China has quickly become the second-largest issuer of green bonds and a major growth driver of the global green bond issuance. Green finance, or sustainable finance, has gained increasing interest in China in recent years, thanks partly to its determination to diverge from the economic growth path based considerably on resource-intensive industries that pollute, and partly to the increasing exposure of international investors to China’s capital markets.
CTG's offshore wind power project in Fujian province [Photo courtesy of CTG]
The growth of green finance is being accelerated by state policies and regulations. China has issued a series of guidelines in recent years to boost financing into projects and technologies that can drive sustainable economic growth or solve pollution, with incentives including interest rate subsidies and tax deductions. In 2016 Chinese authorities released a directive aiming to build a "green financial ecosystem", encouraging the development of third-party services in such areas as credit rating, ESG data collection and data analysis, ESG reporting and management, and project evaluation and monitoring, as well as encouraging the mobilization of financial resources.
Since the first issuances of the RMB-dominated green bond and “low-carbon” bond in 2014, China’s green finance market has boomed. In 2018 China ranked second in internationally-aligned green bond issuance, accounting for 18% of the global issuance, according to the Climate Bonds Initiative. Some five provinces launched green finance pilot zones in 2017. Many local governments have established green development funds. There have been hundreds of green funds. ESG indexes are increasingly launching stock exchanges in mainland China and Hong Kong.
But the development of ESG evaluations is falling behind the sustainable investing surge, lacking standards in ESG disclosure and ESG data, given such a short history of China’s sustainable finance market, low awareness of ESG among Chinese corporations, and the very nature of ESG information.
So far only heavy polluting companies listed on local stock markets are mandated to disclose environmental information. Voluntarily reported ESG information is very limited. Less than 25% of companies listed on the local stock markets published reports on social responsibility, environmental information or corporate governance in 2017. (link in Chinese) The oldest ESG data and services providers only have several years of historical data.
The quality of the self-reported data is relatively poor due to the lack of standardization and transparency. There’s no national standards or regulation on ESG disclosure yet. The two local stock markets only compiled guidelines for voluntary ESG disclosure in 2018. It is reported that Chinese financial regulators are working on a framework for mandatory ESG disclosure and all domestically listed companies are expected to release ESG reports based on new requirements beginning 2020. (link in Chinese)
With the obvious demand for ESG evaluations and management services, a number of startups have tapped into the ESG data and analysis sector, especially those in artificial intelligence or other disruptive technologies, aiming to solve the data shortage problem through alternative data, improvement of data analysis capabilities, or the addition of new services to the sector. Existing services in green bond ratings or ESG analysis are also adopting artificial intelligence and related technologies to expand their data sources and develop more intelligent services.
Natural language processing is applied to automatically extract ESG information online from webpages of news media, regulators or law enforcement, apart from online content published by companies. Automated systems are able to significantly accelerate scaling up of ESG data collection and analysis. Newly emerged data providers have quickly built a database that covers almost all companies that are listed in the mainland China and are expanding to cover Chinese companies that are listed in Hong Kong or the U.S. Some plan to cover all the public and privately held Chinese companies in the near future.
Data availability aside, some tech developers have also built models to automatically generate ESG ratings or reports, or provide real-time or high-frequency risk monitoring.
EnvAI ESG Data Analysis Platform
The existing ESG services providers apply new digital technologies to digitalize their services and add new capabilities to their existing offerings. For instance, EnvAI, AI-assisted software developed by a subsidiary of China Energy Conservation and Environmental Protection Group, helps enterprises listed in mainland China and Hong Kong with sustainability management and reporting with a focus on carbon footprint. Syntao Green Finance, founded in 2009 as one of the earliest entrants, has integrated AI capabilities into their existing data and evaluation services.
Ping An launched Ping An AI-ESG, to further enhance our ESG management.
Some major Chinese fintech developers are more ambitious in this area. Ping An, the Chinese financial conglomerate, has developed a “big data-based intelligent engine” for a range of services in the green finance market, such as bond issuance, credit reporting, insurance, and finance lease. The company claims that the engine, called Ping An AI-ESG, have applied the latest technological advances in artificial intelligence, big data, cloud computing, internet-of-things and blockchain. It uses a wide variety of data sources, including remote sensing data, information from internet-of-things sensors, public opinion monitors, etc, and monitors various types of information, environmental assessment, public sentiment, news media, etc.
The engine has been adopted by a few local governments to verify green bond projects and monitor risks. With its help, more than 40 green projects raised a total of over RMB 29.5 billion in green financing in Chuzhou, a city in Southeast China. (link in Chinese)
Almost all China-based ESG data and services providers have customized their offerings for public Chinese companies, mainly being traded in mainland China or Hong Kong. Some are expanding to cover Chinese companies listed on foreign stock changes or privately held companies.
Unlike the aggressive technology developers who are trying to automate ESG data collection and analysis processes, existing ESG data and services providers think AI alone may miss out some important information. For instance, Syntao Green Finance thinks its research analyst team is still considerably relevant.
China’s tech-driven ESG data and analysis market is indeed still at an early stage. It is believed that the quality of ESG data will be boosted after the release of national ESG disclosure standards and the mandatory disclosure rule. ESG awareness will continue to grow among Chinese enterprises along with the increasing interest from international investors and in the long run, China’s transition towards a sustainable path. With better ESG data, AI and other technologies, the ESG trend will continue to be on an upward trajectory.