People’s Republic of China
According to the requirements of the Paris Agreement, PRC submitted its nationally determined contribution document, Enhanced Actions on Climate Change - PRC's Nationally Determined Contribution to the secretariat of the United Nations Framework Convention on Climate Change in June 2015 (“NDC”). In 2020, PRC announced the updated NDC, namely strive to carbon dioxide peaking before 2030 and achieve carbon neutrality before 2060, lower its carbon dioxide emissions per unit of GDP by over 65 percent from the 2005 level, increase the share of non-fossil fuels in primary energy consumption to around 25 percent by 2030, increase the forest stock by 6 billion m3 from the 2005 level and its total installed capacity of wind and solar power to over 1.2 billion kW by 2030.
Since then, PRC has established a "1+N" policy framework to ensure the timely achievement of its carbon dioxide peaking and carbon dioxide neutrality goals in terms of legal regulations and policy guarantees. At the national level, the Communist Party of China Central Committee and the State Council issued and implemented the Working Guidance for Carbon Dioxide Peaking and Carbon Neutrality in Full and Faithful Implementation of the New Development Philosophy in September 2021. This document incorporates key targets for 2025, 2030, and 2060. In October 2021, the State Council issued and implemented the Action Plan for Carbon Dioxide Peaking Before 2030, which outlines the implementation of ten key actions to ensure the timely achievement of the carbon dioxide peaking goal by 2030. The "N" refers to the implementation plans for key sectors and industries and the corresponding supporting measures. This includes the implementation plans for key sectors such as energy, industry, urban and rural construction, transportation, agriculture, and pollution reduction and carbon reduction. It also includes implementation plans for key industries such as coal, petroleum and natural gas, steel, non-ferrous metals, petrochemicals, and building materials. Additionally, there are supporting measures in areas such as technological support, financial assistance, statistical accounting, and talent cultivation. Each province, autonomous region, and municipality at the local level has also developed its own implementation plan for carbon peaking.
In the field of finance, the official sector guidelines on eligible projects for green bonds can be traced back to 2015, when two sets of standards prevailed in the market. The Green Bond Endorsed Project Catalogue (2015 Edition) published by the China Green Finance Committee, an organization supported by the People’s Bank of China (“PBOC”), applied to all types of green bonds in the PRC, except green enterprise bonds which were regulated by the National Development and Reform Commission (“NDRC”)’s Guideline for Issuing Green Bonds. Only in 2019, seven authorities – NDRC, the Ministry of Industry and Information Technology, the Ministry of Natural Resources, the Ministry of Ecology and Environment, the Ministry of Housing and Urban-Rural Development, PBOC, and the National Energy Administration – published a catalogue of green industries, the Green Industry Guidance Catalogue (2019 Edition) (“2019 Industry Catalogue”). It is a remarkable consensus reached on what is green at the cross-ministerial level. Based on the 2019 Industry Catalogue, PBOC, NDRC, and the China Securities Regulatory Commission (“CSRC”) published the Green Bond Endorsed Project Catalogue (2021 Edition) in April 2021. The new catalogue replaces the two prevailing sets of guidelines, creating a unified national definition of “green” for green bonds. In March 2023, NDRC published public consultancy version of catalogue of green industrial guideline. These are all important milestones in the development of sustainable finance in the PRC.
Based on the above, we can say that both internationally and domestically, from the central government to local authorities, PRC is actively building and formulating policies related to climate change risk response in various industry sectors.
Directors’ Duties and Climate Change
In PRC1, directors must fulfil their duties in accordance with the provisions of the key laws and regulations set out below.
