MioTech’s ESG Risk Analysis
MioTech has launched within AMI, our advanced market intelligence solution, a new online ESG risk management module through the deep integration of ESG risk and industrial chain knowledge map, to help investors visualize enterprise ESG related risks, measure the degree of risk, analyze risk exposure and monitor risk trends, and comprehensively improve the ability of enterprises to track ESG initiatives.
ESG represents three major considerations: environmental, social and corporate governance factors. It is an important consideration factor in the investment decision of socially responsible investing.
When the MSCI announced the inclusion of A-shares into its Index, ‘ESG’ became a buzzword that spread like wildfire in China overnight. Rumors started stirring that the MSCI would potentially conduct ESG evaluations on listed companies included in the index and the companies that fail to meet those standards, could be excluded from the coveted MSCI’s emerging market index.
Since the start of 2019, ESG has become a critical investment strategy, garnering substantial attention within China, especially amongst a large number of institutional investors. In particular, domestic regulatory agencies have begun to impose certain requirements on corporate governance behavior of listed companies. In April of 2019, the Asset Management Association of China issued a notice for the submission of a “Green Investment Guidelines Self-Assessment” report, requiring fund managers to conduct a green assessment report once a year and submit it to the association.
Looking at it from a global perspective, ESG data and ESG assessments have had a much earlier start in foreign countries, with data providers already equipped to provide specialized ESG related solutions or services. MSCI and Thomson Reuters have both developed their own ESG factor evaluation framework. In addition, HKEX has introduced environmental, social and governance guidelines since 2012 to enhance issuers' disclosure responsibilities in ESG.
A strong ESG profile requires companies to focus on environmental protection, fulfill social responsibilities and improve corporate government as they develop. While the impacts may not be directly reflected in the company's financial statements, it does have correlations to the sustainable development of a company. A growing number of studies have shown that enterprises with good ESG data have stronger risk-resistance abilities and tend to have long-term, stable developments, contributing to the gradual progression of ESG becoming a reference index for investment institutions.
But for China, ESG investment strategies are only just on the rise. At present, only a few companies pay attention to and provide ESG data, and the collection and evaluation of ESG data by large, traditional providers is still in its infancy. With the need for regulatory mandates looming, the available data on the market is patchy, and most of the so-called ESG scores remain algorithmic black boxes. It is this vast gap in the market that MioTech wishes to fill, to provide investors or institutions interested in ESG, with a wide and transparent coverage matched with fast updates on ESG data and related analysis.
MioTech ESG Risk Example - Environmental Fines: Industry Percentile Rank & Geographic Performance
Chinese ESG Data and its Challenges
At present, ESG data of A-share listed companies are still mainly subjected to voluntary disclosure. Statistics show that in 2018, a total of 856 A-share listed companies disclosed their annual CSR reports, an increase of 64 over the previous year, with 78 companies disclosed their social responsibility reports for the first time. By August 2019, there were 3,693 A-share listed companies, with only about a quarter of A-share listed companies choosing to voluntarily disclose ESG data. The overall disclosure ratio of A-share listed companies is still at a low level.
The biggest challenge we face is the lack of data. Compared with the data in financial statements, most ESG data we have come into contact with are scattered and discontinuous. Most data is difficult to quantify, and it is difficult to conduct historical back-measurement from the perspective of time series. Therefore, at the present, it is essential to have alternative data sources to supplement the current ESG data sources. However, the alternative data collected by environmental protection organizations and NGOs contain a lot of noisy data, which needs to be cleaned and de-duplicated many times before it can be finally used.
Secondly, there is no overall standard for ESG data in China, nor can it be completely copied from foreign ESG standards. Take for example the recent financial fraud case of Kangmei Pharmaceutical. Financial fraud is uncommon abroad and few financial institutions take it into account as corporate governance risk.
In order to solve the above problems, MioTech has developed a set of strong quantitative standards, we’ve digitized the text process, and used Natural Language Processing to conduct semantic analysis of the text. Say for example environmental penalty data, in addition to penalty amounts, we will also analyze penalty measures like halting productions, factory closures, so investors can have a comprehensive overview of all ESG risks for consideration.
MioTech ESG Risk Example - Environmental Fines: Peer Analysis & Risk Exposure
ESG Data Coverage and Reliability
At present, our ESG data coverage comprises of all A-share companies and A-share related companies, which accounts to approximately 330,000 companies in total in our database.
Our data sources include:
Corporate public reports: ESG related data included in annual social responsibility reports and daily information disclosure
Government regulatory notices: regulatory websites of relevant government departments, environmental penalty data sources such as the State Ministry of Ecology and Environment and various local environment bureaus and regulatory agencies of environmental protection ministries, such as the China Securities Regulatory Commission and other regulatory documents.
Social media news: Public reports of various traditional media and social media data including weibo WeChat
Alternative data sources: Various environmental data monitored by some environmental organizations or NGOs
MioTech ESG Risk Example - Product Quality & Safety: Industry Percentile Rank & Geographic Performance
ESG Evaluation Factors
Under the three factors of environmental risk (E), social risk (S) and corporate governance risk (G), we conduct in-depth statistics on every 1st degree indicator.
Environmental Risks: (1) Environmental protection penalty records, including the statistics of penalty amount; (2) Gas emission data statistics, such as carbon emissions data; (3) Resource consumption, including the total consumption of resources such as coal, electricity, diesel oil and water, and the year-on-year increase or decrease
Social Risks: (1) Product Recall statistics， product recall time, recalled product，related company，link to original product recall notice; (2) Labor data, including employee strikes or mass incidents such as employment discrimination
Governance Risks: Equity pledges, bankruptcy, money laundering, financial fraud, bribery, management bribery, management penalty and other corporate governance risk data
MioTech ESG Risk Example - Labor Dispute: Industry Percentile Rank & Geographic Performance
MioTech’s ESG Risk Differentiator
Most international institutions' ESG ratings only stay at the level of information disclosure, and most scoring systems for ESG are still algorithmic black boxes, and their applicability to Chinese listed enterprises needs to be further verified. At MioTech, we’re looked into the ESG rating methods of international institutions, and have made innovative adjustments based on the China market. We’ve established a scientific index system that innovatively carries out objective quantitative evaluation of ESG information, and finally converts ESG information into sustainable development performance scores that investors can easily use.
We provide a more transparent ESG platform that can clearly present all ESG data with the ability to visualize various ESG risks from multiple angles. Secondly, we combine our ESG database with our existing supply chain data and knowledge graph, to further detect hidden risks by looking at the correlation between companies. By using the industry percentile as a data standard, we help investors to view ESG risks from the perspective of an entire industry. With the help of Natural Language Processing technology, we have effectively integrated the ESG risks extracted from social media. Unlike previous ESG risks and ratings which are mostly in the form of reports after the fact, we can update ESG risks of enterprises in an efficient and timelier manner.
Future ESG Developments
We will continue to optimize the current ESG risk algorithm and analysis method, and establish a more comprehensive and transparent scoring system. From the perspective of data coverage, our goal is to cover more Chinese companies, including all listed non-listed companies.