1. Introduction
In recent years, climate change has had a significant impact on ecosystems, posing a serious challenge to human life, and has become a widespread concern worldwide. The greenhouse effect is one of the most talked about aspects of climate change, and CO
2 from human activities is a major cause of this phenomenon [
1]. The Intergovernmental Panel on Climate Change (IPCC) released a report in April 2022 stating that carbon emissions are still on the rise [
2]. Unlike greenhouse gases such as methane or nitrous oxide, the effects of carbon dioxide emissions will persist over time and these climate changes are irreversible [
3]. Among these climate changes, changes in precipitation will have a dramatic impact on ecosystems in arid and semi-arid regions, with food insecurity and desertification of arable land in South Asia and South Africa [
4]. Another important climate change is sea level rise, with carbon dioxide emissions being the main cause of sea level rise over the last decade [
5]. This will lead to the gradual disappearance of ice sheets at the poles and the erosion of coastal areas [
6]. The impact of climate change on ecosystems is also significant, with the composition of biomes on 5–20% of the US land area likely to change by 2100 [
7]. Greenhouse gas emissions are largely generated by corporate activities, so corporate action is critical to curbing greenhouse gas emissions. Corporations can significantly improve energy efficiency through actions such as reducing emissions, developing new technologies and setting targets [
8]. Over the period 2011–2020, Chinese companies could reduce their consumption of 9.1 billion tons of standard coal through green and low-carbon development compared to the baseline scenario [
9].
The physical risks and transition risks of climate change are gaining increasing attention, with stakeholders demanding climate information disclosure from companies. Climate information is more than just carbon information. It focuses on information related to climate change. Climate information is defined by the International Sustainability Standards Board (ISSB) in International Financial Reporting Standard (IFRS) S2 [
10] Climate-related Disclosures (draft S2) as “information about the climate-related risks and opportunities faced by an enterprise”. In order for stakeholders to possess a comprehensive understanding of the measures taken by an enterprise in response to climate risks and opportunities, the corresponding strategies, actions, performance and results of the enterprise are included, and the stakeholders are more demanding for climate information and are not satisfied only with the data on greenhouse gas emissions but attach equal importance to the corporate governance and strategic adjustments of enterprises under climate change.
Banks were once considered to be an environmentally insensitive sector as their business itself does not generate carbon emissions directly. In recent years, however, the banking sector’s important nexus role in climate risk response has begun to gain traction, and there is a growing expectation that banks will play an active role in the transition to net zero emissions. As a financial services industry, banks can actively address climate change by expanding green investments, limiting financing for high-emission activities and supporting carbon-intensive industries in transition to net zero emissions. Regulators in different regions are actively considering a portfolio of policies to encourage banks to coordinate all stakeholders to address climate change [
11]. In the financial sector, the Chinese government has accelerated the pace of introducing relevant policies since 2020. The “Guidance on Promoting the Investment and Financing in Response to Climate Change” was issued in 2020, raising the subject of climate investment and financing to an unprecedented level. “Measures for the Administration of the Law-based Disclosure of Environmental Information by Enterprises”, issued in 2022, further clarifies and refines the targets and contents of disclosure, requiring the disclosure of information on carbon emissions, investment and financing projects in response to climate change.
