ESG in Taiwan: a new dawn or just ‘flowers in the mirror’?

With an overhaul of the Climate Change Response Act (CCRA), in which the pledge of net zero by 2050 was codified into law, 2024 marks the dawn of a renewed climate change governance regime in Taiwan.

This more stringent regulatory regime galvanised the ESG requirements for corporations, and led to the establishment of a comprehensive sustainability disclosure and reporting system. However, while the sustainability disclosure and reporting system has been enhanced, more challenges lie ahead. These include a lack of clarity on the legal consequences of false misrepresentation or over-commitment by corporations in their sustainability reports (also known as ESG reports), how to ensure integrity by aligning corporations' ESG commitments with their actions, and accountability in a broader sense of corporate human rights and due diligence obligations.

Against this backdrop, this article provides an overview of the ESG policy initiatives that provided the impetus for the current sustainability disclosure and reporting regime in Taiwan, and its key features. The major legal challenges in respect of ESG that have been hotly discussed in Taiwan will also be addressed.

Enshrined in Article 1 of the Company Act, corporate social responsibility (CSR) has long been a normative foundation of corporate governance in Taiwan. While CSR still plays a foundational role, the government realised that reinforcement is needed given the rise of the ESG phenomenon associated with cross-border investment and global supply chains, particularly concerning climate change and the pandemic.

In this light, the Financial Supervisory Commission (FSC) and the Securities and Futures Bureau launched Corporate Governance 3.0 – Sustainable Development Roadmap (Corporate Governance 3.0) in August 2020 to recognise such a need.

Corporate Governance 3.0 became the main policy architecture of Taiwan's sustainability disclosure and reporting regime. In particular, it:

• Transformed listed companies' reporting obligation through an aggressive proposal to rename the reporting regime from "CSR reports" to "ESG reports";

• Incorporated the Task Force on Climate-Related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB) frameworks into the statutory reporting standards;

• Expanded the scope of companies subject to the ESG reporting obligation; and

• Strengthened the third-party assurance requirement and the corporate governance evaluation mechanism.

To align with the industry-oriented, volume-based greenhouse gas (GHG) emissions accounting, registration, and verification requirements under the CCRA, the FSC announced the Sustainable Development Guidemap for TWSE- and TPEx-Listed Companies (the Sustainable Development Roadmap) in March 2022, which lays out a concrete timeline for listed companies' disclosure of their GHG emissions.

According to the Sustainable Development Roadmap, listed companies are required to complete the Scope 1 and Scope 2 emissions accounting and verification in phases from 2023 to 2029, and companies with paid-in capital of TWD 10 billion or more and those that fall within the categories of the steel industry and the cement industry are in the first priority phase to embark on such work. Following the first priority phase, companies with paid-in capital of TWD 5 billion to 10 billion, companies with paid-in capital of TWD 5 billion or less, and consolidated subsidiaries of companies with paid-in capital of NT$5 billion or less are in the second to fourth phase to complete the emissions accounting and verification, respectively.

The Sustainable Development Roadmap was incorporated into Taiwan’s Pathway to Net-Zero Emissions in 2050 (the 2050 Net Zero Pathway), the policy guidelines at the top of the climate governance pyramid, as the policy initiative for sustainable development and finance. Overall, it is expected that the Sustainable Development Roadmap can effectively bridge the GHG emissions disclosure requirements under the CCRA and the ESG reporting obligations, and further improve the authenticity and credibility of climate-related disclosure in listed companies' ESG reports.

Further to Corporate Governance 3.0 and the Sustainable Development Roadmap, the FSC announced Sustainable Development Action Plans for TWSE- and TPEx-Listed Companies (the Sustainable Development Action Plan) in March 2023, which reveal the details of what policies are expected to be deployed to help listed companies to achieve the sustainable development goals and deepen their ESG commitments.

Among an affluence of policies, the Sustainable Development Action Plan focuses on corporations' sustainability disclosure and reporting. These include:

• Requesting listed companies to disclose their mid- and long-term GHG emissions reduction goals and strategies;

• Encouraging listed companies to disclose their Scope 3 emissions;

• Carrying out research on the adoption of the freshly announced International Sustainability Standards Board (ISSB) reporting framework (i.e., International Financial Reporting Standards S1 and S2); and

• Expanding the scope of sustainability disclosure (including updating the reporting requirements of annual reports, expanding the scope of companies subject to the submission of ESG reports, and incorporating the SASB framework into the reporting standards).

