The petroleum and petrochemical industry is committed to the construction of ESG disclosure standards within the industry. The industry association was the first to release a group standard for ESG disclosure in the industry. The CCIIA guidelines are the first ESG evaluation standard for listed companies in China

As the industry moves towards more sustainable practices, regulatory authorities, the market and investors are putting forward higher requirements for ESG information disclosure in the oil and petrochemical industry

It is suggested to follow the principle of "domestic unity, international alignment, and industry characteristics", take into account international concerns and national conditions, and gradually build the "1+N+X" ESG information disclosure system

As the issue of climate change becomes increasingly severe, the concept of environmental, social and governance (ESG) has taken root in people's minds and is increasingly influencing investment decisions. The petroleum and petrochemical industry is a fundamental and pillar industry of the national economy. It has a large economic volume and a high degree of industrial correlation, and is closely related to the stable operation of the economy and the stable growth of industry. Meanwhile, the petroleum and petrochemical industry is a key sector for the pilot program of carbon emission environmental impact assessment and a key sector for pollution reduction and carbon emission reduction. Most enterprises have been listed as key pollutant-discharging units and units subject to mandatory clean production audits. Under the general situation of dual control of energy consumption and carbon emissions, pollution reduction and carbon emission reduction actions, and sustainable development transformation, they are facing considerable pressure. As the industry moves towards more sustainable practices, regulatory authorities, the market and investors are putting forward higher requirements for ESG information disclosure in the oil and petrochemical industry.

There are numerous global ESG disclosure standards, and the trend of integration is gradually emerging

International organizations, industry organizations, and stock exchanges have published over a dozen ESG disclosure standards, providing structured methods and standardized indicators for enterprises to qualitatively or quantitatively present their ESG information. ESG information not only serves as a window for enterprises to showcase their achievements in sustainable development but also provides standards and guidelines for their sustainable and responsible operations.

In February 2024, under the unified guidance of the China Securities Regulatory Commission, the three major stock exchanges in Shanghai, Shenzhen and Beijing simultaneously released guidelines for the sustainable development reports of listed companies. By 2026, more than 400 companies, accounting for over half of the total market capitalization of the exchange, will need to release sustainability reports, disclosing their ESG governance and strategies, energy transition plans, and environmental and social impacts. The guidelines of the three major exchanges have adopted a standardized reporting framework similar to the internationally recognized standard International Sustainable Disclosure Guidelines (ISSB) and the Global Reporting Initiative (GRI), reflecting the consistency between China's ESG disclosure guidelines and the basic rules of international standards. Meanwhile, the guidelines of the three major exchanges also reflect the practices with Chinese characteristics, including high-quality development, rural revitalization, reducing the outstanding debts of small and medium-sized enterprises, and the National Certified Voluntary Emission Reduction (CCER), etc.

Among the numerous and complex ESG information disclosure guidelines, the GRI framework proposed by the Global Reporting Initiative, established in 1997, dominates and has been adopted by 63% of the world's top 100 companies and over 75% of the Fortune Global 500 companies. The CDSB (Climate Disclosure Standards Board) framework and the TCFD framework were merged by the ISSB (International Financial Reporting Sustainability Standards) in 2022 and 2023 respectively. In addition, at the end of 2023, the ISSB released revisions to the SASB guidelines to enhance their international applicability, modifying some indicators in the SASB that were only applicable to the United States to internationally recognized indicators. This move by ISSB indicates that global ESG information disclosure standards are moving towards integration and unification.

China's petroleum and petrochemical industry is promoting industry-specific ESG disclosures

The petroleum and petrochemical industry is one of the industries with the highest ESG risk index. In terms of environmental risks, the first ones are climate transition risks, product substitution and potential losses in the market share of renewable energy; The second is the risk of pollution and leakage, especially the pollutants in the industry have the characteristics of being difficult to degrade, highly toxic and prone to accumulation. The third is to make up for the loss of biodiversity and the investment in ecological restoration, etc. In terms of social risks, there are potential conflicts arising from employee health, operational safety management, pollution leakage or land occupation, etc. In terms of corporate governance, as bidding and corruption issues related to natural resources are highly sensitive, the industry needs to attach importance to anti-corruption, effective supervision and legal compliance. The GRI and TCFD disclosure guidelines are the most frequently used ESG disclosure frameworks by oil and petrochemical enterprises (Table 1), but their disclosure requirements lack detailed elaboration on industry-specific risks.

