Hang Seng Index compiler adds another two stock indices to meet demand for sustainable investment

Asia's Tech News Daily

Hang Seng Index compiler adds another two stock indices to meet demand for sustainable investment

Hang Seng Indexes, the compiler of benchmark indices for Hong Kong’s stock market, has launched two new sustainability indices to tap into growing interest in sustainable investment.

The company Monday announced the addition of the HSI ESG Screened Index and the HSI Low Carbon Index, expanding its family of indices to 16. The additions will be effective as of December 6.

Both new indices will track the 60-stock Hang Seng Index, albeit with different weightings to reflect the constituents’ varied ESG (environment, social and governance) performance in the case of the ESG screen index, and their carbon emission intensity for the low carbon index.

For example, the finance sector has a 39.8 per cent weight in the low carbon index – compared to 34.9 per cent in the Hang Seng Index, while the energy industry’s 1 per cent is less than half the HSI’s 2.3 per cent.

“As sustainable investing strategies continue to gain traction, more investors are incorporating sustainability factors into their investment processes and decisions,” Hang Seng Indexes’ CEO Anita Mo told reporters via videoconference on Monday.

“The new indexes will serve as investible benchmarks for onshore and offshore investors who are seeking to capture investment opportunities arising from the transition to a lower-carbon and greener economy.”

The net addition to sustainable funds globally grew 21.3 per cent to US$132 billion in the third quarter from the second quarter, according to funds researcher Morningstar.

Cumulative sustainable fund assets reached US$3.9 trillion at the end of September, making up around 8 per cent of all managed funds.

A survey of 300 asset managers – mainly in Europe and North America – by the Index Industry Association conducted in March found that they expected the proportion of their funds subject to ESG scrutiny to rise to 43.6 per cent in five years from 26.7 per cent in the next 12 months, Mo said.

Among the seven methods used to incorporate ESG risks and performance into investment decisions, the most popular and fastest growing is ESG integration.

Funds managed globally with this method jumped to US$25.2 trillion last year from US$17.5 trillion in 2018 and US$10.4 trillion in 2016, according to the Global Sustainable Investment Alliance.

Both new indices launched by Hang Seng Indexes adopt ESG integration, where companies’ performance on many metrics are scored. Other popular methodologies include exclusionary screening, corporate engagement and shareholder activism.

As with the Hang Seng Index, the two new indices will also cap all weightings for constituents at 8 per cent, and they will be reviewed quarterly.

Had the indices been adopted between December 2018 and Monday, the ESG screened index would have yielded a 4.4 per cent return, outperforming the Hang Seng Index’s 2.3 per cent return, Hang Seng Indexes chief business development officer Taie Wang noted.

“The HSI ESG screened index not only reduces ESG risks, it can also deliver excess return while maintaining good exposure to the Hang Seng Index,” she said. “This addresses investor concerns about a drag on returns by focusing on ESG.”

However, between December 2014 and Monday, the low carbon index had a smaller edge of 0.4 percentage point, compared to the Hang Seng Index’s 3.9 per cent return.

The two new indices will exclude companies whose revenue contributions from coal power generation, tobacco and controversial weapons breach certain thresholds.

Those that contravene the United Nations Global Compact’s principles on human rights, labour, the environment and anti-corruption will also be precluded.

However, it is still possible for coal power generators to be included as long as they lower the proportion of revenue derived from the fossil fuel, Wang said.

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