In 2004, the United Nations first proposed the concept of environmental, social and corporate governance (ESG). Now, in the past 20 years, ESG has undergone continuous growth and transformation from niche topics to the public context, from conceptual theory to practical action.
However, while sustainability has become a consensus at the conceptual level, there are problems at the practical business level. Is ESG an inevitable requirement for sustainable development? Who should evaluate the good and bad of ESG business? What is the basis for the rating? Focusing on the above issues, the Financial Times reporter interviewed Lu Zhengwei, chief economist of Industrial Bank.
Financial Times: In recent years, ESG has become a compulsory course for companies in China and around the world. In the United States, ESG has also sparked some controversy. What do you think about this?
Political Commissar Lu: "Sustainable development" is indispensable when talking about ESG. Since 1987, the United Nations has been promoting the concept of sustainable development. In 2004, then-UN Secretary-General Kofi Annan put forward the concept of ESG. Since then, the penetration of ESG concepts in the field of global investment strategies and company evaluations has continued to deepen, and its specific connotations have also evolved.
From a practical point of view, in 2015, the United Nations formulated 17 global Sustainable Development Goals (SDGs), marking the maturity of the concept of sustainable development. The SDGs address a wide range of social, economic and environmental issues, many of which involve the responsibilities of government departments and go beyond the capabilities of individual companies and individuals. Up to now, the penetration and integration of ESG at the enterprise level has not yet been completed.
At present, some of the controversies caused by ESG are precisely because of the external manifestation of ESG long-standing challenges after its development enters the deep water area, and at the same time, it is intertwined with political factors such as United States bipartisan disputes. As United States Fortune magazine wrote: ESG has entered a "tricky adolescence" – adolescence is always beautiful and full of hope; "Controversial" is not a bad thing, it is a necessary way for an idea to mature and standardize.
There's nothing inherently wrong with "storytelling", but it's not appropriate to be keen on ESG as a storytelling tool or a promotional gimmick. The China Securities Regulatory Commission (CSRC) has made it clear that companies cannot use ESG disclosure as a means of brand marketing and mislead investors by providing inaccurate information through excessive packaging under the cloak of ESG. With the issuance of the A-share ESG guidelines, ESG disclosure has been clearly included in the scope of compliance. "Telling a good story" requires being consistent with what you say you do. In addition, for Chinese enterprises that "go global", telling a good story in the face of the international market and overseas investors is also a compulsory course in many cases.
Financial Times: What is the overall situation of ESG development in China? What have been the breakthroughs in recent years?
Political Commissar Lu: First of all, it is a breakthrough in regulatory policy and standard setting. On April 12 this year, under the guidance of the China Securities Regulatory Commission, the three major stock exchanges in Shanghai, Shenzhen and North China issued the "Guidelines for Sustainable Development Reporting of Listed Companies" (hereinafter referred to as the "Guidelines"), which came into effect on May 1. The Guidelines are committed to promoting the high-quality development and investment value enhancement of listed companies, and standardizing the ESG information disclosure behavior of listed companies, which is a milestone event in China's ESG field. The issuance of the Guidelines will continue to give birth to a related ecological market with ESG disclosure ratings, ESG index development and ESG multi-asset investment as the three main lines, which will have a far-reaching impact. Earlier, on June 26, 2023, the International Sustainability Standards Board (ISSB) officially released the General Requirements for Sustainable Disclosure Standards (IFRSS1) and Climate-related Disclosures (IFRSS2), and inherited the work of the Task Force on Climate-related Financial Disclosures (TCFD). On 31 July 2023, the European Commission published the first 12 EU sustainability reporting standards, the European Sustainability Reporting Standards (ESRS). The release of relevant ESG standards and guidelines has made ESG move towards scientific development in the past two years, and a good ESG ecosystem will also accelerate the formation of a global ecosystem.
The second is the gradual breakthrough of ESG investment from the equity market to the fixed income market. Compared with equity investment, ESG inclusion in fixed income investment has broad prospects. At present, there are two main aspects of ESG integration into fixed income investment practices: one is to encourage the inclusion of ESG in credit ratings; The second is the ESG integrated fixed income investment strategy. Compared with the previous equity ESG investment practice, which is mainly driven by public funds, the current fixed-income ESG investment practice is more driven by banking institutions, and ESG wealth management products represented by "fixed income +" have become the two main domestic ESG product sequences alongside equity ESG fund products. The objective function and constraints of banks are profoundly affecting the application of ESG fixed income investment strategies, and also profoundly changing the landscape of ESG products in the domestic capital market. We have noticed that recently, Chinese banks and public funds have actively responded to the requirements of doing a good job in the five major articles of finance and financial support for green and low-carbon development, and have cooperated in the issuance of ESG green bond funds and ESG index-linked credit bond products, which has become one of the most significant trends in sustainable investment in the capital market.
