On September 13, the 2023 ESG Global Leaders Conference was held in Shanghai. The theme of this conference was "Sustainable Economic Growth, Social Development, and Environmental Protection." ESG leaders, rating agencies, investors, and businesses from around the world came together to discuss how to promote sustainable development in China through the implementation of ESG strategies.
In the process of ESG development, ESG rating agencies play a crucial role in the ecosystem. They provide the basis for ESG investments, forming an essential market infrastructure for sustainable finance. Additionally, ESG evaluations can help businesses identify weaknesses and shortcomings, leading to systematic improvements in their ESG performance.
Compared to international standards, there are significant differences in ESG ratings among agencies in China.
With the awakening of sustainable development and ESG principles, the construction of ESG rating systems has accelerated. Currently, there are over 600 ESG rating agencies worldwide, while China has only about 20, indicating slower progress.
When comparing the ESG rating systems of domestic and international rating agencies, the ones most widely recognized globally are MSCI's ESG rating system and Thomson Reuters' ESG rating system. MSCI's ESG rating system consists of three categories, ten themes, and 37 key indicators. It uses seven grades, ranging from AAA, AA, A, BBB, BB, B, to CCC, to assess the impact of various indicators on companies and the duration of their impact on industries. In contrast, domestic ESG rating agencies like CSI Evaluation System consist of 14 themes, 22 units, and over 180 indicators. Sino-Securities has 14 secondary indicators, 26 tertiary indicators, and over 130 underlying data indicators. Due to these differences in evaluation methods, there are significant disparities in the results among rating agencies.
Comparing the qualitative selection of indicators between domestic and international rating agencies, international ESG rating systems mainly incorporate nine indicators, whereas Chinese ESG rating systems include seven indicators, without considering factors such as "standardization of ESG rating criteria" and "communication between ESG rating agencies and the rated companies."
Chinese ESG rating agencies are currently in the early stages of development.
Currently, the ESG rating frameworks among domestic agencies are relatively consistent, primarily focusing on risk exposure and risk management capabilities. Major domestic ESG rating agencies include Wind, SynTao Green Finance, Sino-Securities, Harvest Fund, International Institute of Green Finance (IIGF), CASVI, RKS, and Asset Management Association of China（AMAC), among others. However, due to the fact that ESG ratings are not yet regulated, there are significant differences in the characteristics of ESG evaluation systems among different rating agencies. Additionally, these agencies vary in the topics they focus on, the indicators they select, the weighting of these indicators, the methodologies they use, and the data they collect, leading to differences in rating results and posing challenges for users.
Among these agencies, Wind, SynTao Green Finance, Sino-Securities, and Harvest Fund have advantages in terms of evaluation scope, timeliness, and data capabilities. They can serve as effective tools in the investment decision-making process, providing investors with more comprehensive ESG information and helping them select higher-quality investment targets for portfolio construction.
Overall, most companies in China tend to follow foreign ESG rating results, using AAA to represent the highest rating. This reflects that Chinese ESG rating agencies are currently in a stage of learning and referencing international practices. At the same time, there are three main shortcomings in the current domestic ESG rating landscape: Firstly, most rating agencies primarily focus on publicly listed companies and lack attention to non-listed companies, which fails to meet the demand of investors for comprehensive coverage of the entire market. Secondly, in terms of indicator selection within the rating system, Chinese ESG indicators are characterized by opaque evaluation processes, biased indicator setting, and subjectivity in evaluation methods. Lastly, many domestic rating agencies have low update frequencies for their ESG rating data.
To internationalize China's ESG standards, it's not about localizing international standards. Building a comprehensive ESG rating system is a long-term process. Different countries have different institutional mechanisms and developmental stages, so there should be variations in the design of ESG rating system indicators. Given China's unique socialist characteristics, international ESG rating systems may not be entirely suitable for the Chinese market. Therefore, the goal should be to internationalize China's ESG standards rather than constantly emphasizing the localization of international ESG standards. Based on this, the following four recommendations are proposed:
Policy Guidance: Advocate for the government to improve regulatory measures. Given the subjectivity of ESG ratings, the government should enact relevant laws and regulations to reasonably constrain industry "unwritten rules" and similar behaviors. The government can also coordinate corporate ESG disclosure information to provide more reliable data for ESG ratings.
ESG Rating Agencies: Develop uniform basic measurement indicators. Based on China's national conditions, establish a set of basic indicators that companies can further refine. This ensures a certain level of objectivity in rating results, supports the development of China's ESG rating market, enhances market recognition of the ESG system, and increases investor trust. Particularly for controversial indicators, standardizing them can reduce market differences.
ESG Rating Agencies: Standardize the frequency of rating result updates. Address the issue of varying update frequencies for rating results among different companies by establishing uniform rules, specifying a minimum number of updates per year, and allowing capable rating agencies to increase their update frequencies. Rating agencies should also promptly supplement data related to their results, monitor corporate operations, and reduce rating result disparities.
Companies: Strengthen ESG information disclosure efforts. Encourage healthy competition and mutual restraint within the industry. This reduces the possibility of industry "black-box operations" and artificial rating disparities while enhancing the reliability of the ESG system. Timely and comprehensive ESG information disclosure is essential, including both qualitative and quantitative data. Another crucial aspect of the ESG evaluation system is a company's negative news. Companies should strive for full disclosure, enhancing the management of qualitative and quantitative ESG data.