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China and ESG are arguably the two biggest global investment trends in a generation. In China’s case, continued liberalisation and opening-up to international investors, as well as mainland securities’ more recent inclusion in global benchmark indices, have transformed the world’s second-largest equity market over the last five years. In parallel, trillions of dollars of assets around the world have transitioned to sustainable investment strategies, creating a new approach to capital allocation that is influencing markets and companies everywhere.
But while these investment megatrends have run in parallel, they have not yet converged as much as they should. Sustainable investing in Shanghai and Shenzhen-listed stocks risks being held back by the weakness of ESG disclosure by too many mainland Chinese companies. If these companies want to capture the benefits of the shift towards ESG investment strategies, they will need to move fast to close the disclosure gap with other markets. As China’s weighting in global benchmarks increases, so will the ESG scrutiny from international investors – and local investors are becoming more focused on sustainability, too.
ESG-oriented investors looking at the Chinese Securities Index (CSI) 300 benchmark today will find disclosure that is improving, but still weak by international standards. According to a study by the Ping An Digital Economic Research Institute, the average scope and quality of ESG disclosures among CSI300 companies lags behind constituents of other major global equity indices in Australia, Hong Kong, Japan, Korea and the US, for example.
The AI-ESG platform maps more than 500 indicators and has helped automate data collection, monitor changes and generate actionable insights through benchmarking. This has shortened Ping An’s annual reporting process by 22 days
True, 85% of CSI300 constituents released ESG reports in 2019, up from 54% in 2013 – but the study found that only 12% of those reports were audited, and that more than half of the ESG-related indicators in the Wind financial services database are covered by fewer than 10% of companies.
So what’s holding these companies back from more comprehensive, better quality reporting?
Barriers to better disclosure
First, regulation. For CSI300 companies, there are no fewer than nine sets of ESG reporting guidelines, issued by a mix of financial regulators, non-financial regulators and stock exchanges. We believe that Chinese mainland regulators could upgrade the ESG reporting guidelines based on the existing corporate social responsibility reporting system, and specify the most important ESG indicators that all companies must disclose. These indicators can build on the framework provided by the Global Reporting Initiative and the Principles for Responsible Investment (PRI), but they should also reflect local market conditions. Regulators should also encourage companies to have their ESG reports audited.
Then there are ESG ratings providers, which have their own frameworks and assessment processes. These can diverge sharply from each other, which sends mixed messages to companies. The study found an average correlation between pairs of ratings issued by four major domestic and international providers of just 0.33, compared with 0.99 between credit ratings from Moody’s and S&P.
A range of other factors at the company level also hold back disclosure. Few companies have streamlined or automated data collection procedures in place, so their manual workaround processes are time-consuming and can lead to poor quality data output. And, as companies report on ESG annually and mainly to meet regulatory requirements, there is little ongoing monitoring or benchmarking against peers.
Given the capability gap between China and other markets, enabling listed companies and investors to obtain and manage ESG-related data in a comprehensive, scientific and efficient way has become a vital task.
First of all, companies themselves can make better use of technology to collect and monitor their ESG data, especially as disclosures become more standardised. Artificial Intelligence can be used for ESG information collection and analysis, transforming that annual and manual process into a continuous and automated one.
For example, Ping An itself has streamlined its own ESG reporting process, which involves gathering information from more than 40 subsidiaries. Its AI-ESG platform maps more than 500 indicators and has helped automate data collection, monitor changes and generate actionable insights through benchmarking. This has shortened Ping An’s annual reporting process by 22 days, enabling it to be one of the first financial services companies globally to release an annual sustainability report this year.
Applying technology can create substantial value for ESG investors as well. Ping An leverages cutting-edge technologies such as natural language processing, remote sensing image analysis, AI knowledge mapping and big data processing to include more unstructured data sources in analysis. The AI-ESG platform helps portfolio managers address risks and optimise returns from responsible investments.
The big technological challenge with collecting ESG information is to transform fuzzy, broad and scattered text information in unstructured formats such as annual reports, CSR reports or media coverage into clear and quantifiable data. Through its Artificial Intelligence Technology Center, Ping An has invested heavily in algorithms and engineering talent, applying Natural Language Processing technology (NLP) to identify, capture, deconstruct, transform and recombine text information into ‘hard’ data.
For example, the Ping An AI-ESG platform now automates analysis of raw ESG datapoints for mainland-listed companies from more than 1,200 media sources, 800,000 posts on China’s Weibo social network, over 34,000 announcements about administrative penalties and more than 260,000 lawsuits.
Ping An also collects a large amount of real-time information through remote sensing image analysis of the physical environment. This is used to collect undisclosed, multi-dimensional ESG data such as exhaust emissions from factories; distances between operations and water sources, residential areas and farmland; and the use of land and vegetation. These remote sensing images can also be used to validate information that is disclosed by companies. The AI-ESG platform already covers 20 industries, including agriculture and mining, and can accurately assess datapoints such as the number of wind turbines and solar panels used in plants and whether the enterprise is using renewable energy.
Globally, the momentum behind ESG investment is breathtaking. The collective assets under management of the signatories of the PRI – which include Ping An – have risen from $20trn in 2010 to $103trn this year.
ESG investing is still in its early stages in China, although asset managers including China Asset Management, Harvest Fund, Ping An, Southern Asset Management and E Fund have all started expanding their ESG-themed research and products. Alongside growing interest in Chinese securities from global investors, the continued development of the domestic asset management industry will be another critical factor in improving ESG reporting by mainland-listed corporates.
So, with authoritative reporting and disclosure guidance, more transparent ESG ratings, more sophisticated use of technology and more investor focus, ESG reporting in China can catch up with international standards. This would help the two great investment trends of our generation to converge – and create an historic opportunity for investors and corporates to support the transition towards more sustainable and inclusive growth in China.
Richard Sheng is Ping An Group Board Secretary
 Analysis of lawsuits covers CSI300 stocks only