Insights

On February 8, 2024, the Shanghai Stock Exchange, Shenzhen Stock Exchange and Beijing Stock Exchange (hereinafter referred to as the "Three Major Exchanges") simultaneously issued the "Self-discipline/Continuous Supervision Guidelines for Listed Companies - Sustainable Development Report (Trial) (Draft for Comments)" (hereinafter referred to as the "Guidelines"), which were officially released on April 12, more than two months later and will be implemented from May 1, 2024. The release of the Guidelines has made clear regulations on the disclosure of sustainable information such as environmental, social and governance (ESG) by listed companies in my country, filling the gap in the ESG information disclosure standards at the regulatory level of listed companies in my country. At the same time, the Guidelines have made mandatory requirements for the disclosure of sustainable development reports by sample companies of important market indices such as the SSE 180, Science and Technology Innovation 50, Shenzhen 100, and ChiNext Index, as well as companies listed at home and abroad. Through the demonstration effect, it will drive the standardized development of sustainable information disclosure by listed companies and even the entire market. The standardization, consistency, comparability and authenticity of the disclosure of listed companies are the basic guarantees of ESG ratings. The release of the Guidelines will greatly improve the quality of China's ESG ratings.

1. China Chengxin International has incorporated ESG factors into its credit rating index system in 2022

The global capital market pays close attention to the impact of ESG ratings or ESG performance on corporate credit. Since 2017, the three major international rating agencies have gradually begun to integrate ESG factors into credit ratings. With the popularization of ESG concepts in China, the gradual improvement of relevant policies and regulatory systems, more and more institutional investors have incorporated ESG factors into asset allocation and risk management, and the correlation between ESG factors and corporate operations and risk levels has gradually increased. The necessity of incorporating ESG factors into the credit rating framework has become increasingly prominent.

From the perspective of credit rating, the impact of ESG factors on corporate credit risk has the following three characteristics: First, different companies in the same industry often face similar ESG risk exposures, while companies in different industries face different ESG risks. Second, the impact mechanism of ESG factors on corporate credit risk is very complex and may have long-term or short-term impacts on companies. Finally, the potential impact of ESG factors on credit levels is mostly negative, and in rare cases may have an improving effect on credit levels.

Based on the above characteristics, China Chengxin International Credit Rating Co., Ltd. (hereinafter referred to as "China Chengxin International") has integrated and upgraded ESG factors with credit rating methodology in 2022 by absorbing and learning from international advanced experience and professional consensus, based on the overall situation of China's economic and social development, and combined with the characteristics of issuers in China's bond market. It has incorporated ESG factors directly or indirectly related to credit risk into the rating model, further improving the quality of credit ratings and the foresight and transparency of rating results.

Some domestic credit rating agencies still only consider "green factors" or "corporate governance and management" as partial substitutes for ESG factors in the credit rating model, while China Chengxin International selects comprehensive ESG factors related to the credit risk of the issuer, and uses ESG factors as credit rating adjustment items, focusing on the impact of environmental, social and governance factors related to credit risk on the company's risk resistance. In 2023, in order to further improve the accuracy of ESG factor considerations, China Chengxin International will incorporate the ESG rating results of CCXGF Technology (Beijing) Co., Ltd. (hereinafter referred to as "CCXGF") into the ESG factor consideration system used in credit ratings. For entities with ESG ratings below BBB (inclusive), the impact on credit ratings must be evaluated.

In April 2024, the People's Bank of China, the National Development and Reform Commission, the Ministry of Finance, the Financial Regulatory Bureau, the China Securities Regulatory Commission and other seven ministries and commissions issued the "Guiding Opinions on Further Strengthening Financial Support for Green and Low-Carbon Development", which pointed out that "credit rating agencies are encouraged to establish and improve a rating system for green financial products, and support credit rating agencies to incorporate environmental, social and governance (ESG) factors into credit rating methods and models". In the future, as relevant policies are gradually improved and ESG-related information disclosure in various industries becomes more comprehensive, the role and importance of ESG factors in credit rating methods and models will be further enhanced. China Chengxin International will further optimize the indicator system and evaluation methods of ESG factors in credit rating methods and models based on the risk characteristics of different industries, in order to more accurately reflect the impact of ESG factors on credit risk.

2. The release of the Guidelines will greatly improve the quality of ESG ratings of Chinese listed companies

Professional third-party ESG ratings are of great reference value to investors and other stakeholders in the capital market. However, due to the development stage of ESG management of Chinese companies and the irregular and incomplete information disclosure, ESG rating results are currently difficult to apply. The release of the "Guidelines" first constrains the disclosure standards and norms.

The Guidelines follow the principle of "dual importance" and are consistent with the essence of ESG ratings. The Guidelines clearly identify issues in two aspects: those that have a significant impact on corporate value (financial importance) and those that have a significant impact on the economy, society and environment (impact importance). "Dual importance" is also a reflection of the inherent nature of ESG ratings. On the one hand, ESG ratings focus on the evaluation of non-financial indicators, and through the grasp of corporate governance, strategy, operations and other aspects, determine the risk transmission mechanism, and effectively identify the inherent ESG risks that affect the sustainable development of enterprises for stakeholders; on the other hand, ESG ratings also focus on the short- and medium-term benefits and impacts of corporate operating behaviors on the outside, and incorporate the environmental, social and economic values of enterprises into ESG rating factors. The consistency of the inherent concepts of ESG information disclosure and ESG ratings will help meet the needs of investors and other stakeholders.

The selection of topics in the Guidelines is in line with international consensus and takes into account local characteristics, meeting the essential needs of building an ESG rating system for China's national conditions. The Guidelines carry out sustainable development information disclosure around the four aspects of "governance, strategy, impact, risk and opportunity management, indicators and targets", which is consistent with the IFRS framework content released by the International Standards Organization ISSB; in terms of topic selection, the Guidelines clearly define "responding to climate change", "resource utilization and circular economy", "pollution prevention and ecosystem protection", "commercial bribery and unfair competition ", "employees" and other global consensus issues, especially in the aspect of "responding to climate change", which is also a specific implementation under the background of China's "carbon peak and carbon neutrality" goals.

In addition, the "Guidelines" also fully consider the effective combination of international sustainable development goals with my country's actual situation, such as green development, support for small and micro enterprises, and achieving common prosperity. It has set up topics with Chinese characteristics such as "rural revitalization", "science and technology ethics", and "payment by small and medium-sized enterprises". On the basis of complying with the major international sustainable development goals, it carries out localized construction in specific content.

The CCXGF team has carefully studied the indicator system of the "Guidelines", which includes about 288 detailed indicators from the information disclosure perspective. Among them, those that are in line with the China Chengxin ESG rating indicators (Level 3) are shown in the following table for reference by market stakeholders.

The release of the Guidelines will enhance the comprehensiveness and integrity of ESG information disclosure by listed companies, and will also have important guiding significance for the ESG management of listed companies. For ESG ratings, standardized and comprehensive indicators will more accurately reflect the ESG governance level of Chinese listed companies, and also provide an important basis for judging the scientificity, quantifiability and comparability of ESG rating indicators and weight settings. China Chengxin will uphold its objective, neutral and impartial third-party status, and continue to optimize and promote the ESG rating indicator system for Chinese listed companies in accordance with the contents of the Guidelines, and provide effective support for listed companies to improve their own ESG governance level and meet the requirements of stakeholders.