Enterprises still lack confidence in domestic ESG rating agencies|Decoding China's ESG ratings

Anji, Zhejiang, the birthplace of the "Two Mountains" theory, is known as the "Chinese Bamboo Township", surrounded by green mountains, bamboo seas, and more than 70% of the forest area.

In 2016, one year before the State Council approved the launch of the "National Green Finance Reform and Innovation Pilot Zone", Anji Rural Commercial Bank was listed as a "Green Financial Service Reform and Innovation Demonstration Site" in Huzhou City, and took the lead in establishing the first green finance division among local small legal person financial institutions to explore the road of combining inclusive finance and green finance.

Faced with the challenges of identifying, evaluating and managing green projects, the county-level bank decided to use external brains to meet the diversified green investment and financing needs and control risks while innovating green financial products.

In 2017, Zhejiang Anji Rural Commercial Bank and China Chengxin Credit Management Co., Ltd. (CCX) launched the project of "Building a Green and Inclusive Bank to Promote Green Economic Development" to help Anji Rural Commercial Bank build a comprehensive green finance service platform and create an environmental and social benefit risk model for credit assets to ensure the green attributes of green credit assets.

The project has set a precedent for local rural commercial banks in China to build green banks, set a green benchmark for rural green inclusive finance, and innovatively incorporated "environmental and social risks" into the bank's risk management process, which has also become the beginning of CCX's ESG rating.

Start with green finance

As early as 2015, CCX established the Green Finance Division, which participated in the formulation of green and sustainable finance related topics and guidelines by domestic regulators, and launched services such as green bonds and green project evaluation.

With the gradual growth of the ESG and green finance market, CCXGF was officially established in March 2020 and became a subsidiary of CCXG specializing in green finance and ESG services.

Relying on the parent company's experience in credit evaluation data processing and application, CCXGF has established a complete green bond database and green project database, and independently built an ESG database and ESG rating system.

Its ability to build an ESG data platform has also been internationally recognized. In 2021, CCXGF provided technical support to GreenNode RMB, the sustainable bond database of the Singapore Exchange, and conducted research as a special expert for the Asian Development Bank's technical assistance project "ESG Rating Model (Green Investment and Capital Market Development)".

CCXGF's ESG rating system covers 57 industries and involves more than 180 specific indicators, and the weighting of the indicators takes into account factors such as national policies, industry characteristics, and the availability and effectiveness of indicators (CCXGF Rating System). The company believes that compared with overseas rating agencies, the advantage of local rating agencies is that their index system is more in line with the current development requirements of the local market.

However, at present, various ESG rating agencies in China basically follow a homogeneous framework, and due to differences in professional capabilities and data disposal, the consistency and comparability of rating results are poor, which brings confusion to investors.

CCXGF believes that on the one hand, this is due to the incomplete and low quality of ESG information disclosure in the current market, and on the other hand, the development history of the ESG rating industry is still relatively short, and the impact of ESG on investment returns and risk aversion will need to be verified and measured for a longer time and more data.

In this process, supervision and industry norms need to be implemented simultaneously, and if necessary, ESG rating agencies should be provided with a benign competition and development environment through mechanisms such as "qualifications, inspections, rewards and punishments".

In order to ensure the objectivity, authenticity and scientificity of the rating results, CCXGF has set up an independent ESG rating department, formulated an internal risk firewall isolation system, ensured the independence of business and personnel operations, and avoided conflicts of interest.

The company is exploring the application of intelligent technology for the location and systematic review of quantitative data. At present, this work is still dominated by manual inspection.

The company attaches great importance to the consistency of ESG rating results in the industry, and will regularly understand the changes through the correlation analysis of the rating results of different institutions in the same industry, and focus on the analysis of companies with large differences to continuously optimize its own evaluation system.

In 2023, CCXGF became a member of the Working Group on the Voluntary Code of Conduct for ESG Rating and Data Providers in Hong Kong to further promote the orderly development of ESG rating activities and strengthen the standardization of ESG data products and services.

Change and evolution

International credit ratings have a history of nearly 190 years, and sustainability/ESG ratings have only grown in the past 30 years, and their importance in the close relationship between business and society has become increasingly prominent.