The Civil Code of the People's Republic of China (the "Civil Code") regulates the personal and property relationships among equal subjects, including natural persons, legal persons, and unincorporated organizations. It also provides provisions for legal entities, including the obligations of corporate directors, which include:
- Where a corporate body goes into liquidation, members of a legal person's executive body or decision-making body, such as directors, are the liquidation obligors. The liquidation obligors shall, except for being merged or divided, form a liquidation team in order to liquidate the corporate body.2
- The directors of a for-profit corporate body shall not damage the interests of the corporate body by making use of its affiliated relations.3
The Company Law of the People's Republic of China (the "Company Law") regulates the organisation and activities of limited liability companies and joint-stock companies established in the PRC. It specifically includes a dedicated section that outlines the duties of corporate directors4, which include:
- Directors shall comply with the provisions of laws and administrative regulations and the articles of association of the company and bear duties of diligence and loyalty towards the company.5 A director shall not do any act which violates his/her duties of loyalty towards the company;6
- Directors shall not abuse their duties and rights to receive bribes or other illegal income and shall not misappropriate company assets;7
- Where the board of shareholders or a shareholders' general meeting requires a director to attend a meeting, the director shall attend the meeting and answer the queries of the shareholders;8 and
- Directors shall provide the relevant information and data truthfully to the board of supervisors or the supervisor (in the case of a limited liability company which has not established a board of supervisors) and shall not obstruct the exercising of powers and performance of duties by the board of supervisors or the supervisor.9
The Securities Law of the People's Republic of China (the "Securities Law") regulates the offering and trading of shares, corporate bonds, depository receipts, and other securities determined by the State Council pursuant to the law within the territory of PRC.
According to the basic principles determined by the Company Law, the Securities Law, and related laws and administrative regulations, the CSRC revised and implemented the Guidelines on Governance of Listed Companies in September 2018. It sets out the duties of directors of listed companies, including:10
- Directors shall comply with laws and regulations and the relevant provisions of the company's articles of association, perform duties loyally, diligently and prudently, and perform their undertakings;11
- Directors shall ensure that they have adequate time and energy to perform their duties;12
- Directors shall attend board meetings, and state specific opinions on the agenda items;13
- Directors shall be liable for board resolutions.14
According to the Company Law, the Securities Law and other relevant provisions, the CSRC revised and implemented the Guidelines for Articles of Association of Listed Companies in January 2022. The guideline stipulates the basic content of the articles of association of listed companies, including:
- Directors shall comply with laws, administrative regulations, and the articles of association, with the following duties of loyalty to the Company:15
- Directors shall not abuse their authority by receiving any bribe or other illegal income, and shall not embezzle any of the Company property;
- Directors shall not misappropriate the Company's funds;
- Directors shall not deposit company assets into accounts held in their own names or in the name of any other individual;
- Directors shall not, in violation of the Articles of Association, lend Company funds to other people or provide guarantee for other people with Company assets without the consent of the shareholders' general meeting or the board of directors;
- Directors shall not enter into contracts or trade with the Company either in violation of the Articles of Association or without the consent of the shareholders' general meeting;
- Without the consent of the shareholders' general meeting, any director shall not take advantage of his/her position to seek business opportunities that should belong to the Company for himself/herself or for any other person, or operate business of the same kind for himself/herself or for any other person;
- Directors shall not accept commissions for transactions with the Company as their own;
- Directors shall not disclose Company secrets without authorization;
- Directors shall not make use of their related-party relationship to damage the Company's interests and;
- Directors shall have other duties of loyalty specified by laws, administrative regulations, departmental rules and the Articles of Association. Besides the above duties, the Company may, as appropriate, add other duties required for the Company's directors to the Articles of Association.
- Directors shall comply with laws, administrative regulations, and the Articles of Association, with the following duties of diligence to the Company:16
- Directors shall be prudent, serious and diligent in exercising the authority conferred by the Company to ensure that the business activities of the Company comply with the country's laws, administrative regulations and various economic policy requirements, and that the business activities do not go beyond the scope of business activities specified in the Company's business license;
- Directors shall treat all shareholders equally;
- Directors shall keep abreast of the Company's business management status;
- Directors shall sign written statements confirming regular reports of the Company, and ensure that the information disclosed by the Company is true, accurate, and complete;
- Directors shall provide accurate information and materials to the board of supervisors, and shall not interfere with the performance of duties by the board of supervisors or individual supervisors; and
- Directors shall have other diligence duties prescribed by laws, administrative regulations, departmental rules and the Articles of Association. The Company may, as appropriate, add further diligence duties for the Company's directors to the Articles of Association.
