Risk Management 

<h4 style="text-align: justify;">Original article (only available in Chinses):  <a href="https://finance.mingpao.com/fin/specialpage1675936435843/20230314/1678703213637/%e5%a6%82%e4%bd%95%e5%88%a9%e7%94%a8%e5%a4%a7%e6%95%b8%e6%93%9a%e5%8f%8a%e4%ba%ba%e5%b7%a5%e6%99%ba%e8%83%bd%e7%ad%89%e5%b7%a5%e5%85%b7%e5%8d%94%e5%8a%a9%e8%a9%95%e4%bc%b0%e4%bc%81%e6%a5%adesg%e8%a1%a8%e7%8f%be" target="_blank" rel="noopener">如何利用大數據及人工智能等工具協助評估企業ESG表現 | 明報</a></h4>
 
In light of the heightened focus on environmental, social, and governance (ESG) performance in the corporate landscape, poor performance and negative news will have a significant impact on corporate development. Therefore, assessing the development potential of a company should not rely solely on financial metrics but should also consider ESG performance. Over the past ten years, factors such as climate change and sustainability risks have increasingly emerged as key factors for investors in their asset allocation decisions. The market believes that strong ESG performance can facilitate consistent profit growth, sustain competitive advantage, and enable long-term sustainable development. Moreover, it allows organizations to proactively identify and manage risks through forward-looking strategies, mitigating investment losses attributable to inadequate ESG performance or negative news. As a practical tool for investors, ESG ratings offer a convenient and accessible means to gauge a target company's ESG performance. By referring to these ratings, investors can rapidly and directly comprehend a firm's ESG maturity and discern its significant risk exposures.
 
ESG ratings are crucial in evaluating a company's sustainability performance, but their effectiveness is compromised by several data quality and methodology issues. The effectiveness of ESG ratings is hampered by limitations in data sources and the lack of standardized evaluation methods, leading to varying institutional judgments and interpretations that can cause fundamental problems. Firstly, current ESG ratings suffer from a lack of unified standards, with different rating agencies like MSCI ESG, DJSI, Hang Seng Sustainable Development Enterprise Index, and Sustainalytics establishing their research and analysis frameworks. This results in inconsistencies in rating indicators and increases sustainable investment risks. Additionally, most ratings consider the performance of the three ESG pillars and use their average value or predetermined weight to aggregate them into an overall score. This approach may offset positive and negative impacts, dilute rating information, and failing to analyze a company's performance in different aspects. In some cases, strong social and governance performance may overshadow severe environmental risks, providing little assistance to investors seeking to mitigate potential ESG risks. Furthermore, The effectiveness of ESG ratings hinges on the reliability of external information collected. Nevertheless, internal corporate information such as ESG reports and company documents may contain misleading claims, resulting in biased rating results.
 
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<h2 style="text-align: justify;">Potential and Practical Applications of Artificial Intelligence (AI) and Big Data</h2>
Big data and AI technology can effectively address the challenges posed by ESG ratings. Investors can use AI to mine and filter ESG information from multiple data sources (such as news, social media, government reports, NGO analysis reports, etc.) and previous records according to their investment strategies and areas of interest. Natural language processing technology can be used to analyze unstructured data and comprehensively evaluate a company's ESG performance while filtering out greenwashing noise. Massive data collection significantly improves benchmark analysis credibility, allowing investors to gain insight into the target company's ESG performance relative to industry peers, especially during major ESG events. This enables timely and accurate assessments through quick data collection and analysis.
 
ESG data provider Arabesque AI uses AI engines and ESG data analysis methods to help asset managers automate the integration of multiple financial and non-financial dimensions and preferences, generating highly customized active investment strategies and thematic investment portfolios, including mitigating ESG risks, seizing transition opportunities, and aligning with the United Nations Sustainable Development Goals. On the other hand, the screening process for the first "Top 100 Carbon Neutral Hong Kong Listed Companies" by the Greater Bay Area Carbon Neutrality Symposium (“大灣區碳中和論壇”) leveraged the AI ESG report analysis engine technology developed by the Hong Kong Applied Science and Technology Research Institute(“香港應用科技研究院”). With this technology, data from over 2,000 listed companies' ESG reports was processed in under two hours, during which the engine automatically extracted and analyzed key information, enhancing efficiency while also reducing manual costs. In the future, the application of big data and AI technology will bring infinite opportunities for sustainable investment, helping investors comprehensively understand the target company's performance in ESG aspects, reducing investment and greenwashing risks.
 
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AVISTA [Ming Pao Column] Series: Leveraging Big Data & Artificial Intelligence in ESG Performance Evaluation

The initial public offering (“IPO”) journey has never been straightforward. In addition to business-related financial metrics, evolving stakeholder expectations and heightening regulatory demands for resilient growth supported by well-articulated Environmental, Social and Governance (“ESG”) strategy and performance have indicated that ESG and climate-related corporate mandates growingly tip the scales when it comes to a company’s successful IPO and overall performance.
 
Against the backdrop that regulatory authorities and capital markets around the world are demanding transparent ESG disclosures from companies looking to go public, while IPO-ready companies align themselves with enhanced regulatory frameworks, some of them even make ESG practices front and center in their IPO roadshow phase to gain access to the pool of capital from international ESG-focused investors.
 
