Background
In Hong Kong, with the release of the revised ESG Reporting Guide by Hong Kong Exchanges and Clearing Limited (HKEX) in December 2015, HKEX listed companies are all required to disclose their ESG information annually and report on ‘comply or explain’ provisions in a stricter manner. There is no denying that we now see an increasing number of listed companies report on ESG information in order to fulfil the compliance requirements. Those companies are becoming more aware of connection between their business financial outcome and ESG management quality. They are therefore expected to continue to achieve higher ESG performance and reporting standards over time [1].
With more companies realising that ESG is essential to their business success in the long run, how and to what extent they should incorporate ESG concerns into their daily practice and business strategies now has been a new task to all Hong Kong-listed companies. Meanwhile, stakeholders also pay great attention to the maturity of ESG management and implementation within companies, with which they can better measure the long-term value and competitiveness of the enterprise.
To satisfy the demands of those stakeholders who necessitate a higher degree of transparency, accuracy and comparability of corporate ESG data, GCESG provides an effective solution to our customers that allows them to position and benchmark their ESG levels in the industry more precisely. GCESG ESG Rating model was majorly geared toward listed companies in Hong Kong which are needed to meet the requirement in Appendix 14/15 (Corporate Governance Code and Corporate Governance Report) and Appendix 20/27 (Environmental, Social and Governance Reporting Guide). Thus, unlike most ESG rating technologies in the market nowadays, GCESG ESG Rating methodology was well-designed and formulated principally in accordance with relevant guides that regulate the ESG management approach for listed companies in Hong Kong. With this ESG rating model, companies, investors and other stakeholders who prioritise corporate ESG performance in a company’s sustainable development can flexibly pick up their concerned ESG topics for benchmarking and easily compare with their selected peers.
Features
a. Full coverage of ESG topics strictly required by HKEx
With professional experts who have years of experience in ESG reporting and investment industry in Hong Kong, GCESG aims to establish an ESG Rating model that acts in coordination with the Environmental, Social and Governance (ESG) related guides released by HKEx. Since all Hong Kong listed companies should accordingly report on ‘comply or explain’ provisions required in those guides [2], GCESG is committed to processing those publicly available information sources based on the compulsory and recommended disclosure of corporate ESG performance, and eventually conducting a pinpointed data comparison under the standardised measurement scale.
b. Percentile Rank scoring [3]
To provide customers with a meaningful and comparable result, Percentile Rank scoring methodology for grading has been adopted by GCESG. Instead of giving each company an absolute ESG performance score, we believe a scientific relative scoring analysis can better distinguish one company from another in terms of a diverse range of ESG topics. The totally distinct rating results of one company in lists that contain different peers are regarded to be a dynamic way that companies identify their strengths and weaknesses from various perspectives.
c. Objective evaluation with comprehensive qualitative and quantitative grading standard
GCESG ESG Rating model rigorously adheres to the principal of objectivity with well-defined and specified indicators, thereby significantly minimising the possibility of any subject speculation that does not have solid factual evidence. To ensure the unification and consistency of the implementation of rating procedures, a standardised rating system that consists of a variety of qualitative and quantitative indicators has been well-devised. Specifically, a total of 120 indicators falling into three aspects are given different rating procedures according to their property. While the quantitative data is normalised in ways such as transforming into intensity for comparison, qualitative data is also assigned a ‘numeric’ value according to GCESG rating rules that reflects the level of corporate ESG performance in each category based on a range of factors including disclosure completeness, corrective actions, regulation-compliance and so forth.
d. Customised indicators and subjects for comparison process
Stakeholder engagement and materiality assessment are strongly supported by us before ESG rating, which we believe are vital to enhancing the value of the entire benchmarking process. The outcome of preliminary ESG topic screening is then considered as a tool for creating tailored indicator packages and selecting peers for rating. In a nutshell, GCESG ESG Rating model takes into account the flexibility of benchmarking process and commits to genuinely reflect the preferences of both companies and their stakeholders.
e. Five-star rating system
The five-star rating system is universally used to help customers rank the performance and quality of product/service they receive. Considering its popularity and understandability, GCESG adopts the five-star rating system as a visual tool to help present final ESG rating results.
Overall structure
GCESG ESG Rating model has an explicit structure comprised of three pillars: Environmental, Social and Governance, which are formed by a total 14 categories including Emissions, Board, Health and safety, and so on. Under these categories, 120 Key Performance Indicators have been well-designed according to specific listing rules and guide of HKEx and can then be applied to measure the ESG performance of each company.
Data collection
To ensure the effectiveness of GCESG ESG Rating model, a professional team of research analysts are trained, guided and responsible for the collection of sufficient and accurate ESG data in a proper way. Given the current ESG development in Hong Kong and ESG reporting requirements by HKEx, the required ESG information for the rating model is mainly extracted from corporate annual reports, ESG reports, CSR reports, sustainability reports, and other stock exchange filings. With the requirement of HKEx on the transparency, validity and balance of corporate performance disclosure, we believe a heavy dependence on those sources regulated by HKEx can facilitate the credibility of rating results and efficiency of our ESG Rating model. Since reliability of the input information is always of paramount importance, the database is regularly updated based on any refreshment of data sources and company news.
Rating process
With sufficient data input and quality control of collected information, a rigorous series of procedures are strictly taken to ensure the fairness, completeness and preciseness of ESG rating results. In this part, we will demonstrate how the three pillars (E, S and G) of a company can be graded and an overall ESG performance can be rated as compared to chosen peers.
- Should there be no particular requirement in the indicators list, all 120 well-defined indicators under 14 categories of Environmental, Social and Governance pillars are adopted in the calculation one by one;
- A comparison list comprised of subject companies for the rating project is formulated (at least 10 peers totally);
- Values from all companies in the list are extracted for all indicators, under which numeric numbers should be assigned to each company according to GCESG rating rules;
- Percentile Rank scoring formula is applied for companies under each indicator;
- Values are averaged and assigned to each category, such as Emissions;
- Percentile Rank scoring formula is applied for companies under each category;
- Pillar scores and ranks can be derived by averaging all category scores under each pillar;
- Percentile Rank scoring formula is applied for companies by averaging three pillar scores;
- Five-star rating system is used to measure and present the final rating result of each company in terms of its overall ESG performance during the reporting year.
Five-star rating system
To present a direct and explicit outcome of comparison, the five-star rating system is adopted which divides rating subjects into 10 levels according to their overall percentile scores. Specifically, each star/half star has one range equivalent in the percentile scoring result as illustrated below.
Appendix
[1] ‘The ESG journey begins’, KPMG China, November 2017, (https://assets.kpmg.com/content/dam/kpmg/cn/pdf/en/2017/11/the-esg-journey-begins.pdf);
[2] Main Board Listing Rules, (https://www.hkex.com.hk/Listing/Rules-and-Guidance/Listing-Rules-Contingency/Main-Board-Listing-Rules/Appendices?sc_lang=en);
[3] Percentile Rank, Wikipedia, (https://en.wikipedia.org/wiki/Percentile_rank);
[4] Five-Star Quality Rating System, American Health Care Association (AHCA), (https://www.ahcancal.org/facility_operations/survey_reg/Pages/FiveStar.aspx).
