Reflecting growing pressure from institutional investors to curb potential environmental and climate policy risks to public companies, China has put into effect a “green securities” plan. The new requirements impose barriers on heavy polluters applying for an initial public offering (IPO) and mandate that listed companies disclose more information about their environmental performance.

According to the regulation issued by China’s Securities Regulatory Commission (CSRC) in January of 2008, companies from energy- and pollution-intensive sectors must undergo inspection by a State Environmental Protection Agency (SEPA) environmental specialist if they wish to launch an IPO.

Specifically, companies in the sectors of thermal power generation, iron and steel, cement, and electrolyte aluminum, and companies with cross-provincial business in any of 13 listed industrial operations that may cause heavy pollution will be required to obtain SEPA approval of their environmental performance. These companies’ IPO application to CSRC shall include recommendations drawn up by the environmental regulator before they may be considered.

The second prong of the plan is to impose mandatory environmental disclosure obligations on companies. The government will enforce environmental disclosures for companies with high pollution emissions and energy consumption, according to a regulation released by SEPA in February of 2008. The regulation applies to companies that are already publicly listed as well as those seeking listing.

Making environmental disclosure compulsory is a joint program of SEPA and CSRC. Prior to the release of the regulation, environmental disclosure and inspection were already required of companies filing for IPOs. Domestic firms have to report on environmental conduct through the 36 months prior to their floating of shares. Deliberate cover-ups are subject to administrative penalties and criminal charges. According to Pan Yue, deputy Minister of SEPA, most domestic listed companies either do not report their environmental performance or submit “only qualitative descriptions” and “scantily useful facts.” The regulation is designed to make environmental disclosure a key criterion for companies raising funds from the Chinese capital markets.

According to the disclosure regulation, SEPA and CSRC will set up a public information system to monitor the environmental activities of companies already trading on the stock market, as well as set up an “environmental performance” index that will enable shareholders to monitor the behavior of listed companies.

The green securities are meant to help curb the unhealthy expansion of pollution- and energy-intensive industries by preventing them from siphoning funds from the capital market. The green securities plan is among China’s latest moves to inject the green factor into the nation’s financial policies.

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