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Auto in Energy Transition | MioTech ESG Analysis - BYD (Q2 2021)

MioTech ESG Team2021-09-25

MioTech ESG Team2021-09-25

Type: ESG Performance Analysis
Company: BYD Company (1211:HK,002594:CH)
Industry: Auto (HK)
MioTech Rating: BBB (66.85/100)
MioTech ESG Ranking (Auto HK): 3 


Key Takeaways
●    MioTech has awarded Chinese EV maker BYD with a BBB rating and a score of 66.85 for its ESG performance in the second quarter of 2021.
●    BYD continued its Greater China-wide outperformance in ESG while its ranking within MioTech's Hang Seng Auto Industry fell by two places.
●    BYD has achieved balance between its environmental (E), social (S) and governance (G) performance without significantly outperforming or underperforming in any one aspect.
●    BYD released thorough numerical environmental disclosures, but lagged in narrative disclosures, particularly in its recognition and adaptation of climate risks.
●    BYD maintained decent performance in “social”, with its labor management, employee engagement, and diversity improving from the previous year. Meanwhile, its supplier diversity declined and negative news regarding BYD’s product quality worsened product responsibility risk.
●    BYD saw setbacks in its performance in “governance”. Of note, employee bribery and corruption scandals in the second quarter raised concerns.

 

Reporting and Transparency

 

BYD has an exceptional record in making sustainability disclosures (CSR or ESG reports). According to its official website, the company has consistently published annual CSR reports since 2010; for reference, top-ranking industry peer Geely’s (0175:HK) earliest available CSR report dates back to 2015 and second-ranked Yadea's (1585:HK) ESG reports are accessible via HKEX, the earliest of which is from 2016.

 

Reporting Standards

BYD's latest available sustainability disclosure is its 2020 CSR Report. The EV manufacturer based its report on HKEX's “ESG Reporting Guide”, Global Reporting Initiative's (GRI) “G4 Sustainability Reporting Guidelines”, and China’s CASS-CSR guidelines.

 

Covered Topics

 

Figure 1 The Covered Topics in BYD’s 2020 CSR Report and Content Proportion (by % of total pages)

Source: MioTech

 

BYD spent 56% of its 2020 CSR on its social performance, while environmental and governance performance respectively comprised 26% and 18%. The two environmental topics BYD paid most attention to were Environmental Management (20.28%) and Pollutants (2.36%); the most notable social topics were Product Responsibility (19.81%) and Supply Chain Management (9.43%), and top governance topics include ESG Management (7.55%) and Business Ethics (6.13%). 

As evaluated by MioTech, it is evident BYD prioritised more material topics in this industry in its CSR report. Some of the more important topics like Waste and GHG emissions were not discussed extensively, but key value were disclosed. MioTech deemed climate change as a highly material ESG topic faced by BYD. Though, BYD did not detail its recognition of climate risks and opportunities and its actions in response to them, nor did it set targets to reduce GHG emissions and energy consumption. Electrification of vehicles is a pivotal step to a carbon-neutral future and BYD, as a major EV manufacturer, should publicise its action plan towards climate change risks and opportunities in the future.

 

Climate Change (2021Q2 Score: 59.69, Average)

 

MioTech considers the topics of GHG Emissions and Climate Risk and Opportunities highly material to BYD, and the topic of Energy Consumption moderately material. In the second quarter, BYD’s performance in these three topics were in line with the industry average.

In 2020, BYD caused 4,145,179.86 tonnes CO2e of scope 1 and 2 emissions, leading to a GHG intensity of 27.01 tonnes CO2e per million revenue Yuan. Of the 10 auto companies that disclosed 2020 GHG emissions (in MioTech's Industry Classification System MICS), BYD caused the most emissions and had the highest GHG intensity in 2020. The median volume of scope 1 and 2 emissions of the 10 companies was 897,669.31 tonnes CO2e and the median GHG intensity was 27.01 tonnes CO2e per million revenue Yuan.

 

Figure 2 BYD 2020 Emissions and Intensity

Source: MioTech

 

In 2020, BYD consumed 18,493,941.88 GJs of energy, with an energy intensity of 120.51 GJs per million revenue Yuan. Of the 16 auto companies (in MICS) that disclosed their 2020 energy consumption, BYD was the second largest energy consumer and had the fourth highest energy intensity in 2020. The median energy consumption of the 16 companies was 3,387,346.03 GJs and the median energy intensity was 61.09 GJs per million revenue Yuan.