In addition, the amount of climate-risk-related assets in banks’ loan exposures is significant, with the US, EU, China, Japan and Switzerland together accounting for USD 1.6 trillion [
8]. Climate risk can lead to a sudden increase in risk premiums on various assets of banks, amplifying credit risk and liquidity risk. Globally, as the trend towards economic decarbonization intensifies, financial assets associated with carbon-intensive industries could suffer losses that could be amplified by financial leverage. Models by Dietz et al. suggest that, if no action is taken, the climate value at risk (the amount of losses due to climate change) of global financial assets would amount to USD 2.5 trillion [
12]. Battiston and Stefano Mandel validate the results of this model, showing that a high proportion of banks’ loan portfolios are exposed to climate risk [
13]. One of the most discussed risks is the climate policy risk of a ban on fossil fuels in order to meet the temperature control target. This could lead to most of the assets of fossil fuel companies being stranded, and companies in the transport sector, utilities, etc., would also be affected. This risk would also be transmitted to banks as banks are linked to these companies through loans, equity or bond holdings. In one estimate, the equity exposure of JP Morgan Chase is more than USD 30 billion. In addition to the loss of assets directly exposed to climate risk shocks, indirect losses in banks’ equity will occur due to the devaluation of counterparties’ debt obligations on the interbank credit market. In the case of Deutsche Bank, if the fossil fuel and utilities sectors were subject to a 100% policy shock, the resulting direct losses would lead to a shrinkage of equity of more than 25% and indirect losses would lead to another 5% loss [
13].
However, the banking sector has been relatively unresponsive in terms of climate disclosure and has not pursued actions to address climate change with sufficient vigor. According to the Carbon Disclosure Project (CDP), the mean value of carbon disclosure score of 117 companies worldwide in 2018 was 2.79 points out of 7, while the standard deviation is 2.59 [
14]. Banks were only able to achieve a moderate level of compliance in terms of the completeness of their climate information and still have significant room for improvement [
15]. This is particularly true in developing countries, where the lack of a local mandatory disclosure regime and a disclosure framework for the financial sector provide little incentive for banks to voluntarily disclose climate information, and the lack of professional carbon auditors makes it difficult to account for quantitative indicators. These factors contribute to the low quality of climate information disclosure in developing countries.
In summary, banks are an important link in the transition of industries to a low-carbon economy, but their climate information disclosure is relatively lagging behind and the quality of disclosure still needs to be improved. Banks in developing countries lack local policy guidance and support from professional accounting institutions, and the road to climate information disclosure is fraught with difficulties. Due to methodological reasons and the fact that the banking industry often generates less greenhouse gas than heavy polluters, such as electricity, steel and chemical companies, banks are usually excluded from the research sample on environmental and climate risk issues. There are fewer studies on the quality of banks’ climate information disclosure and its influencing factors [
15].
Since the 19th National Congress of the Communist Party of China, the Chinese government has actively promoted climate-related policies, continued to improve its environmental information disclosure system and established a collaborative management model across multiple sectors, but it has yet to introduce a mandatory disclosure system. Shanghai and Shenzhen Stock Exchange have a system for environmental information disclosure by listed companies dating back to 2006. However, it was not until 2021 that listed companies were encouraged to disclose their measures and results of carbon emission reduction in the “Standards for the Contents and Formats of Information Disclosure by Companies Offering Securities to the Public No. 2—Contents and Formats of Annual Reports (2021 Revision)”. A specific climate information disclosure system has not yet been established and there is a lack of institutional regulation.
Against this background, this study aims to address the following questions:
(1) How is the quality of climate information disclosure of A-share-listed banks?
(2) What are the influencing factors of climate disclosure quality of listed banks in the context that China has not yet established a mandatory disclosure system?
Therefore, this paper selects the banking industry as the research object, constructs an evaluation system and assesses the quality of climate information disclosure of listed companies in the banking industry based on ESG reports, social responsibility reports and environmental information disclosure reports of listed companies. This paper is aimed to present the progress of climate information disclosure of domestic banking enterprises in recent years. It also provides perspectives on climate information disclosure in the banking sector under different regulatory environments for comparison with studies in other regions. It also adopts an empirical research approach to study the factors influencing the quality of corporate climate information disclosure.
While China has not introduced a mandatory climate disclosure policy, the guidelines that have been issued covering SOEs and green finance are coming into play. China, as a market with both an A-share and a Hong Kong stock exchange, and with different disclosure guidelines for the two exchanges, can provide unique data to support the legitimacy and proactive disclosure theories. The sample in this paper takes place before the enactment of a mandatory disclosure regime in mainland China and is an interesting one. By quantitatively evaluating the quality of climate information disclosure of A-share-listed banks, this paper will provide targeted guidance for banks to subsequently improve the completeness, consistency and comparability aspects of climate information disclosure. The findings of this paper will also be useful to inform policymakers and regulators in China.
