MioTech, a Hong Kong-based software company that provides artificial intelligence solutions to financial institutions, says that this year a third of its revenues now derive from work related to ESG.
Jason Tu Jianyu, the company’s founder, says the company has only had a functioning ESG solution for about four months. He says the company has a handful of asset-management clients for the new product, both global firms and Chinese, although he declined to name them, or quantify the firm’s revenues.
ESG – Environmental, Social and Governance – standards require investors to take such factors into account when evaluating companies. ESG has been a prominent requirement among European asset owners, such as pension funds, for a decade now, and the trend is also gaining traction in the U.S. Similarly, listed companies in the West are becoming more willing to position themselves as “good corporate citizens” and including ESG-related metrics in their financial reports.
Asia has been slow on both counts but that is changing. “The wind is blowing to Asia,” Tu said. Global investors are beginning to ask Asian listcos about it, but perhaps more importantly, some regulators and asset owners from the region are also taking this seriously.
China’s securities regulators last year said they will require listcos to regularly make sustainability reports, while asset-management associations there have also urged member firms to devote resources to “green finance initiatives”.
New risk factors
MioTech builds A.I.-based solutions to help buy sides get insight from data analytics, and to help sell-side research departments and private banks’ relationship managers tell data-driven stories. It bases its service on building a library of cross-references (a “knowledge graph”) around a multitude of data points on Asian companies. The idea is to use big-data correlations to spot patterns.
The wind is blowing to AsiaJason Tu, MioTech
Now it is using those techniques for ESG-related mandates, treating these as another set of risk factors that investment teams need to consider.
For example, its team of data scientists have built algorithms based on data sets such as Chinese provinces’ record on chemical spills or worker strikes, to serve as factors in evaluating companies based in those places. Similar it is building data around companies that get fined for environmental or labor malfeasance, as well as suppliers.
The hard parts
The hard part is that, first, there is little relevant data available. “There are 3,700 listed companies in China, but fewer than 10 percent publish sustainability reports,” Tu said. MioTech tries to use big-data correlations to add insight, such as looking at whether companies have been fined for labor or environmental breaches, or if they come from provinces with track records of, say, chemical spills, or if there are red flags in shareholding structures.
The second challenge is that this data, direct or indirect, is rarely structured (machine-readable). Instead it might be in the form of a government website’s PDF, say.
MioTech uses processes such as natural-language processing and image recognition to enable a machine to make sense of such unstructured documents. “It gets easier with enough training data,” Tu said.
The third challenge is defining data. Tu says the company tries to rely on broad categorizations such as European accounting standards, but it’s an imperfect fit. “It’s still early when it comes to industry usage of ESG standards,” he said.
The firm began with China and Hong Kong data sets and is expanding its reach to Singapore and Malaysia.
These same challenges exist worldwide, but they are worse in Asia because ESG reporting is still nascent. There is now plenty of data in Europe and the U.S. (although it lacks standardization) – but not in Asia, which MioTech considers a business opportunity. Global service providers such as stock-index vendors or data companies will need to add Asia information to their own ESG offerings.
For now, though, MioTech is concentrating its sales efforts on asset managers and sell-side research departments. “Equity research teams now need to write ESG reports,” Tu said. He is pitching to the biggest players because they are most likely to have dedicated ESG personnel in Asia.