Insights into ISSB Guidelines: Opportunities and Challenges for Businesses

The first batch of ISSB sustainability disclosure standards will soon take effect, marking a new milestone in corporate sustainable development governance, with both challenges and opportunities.

On January 1, 2024, the "International Financial Reporting Sustainability Disclosure Standard No. 1 - General Requirements for Sustainability-Related Financial Information Disclosure" (IFRS S1) and "International Financial Reporting Sustainability Disclosure Standard No. 2 - Climate-Related Disclosures" (IFRS S2) will officially come into effect.

These two ISSB standards may pose challenges for the preparation of future ESG reports by companies, but they also signify opportunities. Companies that take the lead in laying out and optimizing sustainable management will not only be able to better demonstrate their long-term value, but also drive the entire business community towards a more sustainable future.

Against this backdrop, the second "Zero Carbon Future · ESG Innovation Practice Awards" organized by Wall Street News was successfully held on October 20th at the Future Assets Building in Pudong, Shanghai.

During the event, Shi Han, Director of the ESG Center at the China Business School of the University of Hong Kong and Chief Scientist of the Green Development Alliance of National Economic and Technological Development Zones under the Ministry of Commerce, Li Zhiqing, Director of the Environmental Economics Research Center at Fudan University and Deputy Secretary of the Party Committee of the School of Economics, and Dai Rui, Manager of Financial Services Climate Change and Sustainable Development at EY Greater China, engaged in a lively discussion at the roundtable forum titled "Insights into ISSB Standards: Opportunities and Challenges for Companies".

Shi Han, Director of the ESG Center at the China Business School of the University of Hong Kong and Chief Scientist of the Green Development Alliance of National Economic and Technological Development Zones under the Ministry of Commerce, believes that the fundamental purpose of ESG is for companies to internalize their impact on the environment and society, which is an inevitable reform in the development process.

With the rise of the ESG concept, the proportion of environmental and social costs generated by companies themselves is bound to increase. These costs were previously overlooked, but now they urgently need to be taken seriously and absorbed by companies. ESG is an important tool for reshuffling the industry and promoting survival of the fittest within companies, improving the efficiency of natural and social capital utilization.

Shi Han calls on companies to view ESG from a positive perspective, seeing it as a new development opportunity rather than just a cost. By improving their environmental and social performance, companies can seize opportunities in the industry reshuffle and industrial upgrading brought about by the new round of green and low-carbon transformation, and maintain their competitive advantage.

Shi Han emphasizes that companies should not only see ESG as a risk, but also recognize the development opportunities it brings to companies. In the practice of ESG, corporate governance is the most critical part, and companies that fail to carry out good corporate governance will find it difficult to implement the ESG concept.

Shi Han further points out that the quality of ESG information disclosure varies among many Chinese companies, reflecting obvious anxiety and knowledge gaps, which indicates that companies do not fully understand the true meaning and importance of ESG internally. Chinese companies need to improve the quality of ESG information disclosure, use internationally accepted terminology for communication, and learn from the successful experiences of developed countries. Explore the essence and pattern of traditional Chinese culture that aligns with ESG.

Li Zhiqing, Director of the Environmental and Economic Research Center at Fudan University and Deputy Secretary of the Party Committee of the School of Economics, believes that companies need to find a balance between business development and social responsibility to achieve sustainable growth. The government and society should incentivize and support companies in various ways, such as providing economic subsidies, giving moral encouragement, and developing financial innovation tools, to help companies bear the cost pressure of implementing ESG and not solely burden them with all the responsibilities. Financial innovation can play an important role by facilitating ESG practices through capital turnover and addressing the time cost issue faced by companies.

Li Zhiqing also points out that ESG standards have both universal aspects and specific requirements related to a country's development stage and cultural traditions. Some ESG standards formulated by developed countries may not be entirely suitable for China's national conditions. While learning from their experiences, China can explore its own sustainable development wisdom. The core concept of sustainable development is shared, but different countries and development stages may present different forms of practice.

Dai Rui, Manager of Financial Services Climate Change and Sustainable Development at EY Greater China, mentioned that the new version of international sustainable development guidelines has proposed stricter ESG disclosure requirements, which pose challenges for Chinese companies. For example, companies need to strengthen ESG data disclosure and risk management, and further integrate ESG concepts into corporate governance and business strategies.

Dai Rui points out that establishing a scientific ESG risk management system and disclosing quantitative indicators are also urgent issues for companies to address. To implement ESG practices, companies need to start from the top level and integrate ESG concepts into corporate governance and strategies. Although there is still a certain gap between Chinese companies and international ESG standards, this gap is gradually narrowing through proactive actions. To ensure the comparability of ESG disclosure, companies need to establish a systematic ESG performance tracking mechanism, develop a quantitative indicator system suitable for their own business, and link it to executive compensation to drive progress in various ESG initiatives.

Dai Rui believes that challenges also present important opportunities for promoting corporate sustainable development. By increasing international recognition of standards and local sustainable development practices, Chinese companies have the opportunity to occupy a more significant position in the field of ESG. Green financial instruments have proven to be effective in promoting ESG and green transformation for companies. Chinese financial institutions can play a crucial role by guiding corporate green transformation through green financial instruments and driving new progress in ESG practices.