3. Hypotheses
In the context of a mandatory disclosure regime not yet in place in China, we primarily want to test the impact of listed banks’ own characteristics on the quality of climate information disclosure. Based on stakeholder theory, we, therefore, start with firm size and ownership. Based on voluntary disclosure theory, we selected the proportion of independent directors and the board size as proxies for the efficiency of the company’s board of directors. For the financial performance of the company, we selected the return on total assets (ROA) and revenue growth rate. We also selected the indicator of institutional investors’ shareholding ratio to test the performance of shareholder activism among A-share-listed banks. Finally, given that some banks are also listed on Hong Kong’s stock exchange, which has higher climate disclosure requirements, we also selected whether the companies are dual-listed to test the impact of exchange disclosure guidelines on the quality of climate disclosure.
3.1. Company Size
The size of a company refers to the volume of its operations. A company’s business activities often have a direct or indirect impact on climate change, and the company must arrange for additional operational activities to manage the climate impacts of the company’s operations. According to stakeholder theory, management needs to reconcile the interests of all parties. The larger a company is, the greater its environmental and climate responsibilities, and the more likely it is to be noticed by government regulators and the press, etc. The company will need to make more extensive climate information disclosures in order to meet the needs of its stakeholders and maintain its image and competitiveness in all areas. The following hypotheses are, therefore, proposed:
Hypothesis 1 (H1). Firm size is positively related to corporate climate information disclosure.
Most previous studies have used total assets, sales and market capitalization or the logarithm of these indicators to measure firm size. Considering the high proportion of liabilities in the total assets of banks and the large fluctuations in market capitalization of A-share companies within an annual range, this paper selects the annual revenue of a company as an indicator of firm size to better characterize the size of the company within a year.
3.2. Ownership
By the end of May 2022, eight mainland Chinese banks had become TCFD-supporting institutions, including all six large state-owned commercial banks, making SOEs more advanced in taking the initiative to benchmark against international disclosure standards. Given that SOEs have always been the mainstay of the national economy under China’s economic system, and that SOEs also have a social mission and a huge responsibility in climate change and energy transition, the following hypothesis is proposed:
Hypothesis 2 (H2). The quality of climate information disclosure by SOEs is significantly better than that of non-SOEs.
3.3. Dual Listing
In 2019, the SEHK released a new version of its Environmental, Social and Governance Reporting Guidelines, which, for the first time, includes the topic of “climate change”, aligning with the TCFD framework and making it mandatory for companies to disclose “mitigation measures to identify and address significant climate-related issues that have and may have an impact on the issuer”. The 2022 Review of Environmental, Social and Governance Disclosure Practices, published in 2022, also focused on climate disclosure, reporting that over 85% of issuers disclosed the new climate-related requirements. In contrast, no mandatory disclosure requirements have been announced for A-shares to date, and, in terms of disclosure requirements, the SEHK requirements are more stringent, so it is inferred that the quality of information disclosure for H-share-listed enterprises is higher than that for A-shares [
53]. Therefore, the following hypothesis is proposed:
Hypothesis 3 (H3). The quality of climate information disclosure is significantly better for companies listed on both stock exchanges than for companies with a single domestic listing.
3.4. Profitability
Profitability is one of the key financial indicators of a firm, reflecting its ability to earn a profit per unit of capital/equity. The more profitable a company is, the more willing its management will be in pursuing social performance beyond financial indicators. In addition, companies incur costs in making climate disclosures and addressing climate risks, which have an impact on their profitability. If a firm is more profitable, the impact of disclosure costs is smaller and firms will be more inclined to disclose climate information and take action in response. The following hypothesis is proposed:
Hypothesis 4 (H4). The quality of climate information disclosure is better for more profitable firms than for less profitable firms.
