How Hang Seng Indexes Company is Shaping Asia's ESG Investment Landscape

来源:投资洞见与委托 作者:投资洞见与委托 发布时间: 2年前

Source: Shutterstock

Hang Seng Indexes Company is on a mission. 

That mission is to provide indexes to support client's product development, always watching for trends and regulatory developments in the market and innovating to accommodate these into its product suite. It's a mission that has made it the index compiler of choice for clients to issue index-linked products and derivatives including structured products, index funds and exchange-traded funds.

Nowhere is this clearer than in the creation and constant evolution of The Hang Seng Corporate Sustainability Index Series ("the Index Series"), which has anticipated, and facilitated, the rise of environmental, social and governance (ESG) investing from a niche segment 10 years ago to the mainstream.

Today, allocating capital to companies – and products – that mitigate climate change and support the journey to net zero carbon emissions, alongside other ESG goals, is not merely a "nice to have" for investors or a means to show their commitment to sustainability, it is a central element of their investment strategies. 

This evolution has also been driven not just by public consciousness, but also by regulators across the globe as they have introduced sustainability reporting requirements for investors. 

Riding on these trends, Hang Seng Indexes Company is constantly innovating and adding new products to its Index Series, including the Hang Seng Climate Change 1.5℃ Target Index, the HSI ESG Enhanced Index and the HSI Low Carbon Index.

It is that commitment which led to its winning the Insights & Mandate award for ESG Innovation of the Year.

The Hang Seng Climate Change 1.5℃ Target Index

The Hang Seng Climate Change 1.5℃ Target Index was designed with reference to the minimum standards of the European Union's Paris Aligned Benchmark (PAB), which include significant greenhouse gas (GHG) emission reductions (50%), year on year decarbonization (7%), and stringent exclusion criteria, aiming to help asset managers develop investment portfolios with reduced carbon emissions profiles. Taking the Hang Seng Large-Mid Cap (Investable) Index (HSLMIV) as its starting point, it screens stocks against international sustainability guidelines and for involvement in controversial products or services, such as oil and gaseous fuel extraction, refining and distribution, and harm to the environment.

It then weights the screened stocks based on their GHG emissions intensity. Those with a lower emissions intensity are overweighted, and those with relatively higher emissions intensity are underweighted. 

"Through this stringent screening and weight tilting,  the average emissions intensity of the Climate Change 1.5℃ Target Index is around 85% lower than that of the HSLMIV," says Taie Wang, Chief Sustainable & Emerging Business Officer at Hang Seng Indexes Company. "This makes it a powerful tool for investors to access the Hong Kong market while align their investments with the PAB goals – accelerating the global journey towards a low-carbon future and reaching net-zero goals." 

Taie Wang, Chief Sustainable & Emerging Business Officer at Hang Seng Indexes Company (Source: Hang Seng Indexes Company)

The HSI ESG Enhanced Index and the HSI Low Carbon Index

The HSI ESG Enhanced Index applies key ESG principles to the constituents of Hong Kong's stock market barometer, the Hang Seng Index (HSI), including compliance with the United Nations Global Compact framework on social responsibility. It screens out HSI stocks that have the highest 10% ESG Risk Ratings (Note 1) and are involved in controversial products or services. 

The HSI Low Carbon Index, meanwhile, tilts HSI constituents based on their carbon emissions intensity, giving those with lower intensity a higher weighting and vice versa. 

"The HSI ESG Enhanced Index reduces the ESG risk by about 20% compared with the HSI, and the HSI Low Carbon Index has a weighted average carbon intensity that is more than 50% lower than that of the HSI," says Taie Wang. "These are powerful benchmarks for investors seeking to track the HSI's performance while capturing investment opportunities in the transition to a greener and low carbon economy."

Powerful market response

Globally, there is an increased appetite for passive ESG products and solutions, particularly in the exchange-traded fund (ETF) segment. 

ESG ETF assets under management (AUM), have surged in the past decade to reach USD391 billion in 2021, up from a mere USD8 billion in 2011. (Note 2) This near 50-fold increase far outstripped growth in the AUM of all ETFs, although this also rose impressively to USD10.02 trillion from USD1.35 trillion. (Note 3) 

Hong Kong's ETF market has also grown rapidly and is set to receive a further boost from the inclusion of eligible ETFs in the Stock Connect program with the Mainland China, which was introduced in July 2022. (Note 4) 

"We have had an outstanding market response to our ESG indexes," says Taie Wang. "In February 2022, an ETF tracking the HSI ESG Enhanced Select Index (Note 5) was listed on Hong Kong Stock Exchange. This was the first ESG ETF based on the HSI approved by the Securities & Futures Commission and was quickly followed in March 2022 by the approval of an ETF tracking the HSI ESG Enhanced Index in March. Yet another ETF tracking the same index has just been launched earlier this month."

