corporations. Their financial performances, industries, ownership structures, and locations have reviewed,

Based on the findings of Li et al. (2019), there is an uneven dispersion of environmental practices because different industries have different strategies and formats for CSR disclosure in China. Although Chinese companies adopted CSR projects between 2006 and 2013 with increasing rates, there is a decreasing trend of CSR projects after 2013 which was associated with the increase in the costs of the projects and the decrease of financial support from the government and other sources. For example, companies in Tier I regions (e.g., Shanghai, Beijing, Guangdong, Shenzhen provinces) have either more resources or more substantial incentives from the government to undertake CSR projects than companies in less-developed regions. However, there is no agreement on whether financial performance has a significant (positive, negative, or neutral) impact on the levels of environmental disclosures reported by the firms.

Source – Chiu, C.L., Zhang, J., Li, M. et al. A study of environmental disclosures practices in Chinese energy industry



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