There are currently only four ESG disclosure guidelines specifically provided for the oil and petrochemical industry (Table 2), each with different focuses. The IPIECA guidelines emphasize biodiversity, not only requiring the disclosure of the impact of sudden incidents such as pollutant leaks, but also paying attention to the impact on biodiversity. In the latest version of 2023, new indicators for priority areas of biodiversity conservation have been added, including the disclosure of the number and proportion of projects located in or close to nature reserves or priority areas of biodiversity, as well as the commitment to mitigating the impact of biodiversity. The GRI11 guideline emphasizes the connections among issues. The guidelines of the China Chemical Information Association (CCIIA) require the disclosure of media controversy information, environmental protection administrative penalties and other negative information. The China Petroleum and Chemical Industry Federation (CPCIF) guidelines attach great importance to the industry characteristics of pollution and management in the petroleum and petrochemical industry, such as information on the discharge of toxic and harmful substances (environmental dimension) and chemical management (governance dimension), and has a clear list of pollutant disclosures with industry characteristics.

The petroleum and petrochemical industry is committed to the establishment of ESG disclosure standards within the industry. The industry association was the first to release the industry ESG disclosure group standard. The CCIIA guidelines are the first ESG evaluation standard for listed companies in China. CPCIF has released two group standards, namely the "Guidelines for ESG Disclosure of Petrochemical and Chemical Enterprises" and the "Evaluation Specifications for ESG Disclosure of Petrochemical and Chemical Enterprises", which have set up 16 themes, 56 fields and 166 indicators in four dimensions: basic information, environment, society and governance, in a hierarchical manner. Based on these two group standards, CPCIF has evaluated the ESG disclosure performance of listed oil and petrochemical enterprises in China for three consecutive years (2021, 2022, and 2023). In 2023, 217 petrochemical enterprises in China released ESG-related reports, accounting for 39.5% of the total number of listed companies in the entire industry, with a market value exceeding 80%. The average score of disclosure quality was 38.08 points, an increase of 12 points compared with 2022. The quality of disclosure has significantly improved, but there is still considerable room for improvement. From the perspective of industry types, enterprises in the oil extraction sector scored the highest, followed by those in the chemical manufacturing industry, while those in the petrochemical service sector scored the lowest. From the perspective of disclosure indicators, the "basic Information" dimension has the best disclosure situation, followed by "Employees", "Pollutant emissions and Control", and "Technological Innovation and intellectual property Protection". The lowest scores are given to the disclosure of "safety management" and "rewards and Punishments and Disputes".

Relevant suggestions for the Construction of ESG Information Disclosure System in China

(1) Establish a "1+N+X" ESG information disclosure guideline and standard system that conforms to international standards and has local characteristics to enhance the quality of information disclosure.

First, in accordance with the principle of "domestic unity, international alignment, and industry characteristics", taking into account international concerns and national conditions, we will gradually build a "1+N+X" ESG information disclosure system. "1" represents the internationally recognized standard, "N" the industry-specific standard, and "X" the local value issues created by Chinese enterprises, such as Party building, practicing the "dual carbon" goals, poverty alleviation, common prosperity, rural revitalization, the "Belt and Road Initiative", and a beautiful China. This system is in line with international basic rules. For instance, GRI consists of three major modules: GRI General standards, GRI Industry standards, and GRI issue standards. ISSB includes general requirements (S1) and climate-related disclosures (S2). Explore and improve the characteristic and differentiated disclosure standards that are suitable for China's petroleum and petrochemical industry.

