By Joseph Neu
From China’s social credit system to ESG scores, corporates have new ratings to manage. Who will manage them and how?
The time to learn is now. The China-based CFO of a multinational corporation told members of the AsiaCFOs’ Peer Group that he’s working on a project to explore the implications of China’s so-called social credit system for his company. The full system is due to come together in 2020, and pilot efforts are already underway.
A holistic take on credit. Perhaps the best way to think about social credit is as a more holistic approach than the western focus purely on finance. The Chinese word for credit, ‘信用’ (xinyong), has its origins in Confucian ethics and morality and applies to the dignity and trustworthiness of an individual. The Chinese government has formulated its social credit system for commending trustworthiness/creditworthiness and punishing untrustworthiness/uncreditworthiness based on this concept.
Enter big data. While the Chinese Communist Party ultimately decides the determinants of China’s social credit scores, there will be ample reliance on big data gathered from numerous sources, including surveillance cameras and social media. Research into social credit scoring has been ongoing, including via Chinese fintech pioneers such as Sesame Credit, part of Alibaba’s Ant Financial. These fintechs use online purchase history, social media interactions and countless other data points to determine creditworthiness. Their scoring systems also have a big financial inclusion benefit by offering credit to individual and small businesses that banks and other traditional credit providers ignore. Digital algorithms overcome credit assessment challenges found in legacy systems.
Upsides to scoring. While the media assessments have focused on the horrors of being blacklisted—including the inability to book trains, planes or hotels and digital shaming posters—a good score could provide access to favorable financing terms, lower tax rates or even automatic approval to move money out of the country. A bureaucracy of yes or no could be replaced by the social credit scoring algo.
The new ratings management. Understanding how social credit scores come about, therefore, may be a bit like figuring out how the Google search algorithm ranks your web page. There will also be the countless advisory and consulting firms promising to improve your score. Hopefully, the CCP will provide the transparency it promises on what drives the social credit scores it sanctions.
Connecting the dots to ESG. The other major attempt to make credit ratings more holistic is found in environmental, social and governance (ESG) scores. ESG scores so far are focused on companies and not individuals, and the targeted use case, for now, is guiding investors seeking to provide capital to firms making positive ESG contributions. But other than the narrower scope and linkages to personal data, social credit scores and ESG scores are both seeking to influence behavior deemed positive by societal leaders.
New credit managers needed. While it’s still early days, the shift to more holistic credit assessments is real and not confined to China. So traditional managers of credit and credit ratings need to figure out how and who will help firms manage these new ratings. Is it the treasurer, who typically manages the old-school credit rating and rating agency relationships? Or someone outside of finance, given that these new credit assessments are so much wider in scope? It’s time to start asking these questions.