From a judicial perspective, when directors violate the above-mentioned obligations, the highest judicial authority of the country considers the interpretations and guiding cases issued during the application of laws as a component of hard law. The specific application needs to be determined based on the circumstances of individual cases.
In the currently effective laws and regulations in PRC concerning directorial responsibilities, there is no direct and explicit provision regarding climate change risks.
As climate change risks intensify, extreme weather events are having a tangible impact on business operations. Companies can address this issue by adding requirements for directors to address climate change risks in their articles of association. Directors are obligated to comply with the company's articles of association, and these provisions can outline their responsibilities in dealing with climate change risks based on specific circumstances.
In addition, in December 2022, the Standing Committee of the National People's Congress issued the second draft of the Company Law, which stipulates that companies engaging in business activities shall fulfil their social responsibilities by considering the interests of stakeholders such as employees and consumers, as well as the protection of the ecological environment, on the basis of complying with laws and regulations. Furthermore, it elaborates on the duties of diligence and loyalty of directors, explicitly stating that they should take measures to avoid conflicts of interest with the company and carry out their duties with reasonable care for the company's best interests, as expected of managers. This provision, which strengthens corporate social responsibility, if enacted in its current form, would provide a legal basis for the ecological environmental protection obligations and personal liability of directors and it would generally apply to directors in Chinese companies.
Directors' Disclosure Obligations and Climate Change
According to the Securities Law, listed companies are required to:
- formulate regular reports in accordance with the contents and format stipulated by the securities regulatory authority of the State Council and the stock exchange, and submit and announce the regular reports;17
- Upon occurrence of: (1) a significant event which may have a relatively significant impact on the share trading price of a listed company or a company whose shares are traded on any other nationwide securities trading venues approved by the State Council; or (2) a significant event which may have a significant impact on the trading price of listed corporate bonds, if the investors are yet to be informed, the company shall forthwith submit an interim report on information of the said significant event to the securities regulatory authority of the State Council and the securities trading venues, and make an announcement, stating the cause of the event, the current status and the possible legal consequences.18
According to the Company Law, the Securities Law, and other laws and administrative regulations, the CSRC enacted and released the Administrative Measures on Information Disclosure by Listed Companies in March 2021, which came into effect in May 2021. It aims to regulate the information disclosure practices of listed companies and other information disclosure obligors, according to which listed companies are required to disclose the following information:
- A public commitment made by a listed company and its controlling shareholders, actual controllers, directors, supervisors and senior executives, etc., if any, shall be disclosed;19
- the information disclosure documents including the regular reports, interim reports, prospectuses, fundraising prospectuses, listing announcements and acquisition reports, etc.20
The regular reports to be disclosed shall include any information that has a significant impact on the value judgment or investment decision of an investor shall be disclosed.21
For interim reports, where a significant event occurs that may have a relatively large impact on the trading prices of the securities and their derivatives of a listed company, and the investors are not yet informed, the listed company shall immediately make a disclosure, explaining the cause, current situation and possible impact of the event.22
Except for the information that shall be disclosed in accordance with the law, an information disclosure obligor may voluntarily disclose the information related to the value judgment and investment decision made by the investors, which shall not conflict with the information disclosed in accordance with the law and may not mislead the investors.23
Regarding the aforementioned disclosure obligations, the directors of a listed company shall be diligent and duteous, pay attention to the preparation of information disclosure documents, and ensure that the regular reports and interim reports are disclosed within the prescribed time limit.24 The directors of a listed company shall also be responsible for the authenticity, accuracy, completeness, timeliness and impartiality of the information disclosure of the listed company.25Where non-performance of commitment causes investors to suffer losses, relevant directors shall bear compensation liability pursuant to the law.26
According to the revised version of the Guidelines for the Content and Format of Annual and Semi-Annual Information Disclosure Reports,27 issued and implemented by the CSRC in June 2021, content related to environmental protection and social responsibility will be consolidated under the Environment and Social Responsibility chapter. These guidelines apply generally to listed companies in PRC and specify that key polluting entities should disclose major environmental information in their annual reports, including:
- pollutant discharge information;
- the construction and operation of pollution prevention and control facilities;
- the environmental impact assessment of the construction project and other administrative licensing on environmental protection;
- the emergency plans for environmental incidents;
- the environmental self-monitoring plans;
- the administrative penalties imposed due to the environmental issues during the reporting period; and
- other environmental information that should be disclosed.
