A two-step approach: In our accompanying report (see China Internet: A new playbook, 19 October 2021) we integrated the ESG impact into our models. We walk readers through it inside but the two major steps are: (1) we identified key ESG factors (Exhibit 2) for the sector and for quantifiable factors we included the impact into our earnings (Exhibit 3), and (2) for qualitative ESG factors we included them in our terminal growth rate (Exhibit 19).

The result: Tencent, Alibaba, Meituan, and JD.com had the best ESG practices in our China internet coverage universe. That’s important as companies with the best ESG performance should enjoy stronger long-term growth, in our view, which we reflect by giving them higher terminal growth rates (3.5% vs. 2.5% for companies that do less well). In many cases though this was partially offset by cuts to line items in our estimates as a result of ESG factors we identified such as companies needing to pay more by increasing insurance coverage for qualified delivery drivers.

Our E, S, and G approach…: On the Environmental front, we looked at greenhouse gas (GHG) emissions, data centre energy efficiency (for Tencent, data centres generate 88% of its total emissions), and waste generated from packaging and parcel delivery. We find companies with cloud businesses, and therefore more data centres, and logistic businesses generate higher GHG volumes. On Social issues, we looked at employee numbers, job creation, employee benefits, and how important the business is to people’s livelihoods. On Governance, we considered factors like board member composition, government ownership, and data security.

...and our findings: On Environmental factors, we found Tencent has consistently improved its data centre power usage effectiveness. On Social factors, given the current regulatory focus, we believe Alibaba, Tencent, Meituan, and JD.com should be viewed in a positive light given the significant number of staff they each employ and the numerous indirect job opportunities they provide. On Governance, Alibaba and Baozun have a higher percentage of women on their respective boards.

JD.com’s new appointment of its head of compliance to the CEO role of JD Digits (FinTech arm) highlights the company’s efforts to prioritise data security, especially in light of the latest regulatory developments.