Previous studies have often chosen return on total assets ROA or return on net assets ROE as a symbol of corporate profitability, but ROA tends to focus on corporate profitability efficiency, while ROE is more from the perspective of financial and shareholders’ equity, so total assets ROA is chosen in this paper.
3.5. Revenue Growth Rate
The growth rate of corporate revenue is an indicator of the growth capability in financial performance. Climate disclosure entails significant costs in the current period, particularly in relation to the accounting of carbon emissions, stress testing based on different climate scenarios, etc. However, the benefits, such as reducing financing costs, do not accrue in the current period. Companies in an expansionary phase, therefore, tend to invest more resources and energy in their own growth than in climate- or environment-related investments, and the quality of climate information disclosure tends to be poor. The following hypothesis is proposed:
Hypothesis 5 (H5). The quality of climate information disclosure is lower for companies with faster revenue growth than for companies with lower revenue growth.
3.6. Proportion of Independent Directors
In principal–agent theory, the duty of independent directors is to supervise the conduct of management team to disclose more comprehensive climate information. In the face of an increasingly complex and volatile financial environment, it is necessary for commercial banks to enhance the professionalism and diversity of independent directors and strengthen the ability of independent directors to perform their duties. Independent directors should shoulder the responsibility of identifying risks and proposing countermeasures and supervising the board of directors and management for climate information disclosure. The following hypothesis is proposed:
Hypothesis 6 (H6). The proportion of independent directors is positively related to corporate climate information disclosure.
3.7. Board Size
The larger the board of directors, the more likely it is that a dedicated person or a special committee will be assigned to be responsible for operations related to environmental or climate information disclosure, which will help the enterprise to carry out climate risk response work. The following hypothesis is, therefore, proposed:
Hypothesis 7 (H7). Board size is positively related to corporate climate information disclosure.
3.8. Shareholding of Institutional Investors
Institutional investors who hold a large number of shares in a company can even mobilize other shareholders to make requests to management to disclose climate information. In terms of expertise, institutional investors tend to have a deeper understanding of climate investment. In terms of tolerance for climate risks in their portfolios, institutional investors are much less tolerant than ordinary investors. In terms of motivation, institutional shareholders are generally significantly higher than ordinary investors, who are more interested in climate risk disclosure and subsequent risk response by companies. The following hypothesis is, therefore, proposed:
Hypothesis 8 (H8). The quality of climate information disclosure of companies with a higher proportion of institutional shareholding is higher than that of companies with a lower proportion of institutional shareholding.
7. Conclusions
The climate information disclosure of A-share-listed banks started late and the overall level is low. All four primary indicators under the integrity dimension have scores below the international average. However, it shows a rising trend year by year, and the quality of disclosure improved significantly in 2021. Climate information disclosure performs poorly in completeness and consistency, moderately well in the three dimensions of comparability, reliability and green finance and excels in timeliness. Among the evaluation indicators, the disclosure rate of quantitative indicators significantly lags behind that of qualitative indicators. The disclosure caliber and selection of indicators are not uniform, so the reliability still needs to be improved. The main reason behind the result is that China does not yet have a mandatory climate information disclosure policy.
The empirical results on the factors influencing the quality of climate information disclosure found that enterprise size, dual listing and board size had a significant positive contribution to the quality of climate information disclosure of A-share-listed banks. The shareholding ratio of institutional investors was negatively related to the quality of climate information disclosure. ROA, annual revenue growth rate and proportion of independent directors had no significant effect on climate information disclosure.
This suggests that the size of the firm, the disclosure policy and corporate governance all contribute to the quality of the firm’s climate information disclosure to varying degrees. Institutional investors, however, are not motivated to participate in climate information disclosure and do not sufficiently consider climate information disclosure in their investment decisions.
