Chinese insurance and investment firm Ping An has urged a cautious approach to environmental, social and governance (ESG) ratings as some may reward opaqueness in climate risk disclosure, and said there was evidence of “systematic greenwashing” among high-emission companies.

“Some companies engaging in climate risk disclosure appear to be penalised by some ESG rating tools. This gives perverse incentives for selective non-disclosure, leading to greenwashing,” the Ping An Digital Economic Research Center said in a study published on Tuesday (December 8).*

The detailed report employed artificial intelligence (AI) to assess firms’ climate risk disclosures and detect potential evidence of greenwashing – that is, conveying a false impression or providing misleading information about the environmental soundness of a company’s products.

“Surprisingly, firms that do not engage in climate risk disclosure are implicitly rewarded by some rating providers,” said the study, which focused on US and Chinese companies. The results suggest that firms that do not engage in climate risk disclosure may benefit from generous ESG ratings by being able to borrow more.

LEVERAGE CONCERNS

Moreover, the Ping An research found that companies with greater disclosure of metrics of climate risk’s impact on financial performance had higher valuations and lower leverage after controlling for factors such as carbon emissions.

Yet some ESG ratings appear to be positively associated with leverage, after controlling for emissions and other characteristics, said the study. “As ESG ratings are inconsistent in terms of their relationship with firms’ leverage, firms can exploit the dispersion of ESG ratings to appear less risky to investors, another form of greenwashing."

Another interesting finding was that large cap firms that are compliant with the Task Force on Climate-related Financial Disclosures tend to have higher valuations. Hence smaller companies making such disclosures may offer more opportunities for appreciation, the report added.

Overall, “our AI-driven indicators suggest that greater disclosure is associated with lower cost of capital, thus boosting a firm's value”, said Ping An, which has been working for several years to incorporate AI into its ESG investing.

Meanwhile, compliance around disclosure of climate-related metrics is higher on average for lower-emission firms, thus suggesting underreporting by high-emission firms, the report said.

"SYSTEMATIC UNDERREPORTING"

“High-emission firms score better in disclosing financial impact metrics, but with an important exception: information on capital and financing impact is systematically underreported.”

High-emission sectors are likely to have a large number of stranded assets and liabilities – such as those related to coal or oil & gas, seen as having no place in a low-carbon world. The results indicate that a number of firms selectively leave this impact dimension undisclosed.

Ping An has been pushing to improve ESG standards in China for some time. It is the first Chinese asset owner to have signed Climate Action 100+ and the United Nations’ Principle of Responsible Investment (UN PRI), in December and September last year, respectively.

Climate Action 100+ is an investor initiative to help reduce greenhouse gas emissions, while UN PRI signatories are to incorporate ESG factors into their investment and ownership decisions.

*The research, Climate Disclosures and Financial Performance, was carried out in conjunction with the Brevan Howard Centre at Imperial College in London.