In recent years, corporate governance practice scandals have occurred frequently. Volkswagen's emission test scandal has forced it to pay nearly 30 billion euros in fines and compensation. Facebook's abuse of data led to the evaporation of its market value by more than 10%. While the company suffered large financial losses, the interests of investors have been seriously infringed. No wonder corporate governance has become the ESG factor most involved in investment research and analysis. The availability of financial data makes governance factors account for a larger proportion in China's ESG rating system, and it is easier to quantify relative to environmental and social indicators. Therefore, we choose to start with governance factors and discuss the framework of ESG rating system at home and abroad in the form of question and answer:
What issues does corporate governance cover? Firstly, the purpose of corporate governance is to maximize the interests of stakeholders. For listed companies, on the one hand, corporate governance involves the company's organizational structure, including the board of directors (structure, scale, diversity, skills and independence), executive compensation, shareholder rights, stakeholder interaction, information phi, business ethics, bribery and corruption, internal control and risk management. On the other hand, it also involves the impact of the company's business strategy and its implementation on environmental and social factors. According to the survey of CFA Association, board accountability is the ESG issue most concerned by investors (Figure 1).
From the perspective of value creation, why are governance factors most concerned by investors in ESG? A strong governance framework can safeguard the rights and interests of minority shareholders, which has an important impact on the valuation of the company. The world bank pointed out that a study of 539 large enterprises in 27 economies showed that enterprises in economies with good investor protection generally had higher valuations; In addition, the risk tolerance and growth rate of enterprises are positively correlated with the quality of investor protection system. A better governance system enables companies to make higher risk and more valuable investments.
What norms or guidelines does the governance factor framework refer to? Founded in 1995, ICGN (International Corporate Governance Network) is a global leader in the formulation of corporate governance and due diligence standards. In addition, there are OECD corporate governance principles. China's guidelines include the guidelines for the governance of listed companies issued by the CSRC.
ICGN aims to improve corporate governance, risk management, compensation policy, shareholder rights and transparency. Most of its members are investment institutions, with a total asset management scale of more than 59 trillion US dollars. ICGN global corporate governance principles (GGP) contains ten guidelines, which are jointly formulated through member consultation and have become the standard for many investment institutions to formulate voting policies and corporate participation policies (Table 1).
In terms of China's ESG disclosure framework, pri (United Nations principles for responsible investment), business channel ronggreen and other institutions put forward the recommended indicators of China's mandatory ESG disclosure framework according to the sustainable development goals, existing regulations and market practice. The quantitative indicators of governance include the proportion of female members of the board of directors, decentralization of authorization, President / CEO decentralization, and the average salary ratio between CEO and employees.
What are the recognized third-party ESG data providers? Overseas: MSCI, sustainalytics under Morningstar, S & P Dow Jones, etc; China: business road ronglv, Huazheng, Wande, etc.
In terms of data sources, in addition to public information such as company financial reports and Sustainability Reports, major databases and media reports, institutions represented by S & P Dow Jones also collect data directly from the target company through questionnaires. In terms of ESG scoring system, the basic framework is similar, but the specific indicators and judgment methods are different, and the definition and weight of indicators are more subjective. In terms of scoring methods, there are great differences, but the underlying logic of calculation is similar: score from different dimensions, weighted average each index, and finally obtain the total score. In addition, many data providers dynamically monitor negative public opinion / disputes or risk events and adjust the rating results accordingly.
In terms of comparison at home and abroad, China's quantitative ESG indicators are not as rich as overseas ones. Overseas institutions generally adopt a combination of qualitative and quantitative methods. For example, the three-level subdivision indicators of MSCI have quantitative evaluation, and the qualitative weight adjustment of the rating results. However, under the limitation of data availability, many ESG indicators in China are biased.
In terms of governance indicators, what are the main differences in ESG indicator scores at home and abroad? China's governance factors account for a larger proportion of the overall ESG rating, and focus on the interests of shareholders and the company. Overseas assessment dimensions are more diversified, focusing on the consistency of corporate behavior relative to its governance principles or strategies, while China focuses on accounting or auditing. As shown in Table 3, in terms of the number of indicators, MSCI is much less than Wande, and the former is more directional, while Wande divides each part into specific indicators.
How to select ESG rating data provider? It can be selected according to the investment strategy and the coverage of data suppliers. For example, for the bottom-up investment strategy, sustainability, which focuses on the evaluation of a single company, is a good choice. The data supplier generates the corresponding ESG rating report for each subject, which is highly targeted, and provides the ESG ranking of the subject relative to similar companies in the same industry around the world. In addition, some ESG ratings are provided by index companies such as MSCI. If there is a preference for the ESG index or the company's index is used as the benchmark, the data provider can be selected accordingly for the consistency and relevance of the data.
Risk tip: the intense geopolitical conflict has led to the reversal of the global carbon neutralization trend; Covid-19 virus mutation leads to vaccine failure and asset price collapse
