ESG with Chinese characteristics? Ping An upgrade puts green scores in context
One of China’s largest asset owners, Ping An Insurance, has recently upgraded its proprietary ESG evaluating and scoring system, adding indicators that will better assess portfolio performance based on China’s green taxonomy and latest policy developments.
Adding indicators such as "green revenue" and "inclusive growth”, it has also removed certain climate-related indicators that are rarely disclosed in China, and added a “disclosure versus performance” score.
Ping An is also developing industry-specific indicators driven by in-depth industry analysis to serve for fundamental or quant-based investment.
So far, it has finished its analysis of a range of industries including coal, batteries, photovoltaics, steel, and non-ferrous metals, and will continue to expand the coverage.
“The recent upgrade is part of our continuing effort to make sure our framework reflects the latest policy development in China,” said Chex Yu, director of strategy, innovation product team at Ping An Technology, the core technology arm of Ping An.
Since June 1, China’s banking and insurance industry has been following the green finance guidelines issued by their regulator, the China Banking and Insurance Regulatory Commission (CBIRC).
Ping An announced in late July that it had improved the accuracy and comprehensiveness of data in its ESG system to meet a rising demand for high-quality data in portfolio management.
REAL TIME DATA
The artificial intelligence (AI)-based system, which was unveiled in 2021, can collect environmental, social, and governance (ESG) regulatory disclosure-based data and alternative non-disclosure-based data to generate company disclosure and performance scores separately.
The ESG system currently comprises 111 indicators, and 278 data points, to measure ESG risks and opportunities for 37 industry sectors, covering more than 4,500 A-share listed companies and 2,700 Hong Kong listed companies.
It evaluates more than 4,600 corporate credit bond issuers and 58,000 green bonds in the bond market, and nearly 140 fund management companies and more than 14,900 funds in the fund market.
The system frequently updates different data points – daily, monthly, or semi-annually, depending on type – and adjusts the results in real-time based on an indicator called "news sentiment" scores.
For the newly-added "green revenue" indicator, Ping An will deconstruct companies' revenue structure and match them with China’s guideline on green taxonomies. This means estimating the percentage of companies' revenue that is green based on national guidelines.
“It is still mainly for equity investment, but we have attempted to add more in-depth data. Similar methodologies can be applied to fixed-income issuers, for which there's currently a gap,” Yu told AsianInvestor.
The scoring system incorporates both domestic and international disclosure frameworks - about 87% of the system overlaps with at least one international framework, with 13% of the indicators specific to the Chinese context.
Frameworks it refers to include the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), TCFD, major index providers such as MSCI, as well as those of stock exchanges in Hong Kong, Shanghai, and Shenzhen.
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The recent upgrade also simplifies the framework by taking out indicators based on data that are rarely available in China.
For example, the Task Force on Climate-related Financial Disclosures (TCFD) recommends evaluation of specific climate-related issues' material financial impact on the company, in areas such as revenue, expenditure, capital, and financing.
“But very few Chinese companies now disclose the impact of climate issues on companies' financial performance,” Yu said.
Instead, Ping An has added indicators that capture the latest policy developments, and a “disclosure versus performance” score.
In the future, Ping An plans to develop other industry-specific indicators. It will first analyse an industry's material ESG issues, then break down that industry's supply chain and identify which parts are the most relevant to those material ESG issues, analysing the relationship between ESG issues and a company's fundamentals.
“For the material indicators we identify, we then create datasets for them that can be used by fundamental or quant-based investment,” Yu said.
WIDELY USED
Ping An is China's largest life insurer by market capitalisation with 4.1 trillion yuan ($607 billion) of investment assets as of March 31.
It is one of only four Chinese asset owners that are signatories to the Principles for Responsible Investment (PRI) which is currently signed by 697 global asset owners.
ALSO READ: Ping An contributes to China's first ESG disclosure standards
As of December 2021, Ping An’s responsible investment and financing were nearly 1.22 trillion yuan ($180.7 billion), of which green investment and financing was about 224.6 billion yuan.
Its ESG system has been applied within Ping An and to those subsidiaries with investment business. This includes Ping An Asset Management and Ping An Fund.
Ping An has created specific use cases for different investment strategies to help its investment teams better understand how to use the system.
The firm is also working on leveraging the system and expertise accumulated from designing it to help other third-party entities to develop their ESG frameworks.