According to the Administrative Measures for the Mandatory Disclosure of Environmental Information by Enterprises issued by the Ministry of Ecology and Environment in December 2021 and implemented in February 2022, if a company falls into the category of (1) key pollutant discharging entities; (2) enterprises subject to mandatory cleaner production inspection; (3) listed companies and subsidiaries at all levels within the scope of consolidated statements, enterprises that issue enterprise bonds, or corporate bonds and non-financial enterprises that issue debt financing instruments involved in specified ecological and environmental violations, they shall prepare annual reports and interim reports on the mandatory disclosure of environmental information, and disclose environmental information in a lawful, timely, authentic, accurate and complete manner.28
As can be seen, PRC is increasingly emphasizing the management of environmental information disclosure. From top to bottom, a series of regulations have been introduced to gradually improve the system of environmental information disclosure. It has evolved from voluntary disclosure to mandatory disclosure and expanded from public company disclosure to non-public company disclosure, with a focus on strengthening external regulatory constraints. Therefore, from the perspective of comprehensive and truthful information disclosure and the avoidance of administrative penalties from government authorities, corporate directors should possess the awareness of environmental information disclosure and enhance the proactiveness of such disclosure.
Practical Implications for Directors
Based on the above, we believe that:
1. Directors should promote enhanced training and education
Directors should encourage active participation of the company in legal education and training activities organized by ecological and environmental departments, securities exchanges, and other organizations. They should familiarize themselves with the latest policies, regulations, and laws related to environmental and information disclosure, as well as understand typical cases of legal violations. Companies should incorporate the concept of green development into their corporate social responsibility framework. They should also conduct internal training on environmental and information disclosure compliance, taking into account their specific circumstances. Additionally, companies should establish a performance evaluation system for management personnel to enhance awareness and legal understanding among the company's management and employees.
2. Directors should promote the establishment of an environmental management system
Directors should encourage the company to establish an internal communication mechanism to monitor the operation of environmental protection systems, measures, and facilities in real-time. They should promptly address any potential environmental risks and ensure timely remediation. Additionally, companies can establish environmental protection management records and promptly report and update information to ensure the accuracy and completeness of records. Lastly, companies should practice a sustainable business model and adopt environmentally friendly production and operational practices. This will improve environmental performance and enhance the overall strength of the company.
3. Directors should pay attention to the compliance of environmental information disclosure data
With the continuous improvement of legislation in the areas of domestic network security, data security, and information protection, it is essential for companies to ensure compliance in various aspects related to data collection, processing, and usage. It encompasses various aspects of business operations from the development and use of applications, mini-programs, internal management systems, to the confidentiality and file management in the listing process and information exchange on international platforms. Company management should be mindful of data compliance issues, which include but are not limited to the legality and transparency of data collection, secure data storage, management systems for data processing throughout its lifecycle, data delegation, sharing, and cross-border data transfers.
- Zhong Lun Law Firm (https://www.zhonglun.com/en/): KONG, Wei Partner; CHEN, Yuan Partner; NIU, Tianhao Associate; WU, Di Associate