Finally, ESG is the breakthrough from financial investment to real industry. At present, Shanghai, Suzhou, and Beijing have successively issued policy documents to promote ESG development at the real industry level.
Financial Times: At present, there are many ESG evaluation standards and rating agencies in the market. However, some market players have reported that the standards may vary greatly, and the rating results of different institutions for the same company may also be distinct. What do you think about this phenomenon?
Political Commissar Lu: At present, many ESG rating standards and rating agencies have spontaneously emerged in the market, but in addition to the consistency between different ESG rating standards and rating agencies in the three dimensions of environmental, social and corporate governance, the other aspects are different in terms of specific issues, dimensions, weights, data sources, etc. Due to the above-mentioned differences, there are also large differences in the correlation of ESG rating results between different institutions.
More importantly, theoretically, no institution's ESG rating can clearly state where its rating results should be in the capital asset pricing model, or which variable should be most relevant. In practice, it is natural that the logical inconsistency between ESG ratings and investment returns cannot be faced. In addition, there are still many people who have a one-sided perception that "ESG is green" and "green is ESG".
In general, the divergence in ESG ratings is caused by different data sources and evaluation criteria used by institutions, which is also closely related to the huge amount of input information required in the ESG rating process. At present, the domestic ESG rating market is characterized by opaque evaluation process, qualitative index setting, and subjective evaluation methods, which bring difficulties to users. And because the purpose of ESG ratings is to reduce investment risk, it is difficult for investors to make the right investment decisions due to this divergence.
Institutions that are qualified and capable of rating should meet the following conditions: first, have a comprehensive ESG database; Second, there is an objective, reasonable, and national ESG rating framework and a transparent rating process. Third, it can explain which key variables the ESG rating is highly correlated with, and can be publicly verified by regulators and third parties; Fourth, avoid conflicts of interest between relevant entities and rating agencies, as well as between different business units of rating agencies. In the future, on the one hand, with the improvement of domestic ESG information disclosure standards, the completeness, standardization and consistency of information disclosure on the part of enterprises are expected to improve. On the other hand, rating agencies should continue to establish a reasonable, credible and unified ESG rating system in accordance with standard documents such as the CSRC's guidelines to ensure the objectivity of rating results.
Financial Times: Data and standards are the basic conditions for ESG ratings. What is the current availability and quality of data domestically?
Political Commissar Lu: On the one hand, in terms of rating standards, the current ESG rating system has prominent problems such as inconsistent evaluation standards and indicators, and lack of transparency. The evaluation index systems of domestic and foreign rating agencies are not the same, and the scores are quite different, and in the international standards, factors such as rural revitalization, common prosperity, targeted poverty alleviation, and agricultural modernization are often not included in the rating system.
On the other hand, as ESG information disclosers, enterprises have a low ESG information disclosure rate, resulting in the lack of ESG rating scores. Moreover, the quality of disclosure needs to be improved, the quantitative information disclosure is scarce, the statistical caliber of data is inconsistent, and the reports are difficult to compare. At the same time, the data output by the data collectors of the rating agencies and the suppliers is not verified and inconsistent. While ESG data aggregators provide useful services, they often cannot lack the ability or motivation to independently verify data.
From the perspective of improving ESG ratings, it is suggested that, on the one hand, the regulatory authorities should standardize the rules of the ESG rating industry and gradually build binding and guiding endogenous standards for the industry. On the other hand, market participants, as direct users of ESG rating data, can adopt a multi-party linkage and data integration approach to actively improve the demand side's requirements for the quality of ESG rating data.
Financial Times: There are many differences between China's current ESG evaluation system and that of other countries. Some people call it Chinese characteristics, while others believe that it hinders the integration of the international market with China's ESG development and rating system. What do you think of this phenomenon? Do different countries have their own ESG rating characteristics? How to better seek international consensus?
Political Commissar Lu: Building a sound ESG rating system is a long-term process. Different countries have different institutional mechanisms and different stages of development, so the index design of the ESG rating system should be different. For the mainland, the direct application of the ESG evaluation system based on the experience of Europe and the United States will lead to the rating results being out of national conditions, so it is necessary to build a localized ESG evaluation system. If the domestic ESG rating market wants to continue to do well, localized ESG rating methods should not only connect with the international market, but also take into account the national conditions.
In order to seek international consensus, it can be achieved by actively participating in the formulation of international ESG disclosure frameworks and standards. The international consensus is more based on the conceptual level, and the specific indicators should be more based on the national conditions of each country, so as to achieve the "greatest common divisor" between local standards and international standards.
Source: Financial Times
Author: Ma Meiruo
Editor: Han Shengjie
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