Limited by the late start in climate information disclosure in China, fewer companies conduct climate information disclosure, not to mention continuous disclosure for years. In this paper, we have selected listed banks with good quality of sample data but limited in terms of time series length. This paper’s climate information disclosure quality evaluation system only targets A-share-listed banks. Although the internal validity of the multiple regression model is ensured, the sample diversity is limited and can be subsequently extended to other industries.
In terms of the selection of determining factors, we mainly consider important firm characteristics, covering financial attributes, ownership, governance structure, dual listing and institutional investors. We do not consider external variables, such as policy and public monitoring. We do not test carbon performance as an influencing factor because data on CO2 emissions in Scope 1 and 2 are insufficient and the caliber of disclosure is inconsistent.
8. Suggestions
8.1. For Policymakers and Regulators
Benchmark with international mainstream climate disclosure standards and improve disclosure completeness as soon as possible. Considering that there is currently no localized disclosure framework for climate information disclosure, it is recommended that climate authorities, such as the Ministry of Ecology and Environment, in conjunction with the Securities and Futures Commission, should learn from mainstream information disclosure frameworks, such as TCFD and CDP. To unify statistical caliber, accounting standards and disclosure frameworks as far as possible is the first priority so that the comparability and consistency of climate information can be improved. Further, supplement the existing climate information disclosure framework and achieve compliance with industry characteristics. Promote pilot climate information disclosure by industries and enterprises, and explore local practices of the climate information disclosure framework in practice.
Improve climate information disclosure requirements. Considering the banking industry’s dual role in climate information disclosure, indicators such as carbon emissions, emission reduction targets and carbon performance of green finance should gradually transition from encouraging disclosure to mandating disclosure. As China’s industry is currently in the process of transitioning to a low-carbon economy and the share of clean technology revenue has not yet taken off, the government should encourage banks to make disclosures on the share of fossil fuel revenue and the share of clean energy revenue. Encourage companies to make Scope 3 carbon disclosure and accounting for the full life cycle carbon footprint of their products, on top of Scope 1 and 2 carbon emissions.
Establish uniform accounting standards. Considering that the reliability of disclosure and the disclosure rate of quantitative indicators by listed banks in China still need to be improved, it is recommended that the construction of a greenhouse gas statistics and accounting system be accelerated. Unifying and standardizing carbon accounting methods and providing technical support and relevant training for quantitative disclosure are also urgent.
8.2. For Banks
Firstly, bank boards and management should be fully aware of the significant impact and opportunities of physical and transformation risks under climate change on the company’s credit business and develop strategies accordingly, integrating consideration of climate factors into daily business processes. In response to the needs of relevant stakeholders, the board of directors should establish a green finance committee and a climate risk committee to regularly review corporate climate information disclosure and efforts related to risk and opportunity. What is more, banks should proactively raise awareness of social responsibility, enhance the board’s climate governance capabilities, actively participate in climate-governance-related activities and training and make a statement in the annual report or sustainability report. Bank boards should select and recruit independent directors with climate risk management capabilities.
Secondly, the bank board must take the initiative to benchmark the TCFD disclosure framework and further improve the quality of climate information disclosure. Banks should actively examine climate risk exposures and loans to the polluting industries and conduct stress tests under different climate scenarios to ensure that the remaining liquidity can cope with losses and defaults arising from climate risks. Efforts are needed to promote the development of green credit and green bonds for climate-friendly business and ensure that financial instruments for carbon emissions reduction are put into practice. The management should clarify and unify the statistical caliber of climate information disclosure and promote the statistical accounting of Scope 1/2’s CO2 emissions, clean energy share and carbon emissions intensity, as well as the accounting of carbon performance generated by green finance. On top of this, undertake efforts to learn how to account Scope 3’s CO2 emissions.
Before banks are ready to set carbon targets, their own credit structure and climate risk management capabilities should be well evaluated. National and local policies should be considered as it pertains to a scientific and reasonable target. After this, carry out target decomposition and set phased assessment. Banks need to engage a professional carbon accounting agency to carry out verification of disclosure.