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Overview of CICC's ESG ratings
CICC's ESG Rating is jointly built by the Research Department and the Research Institute team – focusing on the financial materiality characteristics and based on the general process of ESG rating, integrating the industry research team's understanding of the industry and listed companies of the CICC Research Department into the rating framework, and drawing on the cutting-edge research of the CICC Research Institute on hot topics in China, such as carbon neutrality, common prosperity and rural revitalization. Version V1.0 of the rating system was first released at the end of 2022 and is currently updated to version 2.0.
CICC's ESG ratings have three main features:
Explanation of CICC's ESG rating methodology
CICC's ESG Rating focuses on financial materiality, and we provide a comprehensive introduction to CICC's ESG Rating methodology in terms of rating objectives, rating principles, coverage, industry standards, indicator system, materiality analysis and weight setting, and rating results based on the general process of ESG rating.
• Based on the financial materiality characteristics of ESG, CICC ESG Ratings takes the financial performance and stock price risk performance of the rated company in the future period as the rating objective function.
• Referring to the recommendations of the International Organization of Securities Commissions (IOSCO) on the standardization of ESG ratings, CICC's ESG ratings are based on the principles of independence, transparency, integrity, comparability and timeliness, which is conducive to improving the management efficiency and quality of ESG rating projects.
• A-share companies are rated in the CSI 800 and CSI 1000 indices since 2018, and Hong Kong companies are listed in the list of constituent stocks of both the Hang Seng Composite Index and the underlying securities of the Hong Kong Stock Connect. In the latest 2024Q1 ratings, CICC's ESG ratings cover 2,762 A-share listed companies, accounting for 89.5% of the total A-share market capitalization, and 421 Hong Kong-listed companies, accounting for 48.7% of the total Hong Kong stock market capitalization.
• : With GICS secondary industries (24 in total) as the main industry classification criteria, the CITIC Industry Classification and Shenwan Industry Classification Frameworks have been added to the A-share ratings, and the Hang Seng Industry Classification Framework has been added to the Hong Kong stock ratings.
• : We have constructed a CICC ESG rating index system formed by a four-level indicator structure, in which 3 first-level dimensions, 25 second-level topics and 74 third-level topics are the fixed structure in the indicator system, and the fourth-level underlying indicators are classified under the corresponding third-level topics according to their nature, and the total number of indicators has been expanded to 1,000+.
• The process consists of three steps: preliminary judgment by the quantitative and ESG team, discussion of feedback with the industry research team, and empirical analysis. Through this step, we determined the importance judgment results of 24 GICS secondary industries at the level of secondary issues, and through quantitative analysis and testing at the indicator level, the four-level underlying indicators included in the rating calculation process were reduced to 300+.
• : The raw data of the indicator adopts standardized steps in the industry and combines the scoring method of indicator polarity. (1) Topic weight: determined by the judgment results of industry importance issues, the four types of importance grades H/M/L/N are given a weight ratio of 8:4:2:0 in the rating framework;(2) Indicator weight: the special nature indicators are adjusted up and down on the basis of the equal weight distribution of the same topic.
• : On the last day of each quarter, CICC's ESG Rating Program completes the calculation of the rating results for the quarter, and outputs the total ESG score and E, S, and G scores of the rated companies as the final results of the ESG rating in that quarter. CICC's ESG rating includes the total ESG score and the E, S, and G scores, and the output results of the four scores have been standardized in the GICS Level 2 industry, with a score range of 0-10. CICC's ESG rating results reflect the relative performance of the company's overall ESG performance and environmental, social and corporate governance performance in the second tier of the GICS industry in the quarter, and the higher the score, the more ESG performance of the company outperformed its peers in the quarter. Due to their nature, the comparability of rating results across industries is relatively weak, and changes in ESG scores at different points in time of the same company must be comprehensively judged by combining the industry-wide percentile information of the rating results.