2019年，海外最大信用评级机构之一标普（Standard & Poor's）宣布收购瑞士资产管理公司RobecoSAM的ESG评级业务，企业可持续发展评估（Corporate Sustainability Assessment，CSA）和道琼斯可持续发展指数（The Dow Jones Sustainability Indexes，DJSI）随之也被纳入麾下。

As a local credit rating agency that has grown up with China's capital market, CCXG has also launched ESG concept index products such as "CCX Beautiful China ESG Index" and "CCXC Carbon Neutral 100 Index" based on the ESG rating data of CCXG, providing investors with a variety of choices.

Unlike index products, which are fixed to investors in the capital market, CCXG's ESG ratings are available to a wide range of investors, including but not limited to all market entities such as banks, investors and enterprises. Banks and investment institutions need to obtain detailed information such as rating results, scores on different topics, and even the underlying underlying data for investment strategy reference and insider risk management. Enterprises mainly obtain ESG commissioned rating results to clarify their own positioning and management direction, and the payment standard is related to the complexity and scale of the enterprise's business.

In the past few years of cooperation with financial institutions, CCXGF has found that the demand for ESG data in the capital market is gradually transitioning from concept to substance:

First, investment institutions have gradually paid attention to the substantive impact of ESG on the excess returns or risk aversion of investment; second, the disclosure requirements for ESG investment are getting higher and higher, and the international "anti-greenwashing" struggle is becoming stricter, and the disclosure of strategies and positions of public funds will gradually become transparent; third, the application of ESG rating data is diversified, and investment institutions can assist in decision-making and analysis through self-built models or directly use data on specific topics.

For enterprises, CCXGF found that the importance of ESG rating performance has gradually changed from a single enhancement of influence to a management demand for sustainable development. The attention of stakeholders has given rise to the demand for ESG ratings of enterprises. Banks and large enterprises are gradually incorporating ESG into their internal risk management processes, and have begun to explore standardized, efficient and intelligent ESG management models.

However, in general, the ESG rating of enterprises still shows a trend of "emphasizing international rather than domestic" and "emphasizing results over management". Driven by the strong drive of international capital, large enterprises and multinational enterprises (especially the constituent companies of international mainstream indexes) pay more attention to the ESG rating results of international mainstream institutions, and lack confidence in domestic institutions. In addition, in order to cope with policy and stakeholder pressure, many small and medium-sized enterprises tend to focus only on rating results, and lack of understanding of the internal factors that affect the results, which is also a reason for "greenwashing".

Future application prospects

ESG rating is an important component of the development of the ESG ecosystem, and is an independent, impartial, scientific and comprehensive measuring scale that reflects the ESG performance of enterprises, which not only serves the traditional financial investment industry, but also an important promoting factor for the high-quality development of enterprises. Because of its wide range of services, strong professionalism, close connection with the capital market, and the support of multiple factors such as taking into account social and environmental benefits, it is the most valuable field for development in the future.

CCXGF believes that policy guidance is still the main driving factor for the development of the ESG rating market from the perspective of the overall market development. In the future, it is expected that under the guidance of regulators, the healthy and orderly development of the ESG rating industry will be jointly promoted with the internal improvement of enterprises as the core, the application of financial institutions (investment institutions) as the driving force, and the ESG rating agencies as the backbone.

In view of the problems existing in the local ESG rating market, such as incomplete information, difficulty in quantifying the impact of ESG on investment returns and risks, and poor industry standards, CCXGF will carry out actions in terms of empirical research, strengthening database construction, overseas expansion, and promoting industry self-discipline.

The first is to rely on the huge ESG database to carry out research on the impact of ESG in terms of risk and value, find important influencing factors, optimize the rating model, and improve the scientificity of the rating method.

The second is the dual-track development of ESG underlying database construction and ESG rating, which continuously improves the construction of ESG database by carrying intelligent tools, model construction, field optimization, etc., to provide a solid foundation for ratings.

Thirdly, combined with the Group's resource advantages in Hong Kong, the financial center of Asia, the Group established an overseas business company, CCXGF, to actively expand overseas business and enhance the international influence of ESG ratings.

Fourth, it complies with its own third-party attributes, cooperates with regulatory requirements, participates in industry self-regulatory organizations, and invites social supervision to maintain the healthy development of the ESG rating market.

(Interviewee: Shen Shuangbo, President of CCXGF; Wang Shuling, Head of ESG Project)

Southern Weekly researcher Kang Hua

Editor-in-charge: Sun Xiaowen