"Furthermore, a fund product linked to the Hang Seng ESG 50 Index, which captures the performance of the top 50 Hong Kong-listed ESG leaders, has been approved for MPF investment in Hong Kong, and a constituent member of the Hang Seng Corporate Sustainability Index Series with a designated rating is being used as a criterion for sustainability-related loans."

Outstanding performance despite market headwinds

There has been a sharp downturn in market sentiment over the past 12 months, but even this has not dampened the appetite for ESG indexes. In fact, Hang Seng's ESG indexes have shown they can outperform the benchmark of the market even in bearish conditions.

In the first half of 2022 (1 January to 30 June), when the flagship HSI lost -11.05%, the Hang Seng Corporate Sustainability Index managed to produce a positive total return of 1.96%. The total returns of other ESG Index Series products also outperformed, with the Hang Seng ESG 50 Index returning -6.96% and the HSI ESG Index returning -7.61%. (Note 6) 

"Our indexes have also shown they are resilient against black swan events, with relative strength against the HSI even during the several waves of the COVID-19 pandemic and the upheaval in China's education and technology sectors," adds Taie Wang.

The natural home for passive investments

With this robust performance, the Hang Seng Corporate Sustainability Index Series is rapidly becoming the natural home for passive investment products in Hong Kong. 

"It provides access to ESG expertise and engage with the sustainability investment community for asset managers and owners who find it difficult to achieve this on their own," says Taie Wang.

"Active and passive products both help investors embed ESG considerations into their investment portfolios.  For investors with more constraints or limited resources, passive products with ESG elements offer a good option with low cost and greater transparency than their non-ESG counterparts, at the same time as giving investors a similar level of influence on companies, for example through proxy voting."

Comprehensive and stringent approach to screening

None of The Hang Seng Corporate Sustainability Index Series' success would be possible if not for Hang Seng Indexes Company's diligent approach to selecting ESG data providers. 

This is based on using multiple data sources, including the Hong Kong Quality Assurance Agency (HKQAA), an independent assessment body established by the Hong Kong Government to promote sustainability and good management practices; ESG Book, a provider of real-time ESG data on more than 25,000 corporations; ISS ESG, which provides climate data, analytics and advisory in addition to corporate ESG ratings; and Sustainalytics, which provides ESG research, analytics, and reporting and stewardship for investors. 

It's onboarding and scrutiny of ESG services like ESG Book, ISS ESG and Sustainalytics is equally as diligent, with Hang Seng Indexes Company undertaking comprehensive research to ensure their methodology is robust and conducting independent checking and analysis to ensure information is accurate before including a stock in the ESG Index Series.

Ongoing commitment to innovative ESG indexes

Hang Seng Indexes Company plans to continue to leverage its wealth of experience in ESG indexing by adding new products to the Index Series. It has already added an ESG overlay to two of its three flagship indexes – the HSI ESG Enhanced Index and the HSCEI ESG Enhanced Index. Furthermore, it has innovated not just general ESG-related indexes, but also thematic plays on sectors like electric vehicles, as well as net zero related products, such as the Hang Seng 1.5℃ Target Index and HSI Low Carbon Index.

"We will continue to offer a variety of indexes to meet investor's sustainability needs and carbon reduction targets" says Taie Wang. 

"We are also closely monitoring the development of the carbon trading market to potentially create a related index. Hang Seng Indexes Company will continue with its mission to build this region's ESG ecosystem, drive capital allocation towards sustainability investment, support Hong Kong's role as a global hub for green and sustainable finance and in doing so, ultimately help Hong Kong – and all of Asia – reach their sustainability and carbon neutrality goals."

On the last of these fronts, the Index Series channels capital towards businesses that are committed to ESG commitments by providing investment strategies based on the abovementioned methodologies and strong frameworks. 

They can also guide asset managers with sustainability and carbon reduction targets to those goals by offering exposure to related investment opportunities.

Furthermore, being a part of the ESG Index series is a mark of honour for listed companies, spurring them to improve their ESG practices and attracting capital from regional and international investors. 

1. https://www.sustainalytics.com/esg-ratings

2. https://www.statista.com/statistics/1297487/assets-of-esg-etfs-worldwide/

3. https://www.statista.com/statistics/224579/worldwide-etf-assets-under-management-since-1997/

4. https://www.hkex.com.hk/-/media/HKEX-Market/News/Research-Reports/HKEx-Research-Papers/2022/CCEO_ETFinclusion_202207_e.pdf

5. Stock code 3136-HK

6. All figures in this paragraph are based on data from Hang Seng Indexes Company.