The FSC also emphasises in the Sustainable Development Action Plan the need to improve the quality of information disclosed by listed companies, which the FSC suggested could be done by expanding the scope of companies whose ESG reports are subject to third-party assurance, strengthening the regulator's review and recommendation mechanisms for ESG reports, and rigorous regulation of institutions providing assurance services. In addition to the quality of reporting, transparency is also highlighted in the Sustainable Development Action Plan (such as allowing ESG reports to be publicly available, setting up an ESG database).

In line with the global trend calling for stronger regulation to deter greenwashing, the Sustainable Development Action Plan signals that more regulatory measures are likely to be introduced by the Taiwanese regulators within the ESG domain.

On the financial sector front, the FSC announced the Green Finance Action Plan 3.0 in September 2022 to establish a foundation for promoting the effective operation of green and sustainable financial markets.

The Green Finance Action Plan 3.0 recognises that the promotion of green financing is confronted with the challenges of:

• A lack of accurate GHG emissions information;

• A gap in the resources and capacity between large and small financial institutions;

• Limited access to climate and ESG data;

• Ambiguity and vagueness of the definition of ‘green’ and ‘sustainable’; and

• A scarcity of professionals.

In response to these challenges, the Green Finance Action Plan 3.0 highlights that an ESG ecosystem will be nourished by enhancing collaboration between financial institutions, and consolidated ESG platforms will be established and made available to the public.

For the measures pertaining to sustainability disclosure, the FSC proposed in the Green Finance Action Plan 3.0 that financial institutions will be required to conduct Scope 1 and Scope 2 emissions accounting and verification, establish climate risk monitoring systems, and produce climate-related risk management and assessment reports. In addition to Scope 1 and Scope 2 emissions, requirements on the accounting and verification of Scope 3 emissions arising from financial institutions' investment and financing portfolios are also considered in the Green Finance Action Plan 3.0 as a long-term policy.

The current sustainability disclosure and reporting regime in Taiwan derived from the above ESG policy initiatives is underpinned by two major regulatory pillars:

• The regulations pertaining to ESG reports; and

• The regulations pertaining to annual reports and public information.

These regulations govern listed companies and public companies only, meaning that SMEs – including start-ups, which account for approximately 98% of the total number of businesses in Taiwan (based on the statistics of 2023) – are not subject to mandatory sustainability disclosure or reporting.

The Taiwan Stock Exchange Corporation Rules Governing the Preparation and Filing of Sustainability Reports by TWSE Listed Companies (the TWSE ESG Reports Regulations) serves as the key regulatory framework governing listed companies' non-financial/ESG reporting, which has undergone major amendments in 2022 and 2024 in response to the evolving policy landscape.

Under the TWSE ESG Reports Regulations, three types of listed companies are required to prepare and submit ESG reports:

1. Listed companies that fall with the categories of the food industry, the chemical industry, or the financial and insurance sectors;

2. Listed companies whose operating income in the last fiscal year is no less than 50% derived from food and beverage businesses; and

3. Listed companies that do not fall within item (i) or (ii) but with paid-in capital of TWD 2 billion or more (listed companies with paid-in capital of less than TWD 2 billion are granted a grace period and are not required to submit ESG reports until 2025).

Listed companies should prepare their ESG reports on the basis of the Global Reporting Initiative and SASB frameworks. Furthermore, listed companies that fall within items (1) or (2) above, as well as those with paid-in capital of more than TWD 2 billion and that fall within certain industry categories (e.g., cement, plastics, iron and steel, oil, electricity and gas, and semiconductors) must strengthen their sustainability disclosure metrics based on their respective industry in accordance with the lists of enhanced metrics set forth under the TWSE ESG Reports Regulations covering quantitative and qualitative disclosures.

In addition to the sustainability disclosure, listed companies are required to disclose climate-related information in a special chapter of their ESG reports, including their GHG emissions accounting results, as well as their GHG emissions reduction goals, strategies, and action plans. A list of required climate-related information, which was made by reference to the TCFD framework, is attached to the TWSE ESG Reports Regulations. All ESG reports are subject to an assurance requirement.