Risk Warning: The validity of CICC's ESG ratings may be affected by factors such as data accuracy bias, rating model bias, and lag in data updates.
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Overview of CICC's ESG ratings
CICC's ESG Rating is jointly built by the Research Department and the Research Institute team – focusing on the financial materiality characteristics and based on the general process of ESG rating, integrating the industry research team's understanding of the industry and listed companies of the CICC Research Department into the rating framework, and drawing on the cutting-edge research of the CICC Research Institute on hot topics in China, such as carbon neutrality, common prosperity and rural revitalization. Version V1.0 of the rating system was first released at the end of 2022 and is currently updated to version 2.0.
Chart 1: Overview of CICC's ESG rating system
Source: CICC Research
CICC's ESG rating system has three major features
Overall, CICC's ESG ratings have three major characteristics: aligning with international ESG standards and reflecting the characteristics of domestic ESG development, fully integrating multi-dimensional research capabilities such as ESG and industry research, and integrating data resources and indicator systems empowered by quantitative means.
CICC's ESG ratings refer to international ESG standards, and also pay close attention to the dynamics of domestic dual carbon and ESG policies, and highlight the specific connotations of high-quality development in mainland China in the rating framework. Specifically, we use some local indicators in the rating system, such as regulatory penalties, the ratio of pollutant emissions to approved emissions, public welfare projects and rural revitalization, etc., and (2) when judging the performance of ESG indicators, we also refer to the requirements of relevant national laws, regulations or administrative regulations to determine the performance of enterprises.
Chart 2: Examples of CICC ESG Rating Domestic Characteristic Indicators
Source: CICC Research
Relying on the complete industry research structure set up by CICC's Research Department and the in-depth research conducted by CICC Research Institute/Research Department on hot topics in China, CICC's ESG rating not only reflects the top-down research on the specific connotation of the concept of high-quality development, but also includes a bottom-up understanding of industry dynamics and company development. (1) In the report "CICC ESG Handbook (2): ESG Hot Spots"[1], the quantitative and ESG team, together with the total team of CICC Research Institute/Research Department, analyzed the cutting-edge ESG issues and applied them to the construction of CICC's ESG rating. (2) In the process of judging the ESG materiality issues of the industry, the quantitative and ESG team basically determines the ESG materiality issues of each industry by discussing them with the industry research team one by one, and the industry team giving written feedback on the judgment results and impact mechanism. (3) In the process of follow-up work, a coordination mechanism for ESG research and rating work has been established, and the industry team has designated ESG specialists to be responsible for docking ESG rating-related work, including participating in the revision and discussion of the rating framework, feedback on ESG rating results and promotion of results.
Chart 3: CICC Research Industry Structure & Research Institute/Research Department related series of studies
Source: CICC Research
We have integrated the products and services of multiple ESG data providers, and have a wealth of ESG underlying data resources - more than 1,000 cross-sectional raw data points have been obtained after the integration of the underlying indicators, and the data series can be traced back to 2018 at the earliest. Combined with the research needs, we use quantitative methods to add different forms of derivative quantitative data such as intensity values, ratios, alternative data event counts and assignments, and ring values, so as to continuously improve the ESG rating index system, improve the accuracy of the depiction of ESG performance by individual indicators, and make the indicators more accurately reflect the ESG rating logic.
Taking news event-based alternative data processing as an example, we believe that the main challenges in the application of alternative data to ESG ratings are to obtain alternative data in a timely manner for accurate counting and determine reasonable scoring principles. Combined with the importance of ESG issues and indicators, we select event-based alternative data such as equity-related negative events, illegal punishment of directors, supervisors and senior executives, social security/wage arrears, related party transactions and guarantees, and environmental pollution-related negative events, and focus on exploring the construction of derivative indicators, so as to improve the effect of alternative data as the underlying indicator in rating applications.
