Market Insight | ESG funds in China
Overview of ESG Funds in China
Our research showed that by the end of 2019, there are almost 80 different ESG-related funds in China, launched by 30 different fund management firms, of which 68% are joint ventures, such as AXA SPDB Investment management, BOC Schroder Fund management, ICBC Credit Suisse Asset Management, Aegon Industrial fund management and Penghua fund management who issued 6 ESG related funds top of all these funds. The other 32% are from Chinese funds, e.g. E fund, Bosera fund management and China Southern fund management, etc.
The funds can be broadly categorised into different groups of E, S, and G pillars, where 68.49% under environmental pillar, named from 'Environment', 'Green Funds' to ‘Low Carbon' as key words. 'Social Responsibility' and ‘Governance' two pillars only make up for 9.59% and 6.85% respectively. Considering the total amount of publicly offered funds are more than 9,300, ESG themed funds are still less than 1%.
China ESG funds investment strategy
Based on our study, most of the ESG themed funds use methods combining negative screening and comprehensive scoring.
Using 'Bosera sustainable development Fund 100' as an example, the first step they took in the compilation process is to eliminate listed companies by screening them against 17 indicators across 6 aspects including industrial policy, special industry, financial affairs, negative events, violation of laws and regulations. As such, the negative elimination method adopted by ESG ETF strategy addresses non-financial and qualitative risks that cannot be ignored in the selection of ETF constituents.
After screening, the index enters the "evaluation model", and scores the listed companies based on 55 segmentation indicators. The index then selects the top 100 companies from the highest to lowest scores to be included in the market capitalisation weighted portfolio. More recently, additional indicators have been included to rank companies on their social and corporate governance policies and selects the well-performing companies to be included in the portfolio index. We will write a separate article on details of the China social credit system which is expected to be effective gradually starting from 2020.
History of ESG and Social Responsibility Funds
Socially responsible investment has attracted more and more attention from financial institutions, but the earliest introduction of the concept of responsible investment can be traced back to a more than a decade ago.
Aegon industrial fund is the earliest practitioner of socially responsible investment in the China A-share market, Aegon industrial social responsibility fund and Aegon industrial green investment fund were established in April 2008 and May 2011 respectively. Since the launch of the first social responsibility fund in the Chinese market in April 2008, it has attracted wide attention from all sectors of the society. The social responsibility fund has become the most representative and important in promoting the development of responsible investment in China.
Performance of China ESG funds
A few ESG themed funds have exceeded 1 billion RMB, approximately equal to 15 million USD, e.g. E Fund ESG responsible investment fund.Looking at the performance of these ESG funds, many of them are tracking CSI300 index which brought more than 30% of return in average in 2019. Taking the three funds mentioned above as an example, data shows that in 2019, the yearly return of Aegon industrial green investment mixed fund has achieved 64.28% and accumulative returns for Aegon industrial social responsibility fund and Aegon industrial green investment fund since their establishment have reached 324.55% and 173.27% respectively. (data from Sina Finance) HSBC Jintrust low carbon pioneer fund has also received an outstanding 54.26% yearly return which largely beat its benchmark CSI300. However, It is also interesting to see that a few funds committed to invest in green energy or technology not less than 80% of its overall portfolio but leave room of 20% to pursue extra returns.
Looking into the future for ESG Funds in China
In 2018, Bosera fund officially joined the United Nations organization for responsible investment principles (UN PRI) and became one of the first public offering fund companies to practice ESG investment philosophy in China.
On November 1, the company officially joined the United Nations responsible investment principles organization (hereinafter referred to as UN PRI), becoming a public offering fund company that practices the investment philosophy of environmental protection, social responsibility and corporate governance (hereinafter referred to as ESG) in China. Currently, only a few large public offering funds in the industry have obtained the above qualification.
By the time of we publish this article, 'Bosera sustainable development Fund 100” hasn’t yet started trading. The year of 2019 could be considered as the first year of launching ESG themed funds in China. By the end of 2019, E-Fund Management collaborating with APG was launching a fixed-income strategy ESG fund, while China Southern Asset Management launched its first equities-focused ESG fund in the same month.
The Hwabao MSCI China A-share universal ESG Index fund (LOF) (security code 501086) managed by Hwabao WP fund management co., Ltd. was listed on the exchange in September 2019. E-Fund ESG responsible investment equity-initiated funds (ESG) was also established in the same month. These two products are the first funds in the public offering market to explicitly include the word "ESG" in their names. China fortune, Cathay Pacific and other public funds' ESG-related products have also submitted filings, according to data disclosed on the CSRC's website.
With the increase in foreign investment in the allocation of A shares, ESG strategies are becoming increasingly effective, and is worth paying attention to following the increase in MSCI China A shares. You can read our previous article regarding the increase in the inclusion ratio of a-share large-cap stocks which increased from 15% to 20%. We see this trend will likely to continue in 2020 with the emergence of new ESG and sustainability related funds in the market.