 

Figure 3 BYD Energy Consumption and Intensity

Source: MioTech

 

BYD did not publicize its GHG emission and energy consumption targets or it recognition of climate risks and opportunities. For comparison, in 2019, 2.63% of auto companies in Greater China set targets for GHG emission and energy consumption, and 3.95% of the auto companies released their actions towards climate risks and opportunities.

As one of the largest EV manufacturers in China, BYD has made great strides in promoting EVs to accelerate the country's low-carbon transition. Historical sales reports show that almost half of the cars sold by BYD in the past three years were new energy vehicles. Due to recent policy pushes such as limited road access and license restrictions, the EV market reached a record high this year. According to the company’s latest report, from January to August 2021, BYD sold 270,570 EVs and 112,128 ICE vehicles, meaning EVs accounted for up to 70.70%.

 

Figure 4 BYD EV and ICE Vehicle Sales

Souce: BYD Company, MioTech

 

Environmental Ex-Climate Change (2021Q2 Score: 66.57, Average)

 

MioTech considers Environmental Management, Pollutants, and Waste environmental topics of high materiality to BYD. In the second quarter, BYD’s performance in Environmental Management was above the industry average and performance in Pollutants and Waste were in line with the industry average.

 

Environmental Management (2021Q2 Score: 94.49, Leading)

BYD had outstanding performance in various environmental management factors. The company obtained mainstream environmental management certifications including ISO 14001. BYD has an environmental impact assessment performed on every new project and the company invested 450 million Yuan in environment protection projects in 2020.

According to its 2020 CSR Report, the company launched the "Blade Battery", a newer and safer lithium iron phosphate battery which has been installed in many EV models since July 2020.

 

Pollutants (2021Q2 Score: 58.07, Average)
BYD provided relatively complete data on its pollution: on air pollution, the company caused 87.11 tonnes of volatile organic compounds (VOCs) in 2020, down by 3.21% YoY; on water pollution, the company emitted 33.85 tonnes of ammoniacal nitrogen (NH3-N) in 2020, down by 12.08%, and 468.7 tonnes of COD, down by 19.06% YoY. BYD made significant achievements in containing pollution in 2020 from the previous year.

 

Figure 5 BYD’s Pollutants Discharge in 2020 and 2019

Source: BYD Company, MioTech

 

According to its 2020 CSR Report, BYD discharged 4,777,086.138 standard billion cubic meters of waste gas, down by 3.27% YoY. In 2020, the company carried out low-nitrogen furnace transformations in 6 regions to reduce nitrogen in waste gas emissions.

 

Waste (2021Q2 Score: 74.71, Average)

BYD had mixed performance in the topic of waste in 2020. In 2020, the company caused 364,520.61 tonnes of waste, up by 17.82%, which was primarily due to the 24.17% increase in non-hazardous waste to 335,435.15 tonnes, while its hazardous wastes dropped by 25.88% to 29,085.46 tonnes. This also indicates that the ratio of hazardous waste to total waste dropped from 12.68% in 2019 to 7.98% in 2020.

Overall, BYD had a well-established environmental management system. The company properly disclosed its environmental data against the standards it chose to comply with and committed to further reducing its environmental impacts. However, like climate change topics, no targets or policies were released to make this process quantifiable.

 

Social (2021Q2 Score: 67.78, Average)

 

MioTech considers Supply Chain Management, Labor Management, Product Responsibility and Employee Engagement and Diversity social topics of high materiality to BYD. In the second quarter, BYD’s performance in Supply Chain Management was above industry average, and performance in Labor Management, Product Responsibility and Employee Engagement and Diversity were in line with the industry average.

 

Supply Chain Management (2021Q2 Score: 80.14, Leading)

BYD had good measures of supply chain management, including requiring new suppliers to fill a corporate social responsibility survey form and imposing clear requirements on suppliers regarding labor management, occupational health & safety, environmental management, anti-bribery and anti-corruption.

According to the MioTech Risk Monitor, in the second quarter, no negative environmental events were identified with BYD’s suppliers, while respectively 4 and 63 negative news reports were identified on social and governance events. Of the reports on negative social events, 3 were safety-related incidents and of the reports on negative governance events, 36 were related to company executives of BYD's suppliers.

MioTech also found that BYD's supplier concentration (the ratio of purchases from the five largest suppliers to total purchase) increased. In 2018, the ratio was 14.61% before growing to 27.52% in 2020; the industry average, on the other hand, fell from 35.61% in 2018 to 33.84% in 2020.