Click <a href="../../../../../uploads/EN_IPO_Journey_the_Importance_of_ESG_in_IPO_Process_20221107_VP_ET_SL_ET_SL_SJC_b180b1b534.pdf" target="_blank" rel="noopener">here</a> to learn more about the latest ESG disclosure requirements and ESG essential for IPO applicants.
 
<a href="../../../../../uploads/EN_IPO_Journey_the_Importance_of_ESG_in_IPO_Process_20221107_VP_ET_SL_ET_SL_SJC_b180b1b534.pdf" target="_blank" rel="noopener"><img src="../../../../../uploads/Cover_EN_5f415ec3d4.png" alt="" width="500" height="707" /></a>

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IPO Journey:  The Importance of ESG in IPO Process

Staying at home and working-from-home have become the new norms under COVID-19. The social-distancing measure has rapidly driven the development of the Information Technology industry. Online games, communication software, and e-commerce are all benefited from the pandemic. Digital transformation was also spotted in various industries through adopting big data, cloud computing and artificial intelligence technologies in daily operations. However, the network security, data security and personal information security risks brought by the application of new technologies are more noticeable than ever.
 
In early July 2021, The Cyberspace Administration of China (CAC) issued the "Cyber Security Review Measures (Revised Draft for Comments)” to respond to the data security concerns arising from recent Chinese companies' applications for overseas listings. With the introduction of various laws and regulations, companies should place more emphasis on cybersecurity and strengthen internal control systems to avoid any violations of laws and regulations.
 
Click <a href="../../../../../uploads/_2f7fc17902.pdf" target="_blank" rel="noopener">here</a> to download the full insight. (Available in Chinese version only.)
 
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 The Cyberspace Administration of China (CAC) Draft on  "Cyber Security Review Measures” 

The Securities and Futures Commission (“SFC”) of Hong Kong has issued a statement on 4 July 2019 (the “Statement”) in which the directors’ duties when considering corporate acquisitions or disposals have been further stressed. The Statement listed out several key types of misconduct and deficiencies of the directors commonly seen in transactions, in particular, lack of independent valuation, lack of due diligence on target entity’s financial position, inappropriate valuation procedures, etc.  Further to the “Guidance note on directors’ duties in the context of valuations in corporate transactions” issued on 15 May 2017, the SFC once again reminds directors that they are liable for ensuring the information in relation to a planned corporate transaction should be compiled with due care. Apart from the financial forecast or profit guarantees, the historical financial position of the target entity also requires a thorough analysis in the process of a proper due diligence.  As an experienced independent valuation and advisory firm, AVISTA has outlined following common queries that corporates might raise when aligning directors’ duties with the SFC’s updated requirements in corporate transactions.
 
What are the appropriate procedures in considering any planned corporate transaction?
 
Although it is not expressly required by statutory law or under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), engaging an independent professional valuer, as well as a financial advisor, are recommended for directors in contemplating potential transactions.
 
A professional independent valuer is able to aid the directors in assessing the business performance and prospects of the target entity, so as to protect the interests of the company and its stakeholders.
 
In addition, in case of a connected transaction, an independent financial advisor (“IFA”) is required to be appointed under Chapter 14A of the Listing Rules. IFA will assist the directors in reviewing the overall reasonableness of the transaction, including but not limited to the terms of the potential transaction, the basis of determining the consideration and the valuation report.
 
Independent professional valuation has been obtained. Would that sufficiently fulfill the SFC’s requirements on directors’ duties?
 
Apart from conducting independent valuation, the SFC has also shown increasing concerns about the reliability of the target entity’s financial information.
 
As a matter of fact, financial and legal due diligence is becoming more commonly performed as a part of pre-deal due diligence. In particular, financial due diligence (“FDD”) is an extensive process for a thorough and complete assessment of the target entity's business, assets, capabilities and financial performance.
 
FDD enables the directors to scrutinize the quality of earnings and the financial position of the target entity, which is considered to be a prerequisite for any potential transactions. Such due diligence work allows the directors to identify any potential risk in early stage of the potential transaction, which could possibly enhance directors’ duty to exercise due and responsible care, skill and diligence in the discharge of their duties.
 
Why are the regulators still showing concerns even market approach has been adopted in the valuation? 
 
There has been an upward trend in the applications of market approach. However, the SFC has noted certain cases in which the valuation parameters have been “cherry-picked”.
 
In order to conform with the regulators’ standards, the valuation has to be carried out under a fair and reasonable basis. In adopting market approach, a systematic way of selection of comparable companies constitutes one of the essential parts of the valuation. Factors such as business nature, development stage, geographical location, etc. of the target entity should be considered such that an exhaustive list of comparable companies could be obtained.
 
To read the full statement released by the SFC, please click <a href="https://www.sfc.hk/web/EN/news-and-announcements/policy-statements-and-announcements/statement-on-the-conduct-and-duties-of-directors.html" target="_blank" rel="noopener">here</a>.
 
 
AVISTA’s Professional Services for Corporate Transactions
 
AVISTA provides one-stop financial advisory services that help clients achieve additional growth and ensure their compliance with regulators’ stringent rules and disclosure requirements when implementing business decisions and strategies. 
 
<ul style="text-align: left;">
<li>Valuation Services for Transactions</li>
<li>Financial Due Diligence Service </li>
<li>Risk Advisory Review on Target</li>
</ul>