ESG 101
All you need to know about ESG

What is ESG?

ESG is an acronym for Environmental, Social, and Governance which describes what is characterized as a responsible, ethical, sustainable investment. 

It’s an investment concept and enterprise performance evaluation standard that focuses on environmental, social and governance considerations, in tandem with financial factors in the investment decision-making and risk management process.

International ESG Evaluation Standards

 

According to the guidelines of the three international organizations (ISO26000 Social Responsibility, SASB, GRI Sustainability Reporting), and the disclosures of ESG ratings by five global ESG rating companies (MSCI, Dow Jones, Thomson Reuters, British FTSE, Morning Star), as well as the ESG investment guidelines issued by 12 international exchanges, the factors that need to be considered in the current mainstream ESG evaluation system include:

 

Environmental factors to determine a company’s stewardship of the environment with considerations such as carbon and greenhouse gas emissions, environmental policies, waste pollution and management policies, energy use/consumption, natural resource (especially water resources) use and management policies, biodiversity, compliance.

 

Social factors look at how a company treats people in terms of diversity and gender equality policies, human rights policies and violations, community relations, health and safety, management training, labor standards, product liability, compliance.

 

Governance risks look into the way companies are run in terms of corporate governance, corruption and bribery policy, unfair competition, risk management, tax transparency, fair labor practices, ethical code of conduct, executive compensation.

 

How far along is ESG being integrated in China's investment field?

 

Since 2019, ESG considerations have been an important investment concept. It has not only gained great social attention in China, but also encouraged the exploration and practice within a large number of institutional investors. In particular, domestic regulatory agencies have begun to impose certain guidelines and requirements on corporate governance behavior of listed companies. In April 2019, the China Securities Investment Fund Association issued a notice on the submission of a “Green Investment Self-Assessment Report", requiring fund managers to conduct a green assessment report each year and submit it to the Association. 

 

In general, ESG data and assessments were implemented early in foreign countries, and large data providers are already equipped with specialized ESG data services. Thomson Reuters MSCI have already developed their own ESG evaluation framework. In addition, HKEX has also introduced environmental, social and governance guidelines since 2012 to bolster ESG disclosure obligations. 

ESG requires enterprises to pay attention to environmental protection, fulfill social responsibility and improve corporate governance in their development. While this information is not reflected in a company's financial report, but it is related to the sustainable development of the company. More and more studies have shown that companies with good ESG data are more resistant to risks and tend to have long-term stable development. Therefore, ESG has gradually become an influential factor when it comes investment institutions’ decision-making process.

 

What are the biggest barriers to large-scale use of ESG data today?

 

At present, the ESG data of A-share listed companies are still based on 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, and 78 companies disclosed their social responsibility reports for the first time. As of August 2019, there were 3,693 A-share listed companies. This indicates that only about a quarter of A-share listed companies choose to voluntarily disclose ESG data, and the overall disclosure ratio of A-share listed companies is still at a low level.

 

One of the biggest challenges for China in applying ESG data on a large scale is the lack of data. Compared with the data in the financial report, most of the ESG data currently applied are scattered and discontinuous, and most of them are difficult to quantify and to carry out historical back-testing from a time-series perspective. Therefore, at the present stage, we need alternative data sources to supplement current ESG data sources. However, the alternative data collected by environmental protection organizations and NGOs contain mostly unstructured, unfiltered data, which needs to be cleaned and deduplicated several times before finally being able to be of use.

The second biggest challenge is the fact that there isn’t an overall standard for ESG data in China, nor can the Mainland fully adopt foreign ESG standards. For example, in the recent case of Kangmei Pharmaceutical, financial fraud is not common in foreign countries, and only a few financial institutions consider it as a corporate governance risk.

 

Problems with the international ESG evaluation system

 

Within China, ESG as an investment concept is still in its nascent stages. Currently, only a small number of companies have paid attention to and provided ESG data, and the collection and evaluation of ESG data by traditional large suppliers is still in its infancy. Despite regulatory mandates looming, the available data in the market is uneven, and most of the ESG credit scoring out in the market remain algorithmic black boxes.

 

  1. Black Box: Low levels of ESG assessment and index transparency. For example, information collection methods like assumptions, calculations, weighting, thresholds and analysis, are rarely disclosed or the degree of disclosure is insufficient. As a result, users and stakeholders cannot make a complete evaluation of their assessment and scoring results.
     

  2. The rating process is not standardized and has limited credibility. Different companies have different rating methods, and even if they evaluate the same company, the results are likely to be completely different due to different data.
     

  3. The data lacks independence and the rating results are biased. Since most of the ESG data sources at this stage are derived from a company's own disclosure, and since the focus may be different in the rating process, the final rating results may be biased.
     

What is MioTech's current coverage of ESG data on companies? What are the main data sources? How do we ensure the reliability of the data?

 

At present, we cover ESG data of all A-share companies and A-share related companies, totaling about 600,000 companies.

Data sources include:

Corporate public reports: Includes ESG related data in annual reports, social responsibility reports, and daily information disclosures.

Government regulatory information: regulatory websites of relevant government departments, sources of environmental monitoring such as the National Development and Reform Commission, the Eco-Environmental Protection Bureau, and local environmental protection departments. Various regulatory agencies, such as the Securities and Futures Commission, the Banking Regulatory Commission and other regulatory documents.

Social media news: public reports of various traditional media, as well as social media data such as Weibo and WeChat.

Alternative data sources: various environmental data monitored by some environmental organizations or NGOs.

Existing ESG data providers commonly have unstructured, dirty data. Before using this data, MioTech processes the data through multiple data cleaning and de-duplication processes and manually verifies the sample data to ensure the reliability of the data.

 

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