 

Figure 6 Supplier Concentration at BYD (Ratio of the Purchase from the Five Largest Purchasers)

Source: MioTech

 

Labor Management (2021Q2 Score: 62.94, Average)

BYD made full commitments to compliance issues regarding recruitment and employment, including prohibition of child labor and forced labor, non-discrimination policies, and regulations regarding fair pay and work hours.

In 2020, the average compensation received by every employee at BYD rose to 102,492.60 Yuan from 90,385.69 Yuan in 2019, while the average insurance and welfare declined to 9,291.35 Yuan from 9,633.77 Yuan. The average expenses on the major types of insurance all fell in 2020.

 

Figure 7 Average Compensation and Insurance & Welfare Per Employee at BYD (Yuan)

Source: MioTech

 

Product Responsibility (2021Q2 Score: 66.73, Average)

According to its 2020 CSR Report, BYD established a sophisticated product quality management system and obtained major certifications ISO 9001 and IAFT 16949.

On customer satisfaction management, BYD mainly communicated with customers through distant means and improved its service based on customer feedback. On recall management and complaint management, BYD set up procedures on recall control and complaint processing.

In 2020, BYD witnessed 1 product safety & quality issue and 2 complaints. According to the MioTech Risk Monitor, 10 news reports were identified on negative product responsibility events in the second quarter. Of the reports, 3 were safety-related incidents, 3 were related to complaints and litigations, and 4 were related to product safety & quality.

 

Employee Engagement and Diversity (2021Q2 Score: 71.11, Average)

At the end of 2020, BYD had 224, 280 employees, of which 34% were female and 66% were male; the ratio of female employees rose slightly from 33% in 2019.

The company offered a series of training programs for its employees in various departments and newly-hired employees. According to company disclosures, BYD offered 12 hours of technical skill training for its employees, but it did not disclose the average training hours per employee.

Employee productivity rose significantly in 2020, with revenue per employee up by 25.26% YoY to 698, 224.05 Yuan and profit per employee up by 167.97% to 18, 879.38 Yuan. Noticeably, the increments were not steady as the two indicators fell steeply in 2019 compared to 2018.

 

Figure 8 Revenue and Profit Per Employee at BYD

Source: MioTech

 

Governance (2021Q2 Score: 65.63, Average)

 

MioTech considers Business Ethics, ESG Management and Corporate Governance highly material governance topics to BYD. In the second quarter, BYD’s performance in Business Ethics was above industry average and performance in ESG Management and Corporate Governance were in line with industry average.

 

Business Ethics (2021Q2 Score: 83.12, Leading)

BYD paid great attention to compliance with anti-corruption and anti-bribery measures. It formulated a company-wide code of conduct and a penalties mechanism. Furthermore, it implemented whistleblower protection and reward rules, which are also effective on BYD’s partners.

In 2020, BYD witnessed 5 negative executive incidents and 6 disclosure violations. According to the MioTech Risk Monitor, in the second quarter, respectively 6 and 32 news reports were identified on negative executive incidents and corruption and bribery; this marked a considerable rise compared to previous quarters. The major reason for this is that BYD announced on 16 April that it had identified several corruption and bribery events concerning 7 employees.

 

ESG Management (2021Q2 Score: 60.27, Average)

ESG management was the most attended governance topic in BYD’s 2020 CSR Report.

The positive factors of the ESG management at BYD include the high quality of disclosures with reference to widely-acknowledged standards published by HKEX and GRI, and that BYD stays in close communication with its stakeholders over ESG issues.

Weaknesses were also seen, including that the company had not set up a board-level ESG committee and the company had not proclaimed that its disclosed ESG data were verified by a third-party institution.

 

Corporate Governance (2021Q2 Score: 47.70, Average)

BYD’s board has 6 directors, with no female directors and 3 independent directors. It is worth noting that BYD used to have 1 female director before it replaced all 3 independent directors in 2020. Therefore, the gender diversity of BYD’s board is below industry average, while an independent director ratio of 50% is above 96% of the industry peers.

BYD's board of directors has a total of 1 legal professional and 1 professor and legal professional. Professionals with expertise account for 33.33% of its board, which is 20% more than industry peers.

BYD's board of directors, board of supervisors, and senior managers have a total of 17 positions. On average, they hold 17 positions in other companies in addition to their corresponding roles at BYD Company. The person with the most external or part-time positions hold 40 positions outside BYD.

 

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