We introduce the news data from the database, filter out ESG-related news information, define event tags and set corresponding codes according to the content of news events, and build a mapping from the content of news events of listed companies to event tags. In this process, we distinguish the nature of different news events in the following ways, which is reflected in the principle of metric scoring:
► Sentiment Factor: Using the news text sentiment scoring model built by the quantitative strategy research team of CICC's Research Department in the Alternative Data Strategy Series Report[2], the sentiment score is used for each ESG-related news message;
► Time window – Comprehensively consider the length of time for the impact of news events on listed companies and the regression significance of the four-level ESG indicators for financial and risk indicators in different time windows, and set time windows for different alternative indicators to accurately and dynamically evaluate the ESG performance of listed companies;
► Event Counting - Comprehensively considering the correlation between the frequency of different events and the company's market value or business scale, as well as the company's market attention, the direct cumulative frequency counting method is adopted for news of different natures or adjusted according to the company's market value scale.
Chart 4: CICC ESG Ratings news event-based alternative indicator construction process
Source: CICC Research
Explanation of CICC's ESG rating methodology
CICC's ESG Rating focuses on financial materiality, and we will provide a comprehensive introduction to CICC's ESG Rating Methodology in terms of rating objectives, rating principles, coverage, industry standards, indicator system, materiality analysis and weight setting, and rating results in combination with the general process of ESG rating.
Rating objectives: financial dimension and stock price risk dimension
Starting from the financial materiality characteristics of ESG, we take the financial performance and stock price risk performance of the rated companies in the future as the objective functions of CICC's ESG ratings. In the process of screening the underlying indicators, we also take the correlation between ESG indicators and the indicators under the rating target dimension as one of the reference information for whether to include the indicators in the rating system.
Exhibit 5: CICC's ESG Rating Objective Function
Source: CICC Research
Rating principles: independence, transparency, completeness, comparability, timeliness
With reference to the recommendations on the standardization of ESG ratings in the International Organization of Securities Commissions (IOSCO) ESG Rating and Data Product Providers (Final Report)[3], combined with the current practice and development trend of ESG ratings at home and abroad, we have determined that independence, transparency, integrity, comparability and timeliness are the rating principles, and we have put them into practice at every stage of the rating project. The establishment of rating principles is conducive to improving the management efficiency and quality of ESG rating projects.
Chart 6: CICC's ESG Rating Principles
Source: CICC Research
Coverage: Covering A-share and Hong Kong-listed companies, the rating scope continues to expand
With the update of CICC's ESG rating from V1.0 to V2.0, the number of companies included in the rating range and the proportion of market capitalization have increased simultaneously. At present, the latest rules for the coverage of CICC's ESG ratings are set as follows:
• A-share companies are rated in the CSI 800 and CSI 1000 Index since 2018;
• The rating range of Hong Kong stock companies is companies that are included in the list of constituent stocks of both the Hang Seng Composite Index and the underlying securities of the Hong Kong Stock Connect;
• Delisted companies in the above lists of A-share and Hong Kong stock securities, as well as listed companies whose domicile and business scope are not in China, are excluded from the rating scope.
In the latest 2024Q1 ratings, CICC's ESG ratings cover 2,762 A-share listed companies, accounting for 89.5% of the total A-share market capitalization, and 421 Hong Kong-listed companies, accounting for 48.7% of the total Hong Kong stock market capitalization. A-share and Hong Kong-listed companies use independent rating sequences for scoring and results display, and the same distribution of ESG materiality issues is used for framework construction under the GICS industry classification, while the ESG rating scores of A+H-share listed companies are displayed in the ESG rating series of A-share companies.
