Do Organizations pay more attention to ‘S’ in ESG Reporting: A critical evaluation of Alibaba Group
In this case study on Alibaba, one of the most valuable companies in the world and China’s largest online retail platform, we take a look at the events over last few months including the suspended IPO of the Ant Group, which is a part of the Alibaba Group and speculations on whereabouts of its celebrity founder, Jack Ma. This is not an isolated case and on the issue of business continuity, we think there are important differences on the basis of geography and country of origin. The Sustainability and ESG reporting often pays a disproportionate amount of attention to Social issues but many of these issues on Governance often gets ignored. If investors want to avoid unpleasant surprises, the Governance and Environmental issues are often equally important.
First a bit of background. In the last quarter of 2020, most global business media covered the events at Ant Group of China extensively. Unless someone is living under a rock, they would not have missed the stories around Jack Ma, the legendary founder of Alibaba Group, the parent of Ant Group. First, there was the scheduled initial public offering (IPO) in which the company had hoped to raise close to $37 billion from the market, a fund raising that would have been the world’s largest, beating the last year’s $29.4 billion listing of Saudi Aramco. Then came the news that the listing was suspended after the local regulators had a meeting with founder Jack Ma and other top executives of the Ant Group.
Just like Alibaba which is China’s largest online retail platform, the Ant Group has been a phenomenal success in the area of financial services. It is even possible to argue that in many ways, Ant even surpassed Alibaba. In 2004, when Jack Ma’s Alibaba Group, started to build out an efficient payment platform, Alipay, it immediately started doing very well. The app now has almost a billion users, with majority of them active on a monthly basis. Buoyed by Alipay’s success, Jack Ma spun off the app and brought it under a company called Ant Financial, which later became Ant Group.
Last October, Ma publicly and severely criticised China’s financial regulations and called them “outdated” because they were not allowing innovation at a rapid pace in the sector. Apparently and as is widely believed, the comments were not liked by the Government officials and senior functionaries of the ruling party. The Ant Group IPO was first suspended by Shanghai stock exchange, which also prompted the group to suspend the Hong Kong leg of the listing. The suspension, was widely seen as a rebuke to Ma for his public outburst.
Now, there are reports that Jack Ma is missing for months. He has not been seen in public for almost three months now there is speculation about his whereabouts. There are different theories. On one side, there are reports that Ma may be lying low as authorities investigate his businesses empire. But on the other side, there are also reports which are discussing more possibly sinister plans highlighting instances from the past when high-profile Chinese figures disappeared and, then there were reports that how they were arrested and prosecuted.
Of course, it is very difficult to say with certainty what could be the truth. But this development clearly highlights the importance of several important distinctions between different business environments across the world, a) how does the local authorities influence the business decisions and how much leeway they have on specific outcomes by policy tweaking, b) how the public statements of senior managers and owners could lead to serious repercussions but how this will different across geographies, c) why it is important for businesses to look at issues like ‘management continuity’ and ‘succession planning’, d) why these issues are important for the investors in public companies, and, e) how the ESG and Sustainability Reporting should cover issues like these.
This led to EMAlpha taking a deep dive on such relevant issues and specifically on Alibaba, we looked at their Sustainability reporting in detail. What catches an immediate attention is that Alibaba Group has not really published an ESG report after 2018. It has been more than two years and there was no publication on ESG or Sustainability by the Group in either 2019 or 2020. Interestingly, the 2018 ESG Report often talks about the leadership succession, succession planning and other business continuity issues. The word ‘succession’ appears nine times in this 54 page report and out of these, seven times it appears as ‘leadership succession’.
But there is not enough on regulatory challenges in this 2018 ESG report. For example, the word ‘regulator’ just appears twice and ‘regulations’ only six times. This is very clearly on the lower side, considering how important the issue of regulation is for an online retail platform. There is also just a passing mention for General Data Protection Regulation (GDPR). The 2018 ESG report says “We comply with applicable laws and regulations in the markets where we operate when sharing personal data of our customers with third parties, and we obtain opt-in or opt-out consents as required. In 2018, we have been devoting considerable resources to complying with the European Union’s General Data Protection Regulation (GDPR).”. Clearly, you would expect a little more on this considering how important the privacy issues have been for the online commerce industry.
