Between law and market: voluntary ESG disclosure as a legal counterpoint to mandatory governance in China

This article analyzes voluntary Environmental, Social, and Governance (ESG) disclosure as a complementary governance tool in Chinese listed companies from a legal analysis perspective. While most countries initially favored mandatory ESG disclosure, recent regulatory adjustments in Europe and the U.S. have revealed significant drawbacks, including rigidity, high compliance costs, and inconsistent disclosure. In China, these limitations are further complicated by a layered regulatory structure, uneven firm capacity, and the coexistence of administrative guidance, exchange self-regulation, and market-based ESG evaluation. Using soft-law governance as the dominant analytical framework, and drawing on institutional complementarity, signaling theory, the efficient market hypothesis, and policy compliance willingness as supporting mechanisms, this study argues that voluntary ESG disclosure can operate above a mandatory legal baseline. It can provide more tailored, firm-specific, and forward-looking information, improve transparency, and reduce information asymmetry for investors when supported by credible verification, reputational discipline, and market-based rewards. The article also cautions that voluntary disclosure may generate selective disclosure, symbolic compliance, and greenwashing if it is not supported by baseline mandatory rules, credible third-party assurance, and clear liability boundaries. Current voluntary disclosure in China faces challenges, including weak enforcement, vague guidance, insufficient safe-harbor protections, misaligned incentives, free-rider problems, and barriers specific to SMEs. To address these problems, the article recommends improving regulatory clarity, strengthening market-based incentives, developing effective third-party assurance, expanding safe-harbor protections, and investing in ESG capacity building.