Chart 7: Number of listed companies in CICC's ESG rating range
Note: As of March 31, 2024
Source: Wind, CICC Research
Chart 8: Market capitalization of listed companies within CICC's ESG ratings
Note: As of March 31, 2024
Source: Wind, CICC Research
Industry standards: Based on the GICS secondary industry classification standard
CICC's ESG rating system uses the GICS industry classification as the standard for studying the industry characteristics of ESG issues, and establishes an industry ESG rating framework based on the GICS secondary industries (a total of 24 industries) to identify and judge ESG materiality issues. We pay close attention to the announcement of the update of the GICS Industry Classification Standard, and adjust the naming of the industry framework and the importance of the industry in CICC's ESG rating system as appropriate. If there is a change in the industry category information of the rated company, we will also update the information in a timely manner to ensure that the company conducts ESG performance evaluation under the latest corresponding industry framework.
Exhibit 9: Industry classification standards used for CICC's ESG ratings
Note: In the latest version of the GICS industry classification standard, the secondary industry of "real estate investment trusts (REITs)" has been added under the primary real estate industry, and considering the differences between REITs and other listed companies, REITs will not be included in the rating coverage in this iteration of the rating framework
Source: GICS, CICC Research
In order to take into account the needs of different users, we have added ESG rating scores under the CITIC Industry Classification (with CITIC Level 1 industry as the rating framework, a total of 30 Level 1 industries) and Shenwan Industry Classification (with Shenwan Level 1 industry as the rating framework, a total of 31 Level 1 industries) for A-share companies, and added the rating scores under the Hang Seng Industry Classification System (with Hang Seng Level 2 industry as the rating framework, a total of 31 business categories) for Hong Kong stock companies, providing a perspective of multiple industry classifications。
Indicator system: A four-level ESG indicator structure has been formed, with abundant data resources
ESG data is based on data facts to depict the performance of entities in individual indicators of environmental, social and corporate governance. It has a strong degree of objectivity and is the basic information necessary for rating activities. After data preprocessing and basic sorting of indicators, we have constructed a CICC ESG rating index system formed by a four-level indicator structure, in which 3 first-level dimensions, 25 second-level topics and 74 third-level topics are the fixed structure in the indicator system, and the fourth-level underlying indicators are classified under the corresponding third-level topics according to their nature. By purchasing the products and services of data suppliers and integrating internal resources, the number of four-level underlying indicators has been expanded to 1000+. The underlying indicators can be divided into disclosed data and alternative data according to the data source, quantitative indicators (numerical type) and qualitative indicators (event type) according to the nature of the data, and general industry indicators and industry characteristic indicators according to the industry generality of different indicators.
Chart 10: CICC's ESG rating system
Source: CICC Research
The quality of the underlying data is an important prerequisite for the effectiveness of the rating system. We continue to pay attention to ESG policy developments, industry development and corporate disclosure practices at home and abroad, communicate and cooperate with ESG stakeholders such as data providers, professional service providers, and industry associations, continue to enrich the underlying indicator data resources, and regularly check the quality of the underlying data.
Exhibit 11: CICC's underlying data management practices in the ESG rating system
Source: CICC Research
Materiality Analysis: With financial materiality at its core, the quantitative and ESG team collaborates with industry teams
The financial materiality of ESG describes the ESG factors that are important to corporate value creation, and its information can help investors and other capital providers improve their investment capabilities. The financial materiality of ESG is an important bridge between the underlying data of ESG and the application scenarios of ESG ratings, and is an important theoretical basis for ESG ratings to serve investment research. Rating agencies need to take ESG financial materiality characteristics as the core framework, screen the underlying ESG indicator data, and measure the ESG performance of the rated entity based on the ESG data collection with significant financial impact. The combination of financial information and financially material ESG information can help investors make a more comprehensive assessment of the value of assets. The application of ESG financial materiality characteristics in rating activities can also reduce the impact of "greenwashing" by over-disclosure of non-material ESG information, because the materiality judgment process only focuses on ESG information that has a significant impact on finance.
ESG financial materiality characteristics are usually related to the rated entity's industry, geographical location, regulatory environment and other factors. ESG financial materiality characteristics can have a substantial impact through corporate value creation, value management, or value evaluation. Based on the theory of enterprise value management, we sorted out the objective function of CICC's ESG rating, financial materiality, and the channels of impact on corporate value.
