Updated: Feb 24, 2021
ESG investing has been ever more widely recognized as the rising trend while data of this topic is considered among the cores of future competitive edges. According to Morningstar, assets under management in funds abiding by ESG principles have surpassed US$1 trillion in August 2020, and reached 1.2 trillion after Q3 with a 19% up from the previous quarter. Europe remains the main battlefield with a dominating 76.57% (2020 Q3), the US for 12.2%, while China has also been picking up its pace on this topic and considered as a hot spot for investment in the few years to come, along with the search for quality ESG data for China market.
ESG data is a collective pool consisting of ESG raw data, rating data and analytic data, covering a variety of environmental, social, and governance themes. Similar to other markets, one of the predominant China ESG data sources is the corporate self-reporting documents, including annual or quarterly financial reports, themed reports like CSR (corporate social responsibility) reports and ESG reports; another group is from regulating authorities, where regulating penalty information could be found, especially for the Environmental-pillar, from governmental online platforms, such as the Ministry of Ecology and Environment; With ever more inclusion of fintech into the data, corporate news and social media, which largely fall into the classification as alternative data, could also join into the fray. (Please refer to our previous article An overview of Alternative data in China)
ESG Data Development in China
Historically, insufficient data and poor data quality have been seen as major concerns for international investors considering ESG investments in China. This is now changing. While the government is accelerating their steps for disclosure-encouraging regulations and opening up the financial market to global investors, onshore Chinese companies have also been increasingly included in international benchmarks and making their own efforts on improving ESG performance. According to PRI, more than 60% of companies listed on the Shanghai Stock Exchange disclosed ESG data for 2018, which is a 235% increase compared with that in 2017. For CSI 300, approx. 82% of constituent companies released related ESG data and analysis as of September 2018. A more comprehensive study on CSI 300 ESG disclosure by SynTao is shown below:
Table: Growth of CSI 300 Index constituent companies voluntarily disclosure of ESG data through corporate social responsibility reports
Since no mandatory regulation of ESG disclosure has yet been in effect in the Shanghai or Shenzhen Stock Exchange, the data above reflects a voluntary disclosure situation with substantial growth from 43% to 81.7% over 10 years, suggesting a steady upward trend of ESG awareness, as a direct response to the screening pressure of foreign investors and ever pro-sustainability governmental policy trends.
Also, heavily relying on its main source - corporate self-reportings and public information, ESG data, China and global vendors alike, shares a common feature of low-frequency of updating. For instance, fundamental ESG data, which is heavily subject to annual corporate disclosure in their ESG and related reports, is on a yearly basis. Other sub-categories are reported more frequently, or on a continuous basis based on the tools used, as data could be picked up through channels like media when any concerned events occur or regulation violation data released from governmental platforms.
Available ESG data for China market
Mainstream global index providers, start including A-shares in the emerging market since 2018, covering more and more listed companies ever since. While one major concern for global institutional investors on China ESG data is their insufficient coverage, which leads to only partial inclusion of A and H share companies due to a limited selection of A/H Share companies in global indices; next to that comes “less localized”, namely, data from global vendors may work on a more international framework with less emphasis on considering factors specific to the local context.
To fill the gap, it should be wise to also consider data from local China ESG data providers. Having their intrinsic advantages as selling points, some of those local ESG data providers could present data of full coverage over A and H shares, tracing back to as far as 10 years ago.
Like their global counterparts, they are basically located in financial centers in China, like Beijing, Shanghai, Shenzhen, and Hong Kong.
Chart: Examples of China ESG data providers
Each of these providers above has its own approaches and strengths based on their perspectives and backgrounds. They are also positively seeking to promote their own sets of rating system and/or ESG indices, aiming to expand their services of the growing market; while these providers have slightly different rating methodologies alongside listed companies.
Before all mentioned 7 data vendors and rating agencies, plus their international competitors, it becomes increasingly bewildering to figure out whose data and rating systems could be the best fit, especially when the results are of low consistency, according to a report on MIT Sloan. Taking the research below by Ping’an for example, on the same groups of companies, 4 rating systems actually produced very different results with low pair-wise correlations.
Table: Pair-wise correlation between ESG ratings of four providers
This situation is pushing the choice of a suitable data partner ever more important for a wise investment decision.
(written by Vic LI)
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