It is the Social issues which completely hogs the limelight. In his ‘Letter from the Chairman’ in the 2018 ESG Report, Jack Ma begins with “Alibaba Group’s mission is to “make it easy to do business anywhere.” Having positive social impact has always been embedded in our organizational DNA. We believe that a profitable and prosperous business can only be achieved and sustained by solving large-scale societal problems.” In his one-page letter, he also focused on the fact that, a) the Alibaba Digital Economy serves hundreds of millions of consumers and tens of millions of enterprises, most of them small businesses, b) This economy extends far beyond immediate customers to impact the lives and businesses of all stakeholders in ecosystem, c) Alibaba has become an institution of public trust.
The word ‘social’ appears 98 times and ‘society’ 9 times, along with ‘community’ six times. Of the total 54 pages, there are 8 pages on Governance, 11 on Social and 5 on Environment. This fuelled our curiosity further. Next, we did an analysis of this report using EMAlpha proprietary tools for ESG evaluation. This tool is based on a proprietary model of evaluating text for ‘E’, ‘S’ and ‘G’ issues separately. Not just on the sustainability or ESG reports, but it can be applied to any text, any news or any source material to see how the coverage measures on these ‘E’, ‘S’ and ‘G’ evaluation. The positive scores mean a favourable tone on the selected parameter of either ‘E’, ‘S’ or ‘G’ and similarly, the negative scores are showing the company in a poor light.
On the basis of analysis of Alibaba’s 2018 ESG Report using this EMAlpha proprietary tool for ESG evaluation, we find the following ESG scores;
- E: -0.21
- S: 3.74
- G: 0.45
This actually confirms our assessment that the ESG report is much focused more on Social issues. At EMAlpha, the ESG team is doing more research on why it happens that ‘Social’ gets more prominence as compared to Environmental or Governance issues. But on the basis of preliminary assessment, we find that some of the underlying contributing factors could be;
- There are reasons in history, the ‘corporate responsibility’ began with the evaluation on what the company is doing for the society and there are legacy reasons.
- The company may focus a lot more on social part because they want to show their more benign version to the outside world.
- Weaving stories which resonate with a reader are far easier in S than in E or G. Why? One reason is that ‘S’ is often less objective than ‘E’ and ‘G’.
To figure out the macro trends in ESG and look at specific cases is a very intense and yet, interesting exercise. The data, information and ratings are a humongous challenge for ESG and it takes time to reach the depth of the issues as the field is evolving so quickly. But, EMAlpha is making a solid contribution in tackling these challenges. EMAlpha has solutions for ESG which are practical and user friendly. For example, EMAlpha has developed a Flexible ESG Framework Management System which is a proprietary technology that makes ESG scores framework agnostic, thus allowing for quick adaptation. In addition, the users decide what matters to them and the EMAlpha system does a classification into E, S, G and more granular categories. We strongly believe that the entire ESG ecosystem requires multiple stakeholders to pull in the right direction to make it operational and that will be the most critically determining factor for ESG’s success in making the corporate responsibility actually work.
EM Alpha LLC
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EMAlpha, a data analytics and investment management firm focused on making Emerging Markets (EMs) more accessible to global investors and unlocking EM investing using machines. EMAlpha’s focus is on Unstructured Data as the EMs are particularly susceptible to swings in news flow driven investor sentiment. EMAlpha works on information discovery and ESG solutions for Investors in Emerging Markets, using AI and NLP tech. Our mission is: “To help increase capital flow, in terms of FDI and FPI, to Emerging Markets by lowering information barriers using AI/NLP”. EMAlpha Products help achieve both alpha and ESG solutions and the idea is to help asset allocators, asset managers, banks and hedge funds along with companies with cost and time efficient access to relevant information. We use thoroughly researched machine learning tools to track evolving sentiment specifically towards EMs and EMAlpha pays special attention to the timely measurement of news sentiment for investors as these markets can be finicky and sentiment can be capricious. Our team members have deep expertise in research and trading in multiple Emerging Markets and EMAlpha’s collaborative approach to combining machine learning tools with a fundamental approach help us understand these markets better.
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