Exhibit 12: Ways to impact ESG financial materiality characteristics
Source: SASB, Value Based Management.Net, Pedersen, Fitzgibbons and Pomorski, Responsible Investment: The Effective Frontier of ESG (2021), CICC Research
In the section on ESG materiality issues in various industries, we have designed a "three-step" research method to judge and test the financial materiality characteristics of ESG factors, including three steps: quantitative and preliminary judgment by the ESG team, discussion and feedback with the industry research team, and empirical analysis. Through this step, we determined the importance judgment results of 24 GICS secondary industries at the level of secondary issues, and through quantitative analysis and testing at the indicator level, the four-level underlying indicators included in the rating calculation process were reduced to 300+.
Exhibit 13: CICC's ESG rating materiality process
Source: CICC Research
After completing the results of the materiality judgment of each industry at the level of secondary issues, we obtained the materiality issue distribution map of CICC's ESG rating system (see Charts 14 to 16). We will regularly return to the distribution of ESG materiality issues in the industry based on regulatory developments and industry developments, and adjust them according to their necessity.
Chart 14: Distribution of CICC ESG Rating Industry Materiality Issues (1)
Note: H represents high importance, M represents medium importance, L represents low importance, and N represents no significant impact, and the overall judgment result of H (high importance) is given to the corporate governance dimension, and different weights are given according to the degree of influence of corporate governance factors on different industries, and the weight range is set in the range of 30%-50%.
Source: GICS, CICC Research
Chart 15: CICC ESG Rating Industry Materiality Issues (2)
Note: H represents high importance, M represents medium importance, L represents low importance, and N represents no significant impact, and the overall judgment result of H (high importance) is given to the corporate governance dimension, and different weights are given according to the degree of influence of corporate governance factors on different industries, and the weight range is set in the range of 30%-50%.
Source: GICS, CICC Research
Chart 16: CICC ESG Rating Industry Materiality Issues Distribution (3)
Note: H represents high importance, M represents medium importance, L represents low importance, and N represents no significant impact, and the overall judgment result of H (high importance) is given to the corporate governance dimension, and different weights are given according to the degree of influence of corporate governance factors on different industries, and the weight range is set in the range of 30%-50%.
Source: GICS, CICC Research
Assignment and weight setting: The importance judgment results are superimposed on the lifting and lowering rights
Based on the distribution of industry materiality issues, we assign a weighting ratio of 8:4:2:0 to each of the four types of materiality levels H/M/L/N in the rating framework, and calculate the specific weighting values of ESG issues in each GICS Level 2 industry (see Charts 17 to 19).
Chart 17: Weights of Level 2 Issues in CICC's ESG Rating Industry Framework (1)
Source: CICC Research
Chart 18: CICC ESG Rating Industry Framework Level 2 Issue Weights (2)
Source: CICC Research
Chart 19: Weights of Level 2 issues in CICC's ESG Rating Industry Framework (3)
Source: CICC Research
For the raw data of the underlying indicators, we adopt different types of industry-wide standardization steps for the characteristics of the indicators, and assign scores based on the polarity of the indicators. In the process of constructing the values of the fourth-level indicators and the third-level topics, we adjust the weights of the indicators according to the results of importance analysis, and the main weight adjustment methods include the following two points:
► Since the positive indicators in the event-based indicators may not be able to fully and accurately portray the company's actual ESG management capabilities, while the disputed (negative) event-based indicators have an impact on the company's ESG evaluation and business performance due to their high attention, we will upgrade the weight of the indicators of disputed events.
► In order to reduce the impact of data fluctuations, we will downweight the indicators that describe the month-on-month changes.