Second, gradually increase the granularity of indicators to enhance the breadth and depth of ESG information disclosure. Looking at the ESG disclosure guidelines of international organizations, most of them have undergone multiple rounds of updates, promoting the improvement of indicators and the unification of important issues and practices. For instance, the IPIECA guidelines have undergone five rounds of updates since their release in 2005. At the end of 2023, priority areas for biodiversity conservation were newly added as one of the disclosure categories. GRI was established in 1997. It has evolved from an initial auditing mechanism that urged companies to comply with environmental action guidelines to a comprehensive ESG auditing mechanism covering various issues such as society, economy and corporate governance. In the current ESG information disclosure guidelines of our country, the specific requirements for certain topics or indicators have been reduced. Specifically, while emphasizing quantification, qualitative disclosure is allowed for requirements that cannot be quantified for the time being. The spatial heterogeneity of social and environmental impacts is not emphasized for the time being. In the future, based on the development stage, industry practice, data availability, etc., the granularity of indicators can be gradually improved and enriched to enhance the quality of disclosure and avoid the phenomenon of enterprises "reporting good news while concealing bad news".

(2) Focus on software and hardware construction to consolidate the foundation of ESG information disclosure in the petroleum and petrochemical industry

The first is mechanism construction. Firstly, an incentive mechanism should be established to enhance the internal driving force of enterprises. The results of ESG disclosure performance ratings should be applied to the credit evaluation and daily supervision of enterprises. Enterprises with high ratings should be given priority support in terms of policy preferences, financial subsidies, and reputation rewards. Secondly, enhance the requirements for third-party verification of ESG information. The independence, objectivity and fairness of third-party verification are conducive to improving the credibility and authority of enterprises' ESG reports.

The second is the data foundation. First of all, establish and improve the ESG data statistics system and collection process. ESG indicators cover a very wide range of content. During the data collection process, enterprises may encounter problems such as inconsistent understanding of the connotations of the indicators, inconsistent statistical standards, and unclear calculation logic. Especially for large enterprises that span multiple business divisions or have branches/subsidiaries both at home and abroad, the information to be collected may amount to hundreds of indicators, and the entire process is extremely time-consuming. Therefore, it is urgent to ensure the quality of relevant data from the source. Secondly, accelerate the adoption of new technologies to improve the monitoring of greenhouse gas emissions such as carbon dioxide and methane. At present, most oil and petrochemical enterprises rely on emission factors rather than actual measured factors to estimate emissions. With the emergence of measurement technologies such as aerial surveying, unmanned aerial vehicles, and remote sensing satellites, as well as the popularization of online monitoring equipment, it is expected to obtain emission data through actual measurement methods.

The third is digital transformation. By applying digital technologies such as the Internet of Things, cloud platforms, machine learning, and digital twins, we manage a large amount of structured and unstructured information, build digital accounts for all parties in the supply chain, precisely track the ESG information of each producer and consumer, and ensure the accuracy and traceability of the data. Take carbon reduction as an example. One of the reasons why mainstream disclosure guidelines do not mandate the disclosure of greenhouse gas emissions within scope three is that enterprises are unclear about the carbon emission data in their upstream and downstream supply chains. The application of digital technology can gradually improve the construction of carbon emissation-related databases, connect with partners in the supply chain, thereby obtaining more relevant data, and gradually grasp the carbon footprint of the enterprise supply chain, enhance the transparency of supply chain data, and promote carbon reduction in the supply chain.

(3) Conceptually recognize ESG and form a virtuous cycle between financial resources and ESG information disclosure

Seize the development opportunity of transitional finance and promote the green transformation of the petroleum and petrochemical industry. Transition finance is a financial resource provided for traditional carbon-intensive industries and those with high environmental impact, supporting their transition to low-carbon and zero-carbon emissions. It is an extension and expansion of green finance. The green transformation path of the petroleum and petrochemical industry requires a large amount of funds, which is precisely the service target of transition finance. At the same time, green technology research and development and transformation project construction in the oil and petrochemical industry have also been favored by capital. For instance, in the past two years, renewable diesel, CCS (Carbon Capture and Storage), and direct energy conversion projects of oil refining enterprises in North America and Europe have attracted an investment of 14.5 billion US dollars. The effective disclosure of ESG information helps investors enhance their confidence in the oil and petrochemical industry and attracts more abundant financial resources