The ESG reporting regime under the TWSE ESG Reports Regulations was followed by similar regulations governing securities firms, futures commission merchants, and securities investment and trust consulting firms.

With the ISSB's Sustainability Disclosure Standards hitting the road in June 2023, the FSC announced in July 2023 that it plans to incorporate the new ISSB standards into the sustainability reporting standards applicable to listed companies.

The FSC is conducting a compatibility analysis and plans to press ahead with the implantation of ISSB standards in phases from 2027. Although adopting the ISSB standards will allow the sustainability disclosure and reporting regime in Taiwan to be geared to the international standards, an adaptation period for listed companies is still needed to ensure a smooth transition.

Similar to the TWSE ESG Reports Regulations, the Regulations Governing Information to be Published in Annual Reports of Public Companies (the Annual Report Regulations) were subject to an amendment in November 2022 that aimed to enhance the sustainability reporting and climate-related disclosure requirements for annual reports.

Under the Annual Report Regulations, public companies are required to disclose in their annual reports the sustainable development implementation of the preceding year and the difference between their actual implementation and the requirements under the Code of Practice for Sustainable Development of Listed Companies.

A list of required disclosures attached to the Annual Report Regulations lays out 15 ESG topics and more than 20 questionnaires that public companies should include in their annual reports. Public companies that are also listed companies must disclose climate-related information in their annual reports in accordance with the TWSE ESG Reports Regulations if a disclosure threshold under the TWSE ESG Reports Regulations is met.

The information contained in the annual reports of listed companies will be posted on the Market Observation Post System and become publicly available information.

Aside from the mandatory requirements, there are also soft laws that play an important role in enhancing the overall sustainability disclosure and reporting regime. These include the Guidelines of Climate-Related Financial Disclosure for Domestic Banking Institutions and the Guidelines of Climate-Related Financial Disclosure for Insurance Institutions. These guidelines require domestic financial institutions to identify, disclose, and incorporate climate-related financial risks into their governance and risk management planning.

Another relevant non-binding guideline is the Taiwan taxonomy for sustainability activities; namely, the Guideline for the Determination of Sustainable Economic Activities (the Sustainable Economic Activities Guidelines) promulgated by the FSC in December 2022.

Under the Sustainable Economic Activities Guidelines, the FSC lays out the general principles for 16 industries regarding how to determine whether a company's business and operations can be considered green or sustainable, and reiterates 13 types of "forward-looking economic activities" identified in the 2050 Net Zero Pathway as frontier markets that are critical to achieving net zero by 2050.

The FSC recommended that the Sustainable Economic Activities Guidelines should serve as a valuable reference for companies when they prepare ESG reports, annual reports, and disclose the relevant investor-facing information on their websites.

While a comprehensive sustainability disclosure and reporting regime has been gradually established, an accountability regime in response to misleading, deceptive descriptions, and over-commitment by corporations in their sustainability disclosure (especially the qualitative descriptions), as well as a lack of action, is still lacking. This is the major loophole that warrants stronger regulation.

Within academic circles, a ‘new wine in old bottle’ approach has been developed; under which, scholars have been exploring the possibility of using the liability regime under the Securities and Exchange Act (SEA) to capture greenwashing. Under this approach, misleading, deceptive, or over-committed statements in listed companies' ESG reports are likely to constitute a security fraud or misrepresentation of financial or business documents, and hence a violation of the SEA, and criminal and/or civil liabilities might be triggered. However, this approach remains to be tested in court.

Outside the SEA, non-profit organisations have been advocating the establishment of a new corporate due diligence law focusing on the implementation of corporate ESG commitments and mitigations when the ESG commitments are falling short. This approach was developed based on the concept of corporate human rights obligations under the broader human rights context, but whether it fits the legislators' appetite remains to be seen.

ESG still dominates the headlines of major media outlets in Taiwan, and sustainability disclosure is at the crux of it. While a comprehensive sustainability disclosure and reporting regime is now in place, an accountability regime concerning greenwashing needs to be established soon to ensure that Taiwan’s approach to ESG is not ‘flowers in the mirror’ but a real commitment to be put into action.