Exhibit 20: CICC's ESG rating system scoring methodology and calculation process
Note: MAD is the absolute median difference and STD is the standard deviation
Source: CICC Research
Rating output: Quarterly update, normalized to a 0-10 score range within the industry
Output and application of rating results: Based on the weighting information and scoring methods in the above process, we can calculate the ESG performance of the rated companies in each industry, update them frequently on a quarterly basis, complete the calculation of the ESG rating results for the quarter on the last day of each quarter, and output the total ESG score and E, S, and G scores of the rated companies as the final results of CICC's ESG rating in that quarter. The data of Level 2 or Level 3 topics is only used as process data and does not constitute the final result of the evaluation of the ESG performance of enterprises under CICC's ESG rating system.
CICC's ESG rating includes the total ESG score and the E, S, and G scores, and the output results of the four scores have been standardized in the GICS Level 2 industry, with a score range of 0-10. CICC's ESG rating results reflect the relative performance of the company's overall ESG performance and environmental, social and corporate governance performance in the second tier of the GICS industry in the quarter, and the higher the score, the more ESG performance of the company outperformed its peers in the quarter. We also provide the percentile information of the total ESG score and the E, S, and G dimensions in the GICS secondary industry for users' reference.
It should be pointed out that under the setting of CICC's ESG rating, the judgment of ESG materiality in different secondary industries, For the changes in the rating scores of the same company in different quarters, because we use a standardized scoring method in the industry, the ESG score of a company may be affected by the changes in the ESG practice performance of other peer companies in the quarter.
Rating Maintenance and Update: We have formulated measures for the maintenance and updating of the ESG rating database, established a process for updating, reviewing and uploading ESG rating data, regularly inspected the database update and calculation process, and implemented quality control. At the same time, we regularly iterate the rating system based on user feedback and the latest trends in ESG standards, regulatory policies and industry research.
Risk Warning
Data accuracy bias: Some of the underlying data of CICC's ESG ratings are derived from data collected by third-party data providers from the disclosure documents of listed companies or the platforms of regulatory authorities, and there may be deviations or omissions in the sources and methods of obtaining them. In addition, due to the differences in disclosure methods and measurement methods between different companies, there may inevitably be errors in the horizontal comparison of ESG data. Some companies may not fully disclose certain key ESG data for business strategy considerations, which increases the difficulty of data acquisition and objectively affects the accuracy and comprehensiveness of the data.
Rating model bias: ESG rating activities are evolving, and there is currently no unified standard for ESG rating practices. CICC ESG Rating sets up a specific rating objective function, which involves the processing and construction of many underlying indicators in the process, and the weight setting and scoring methods reflect the research team's judgment on the influencing mechanism of ESG factors, which may also limit the universality of the use scenarios of CICC ESG Rating, and the rating model may have certain deviations for users with different purposes.
Lag in data updates: CICC's ESG rating principles reflect timeliness, and rating data is updated on a quarterly basis. However, if a major ESG event occurs during the quarter, we are unable to make immediate adjustments to the rating results, and there is a certain time lag. In addition, most companies only release ESG reports once a year, and some key data lag behind the actual ESG progress of listed companies, so the rating results may not fully reflect the company's latest ESG status when they are released.
[1]https://www.research.cicc.com/zh_CN/report?id=288948&entrance_source=search_all_reportlist&page=1&yPosition=0
[2] CICC Research, "Alternative Data Strategies (1): The Possibility of Text Data": https://www.research.cicc.com/zh_CN/report?id=318865&entrance_source=search_vertical_reportlist; https://www.research.cicc.com/zh_CN/report?id=318867&entrance_source=search_vertical_reportlist. Alternative Data Strategies (3): Textual Information for Thematic Investing ：https://www.research.cicc.com/zh_CN/report?id=318868&entrance_source=search_all_reportlist
[3]https://www.iosco.org/library/pubdocs/pdf/IOSCOPD690.pdf
Article source:
This article is excerpted from: CICC ESG Rating System Explained on April 12, 2024
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