Li Xuhong: taxation should promote sustainable development

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Climate change has posed enormous challenges to the global economy in recent years. Many countries have developed economic policies, including carbon taxes and carbon tariffs, to encourage more market players to support sustainable development. Twenty countries have now started to levy carbon taxes.

However, due to the difficulty in quantifying the tax base and limitations to the scope of taxation, the progress of carbon taxes and carbon tariffs has been relatively slow.

Earlier this year, the International Sustainability Standards Board (ISSB) published ED IFRS S1 General Requirements for Disclosure of Sustainability-related Financial Information (ED IFRS S1) and ED IFRS S2 Climate-related Disclosures (ED IFRS S2), which by regulating accounting information disclosure, could help assess the impact of risks and opportunities of climate-related matters on the value of the entity, and assess the ability of market entities to adjust their planning, business models and operations in response to significant climate-related risks and opportunities.

It is foreseeable that information based on corporate greenhouse gas emissions will be disclosed in more detail through financial reports, and more accurate information will be provided for tax calculation bases, and taxation will be clearer. The tax adjustment system related to sustainable development will more easily and significantly influence the behavior of market players.

The Covid pandemic is another factor affecting tax policies that promote sustainability. Over the past three years, Covid has had a huge impact on the global economy. Various monetary and fiscal policies have been introduced to ease downward pressures and stabilize the economy.

However, variations in vaccination rates and different attitudes to the epidemic, as well as the uncertainty brought about by the newer variants of the virus, have made the global economic recovery uneven.

The third meeting of the G20 Finance Ministers and Central Bank Governors in Italy last year judged that the global market outlook will further improve, and proposed that the recovery momentum should continue to ensure financial stability and long-term fiscal sustainability.

In the long run, when the impact of Covid gradually weakens and economies begin to recover, tax policies to guide the global economy to achieve strong, sustainable, balanced and inclusive growth should still be based on the perspective of sustainable development.

ESG Disclosure Case Study of Listed Companies in China

The main references for listed companies in China to prepare ESG reports include:

  • The Sustainability Reporting Standards of the Global Reporting Initiative (GRI);
  • The Social Responsibility Guidelines (2010) of the International Standards Organization (ISO 26000);
  • The Task Force on Climate-related Financial Disclosures (TCFD).

Currently, the Shanghai Stock Exchange requires companies engaged in thermal power generation, steel, cement, electrolytic aluminum, and mineral development that have a greater impact on the environment to disclose their environmental information, but other listed companies are only encouraged to file a disclosure.

The disclosure of corporate climate information is generally covered in social responsibility reports, ESG reports and sustainability reports.

We selected ESG reports from 65 listed companies in 15 industries for analysis and found that the content of carbon emissions disclosure mostly follows the Scope 1 and Scope 2 calibers of the International Financial Reporting Sustainability Disclosure Standards No. 2 – Climate-related Disclosures. Only very few companies (such as Tencent) disclose Scope 3 emissions.

  • Scope 1 emissions refer to direct greenhouse gas emissions from equipment owned or controlled by market entities, such as emissions from the combustion of boilers, furnaces, vehicles, etc., or emissions from chemical production of process equipment.
  • Scope 2 emissions refer to indirect greenhouse gas emissions from purchased electricity, heat or steam consumed by market entities.
  • Scope 3 emissions refer to indirect emissions that occur in the reporting entity’s value chain that are not covered by Scope 2 emissions, including upstream and downstream emissions.

There are also significant differences in the quality of information disclosure by listed companies across different industries.

The sample companies in the industries of finance, real estate, transportation, healthcare, technical communication, mining and mineral processing are basically large-scale, central government-owned enterprises and smaller companies owned by local governments — with the most detailed disclosure and relevant quantitative indicators. And the information provided in the report can basically cover the annual report and previous biennium related information.

The power industry, despite being a major carbon emitter, has relatively simple disclosure requirements. Only two companies have disclosed carbon emission reductions, and some have not disclosed any relevant information.

In the consumer goods industry, state-owned enterprises and foreign-funded firms disclose more detailed information on carbon emissions, while listed companies disclose less information.

Although sustainable development tax policies originated from addressing climate change and environmental protection, they must also be compatible with fiscal and socio-economic sustainable development. The formulation of policies should be carried out step by step, and should not be rushed or disrupt economic development.