Limited HK ESG funds force investors to look further afield

21 April 2017   Category: News, Asia, Hong Kong   By Natalie Leung

The limited availability of environmental, social and governance (ESG) funds in Hong Kong means interested investors may have to expand their scope to include those that incorporate ESG factors without an explicit mandate.

Currently, only four out of more than 2,000 funds listed in Hong Kong are considered ESG funds, with mandates that incorporate ESG factors as investment objectives, according to Wing Chan, director of fund research at Morningstar Asia, citing figures from the Securities and Futures Commission.

The largest is BNP Paribas’s Parvest Sustainable Equity High Dividend Europe Classic-Capitalisation, with US$832 million in AUM as of April 11, 2017. The fund invests in shares of European companies that respect sustainable development of markets.

The second largest is Allianz Global Sustainability A EUR, which targets long-term capital growth by investing in a selection of global companies with sustainable business practices.

The other two funds are Hang Seng Corporate Sustainability Index A HKD, which invests primarily in constituent stocks of the Hang Seng Corporate Sustainability Index; and UBS (Lux) Equity SICAV - Emerging Markets Sustainable (USD) P-acc, which invests in companies whose products and services contribute to sustainable development in emerging markets.

“We are currently only aware of a few ESG funds in the Hong Kong retail market, and believe the landscape is underdeveloped in terms of both supply and demand of such products,” Katy Yung, director of investment at Hong Kong-based family office RS Group, tells Asia Asset Management.

About 91% of total assets in RS Group’s portfolio were in sustainable and targeted impact strategies across all asset classes as of June 2015, according to its latest impact report. The current level is similar, it says.

Given the difficulty finding ESG funds in the local market, the group invests in US and European ESG or socially responsible investing funds, which have global exposure in their underlying holdings, including in Asia and Hong Kong.

“We would certainly like to see more local Hong Kong ESG funds, so that we could consider them for our portfolio and also see the local ecosystem grow,” says Ms. Yung. “Ultimately, we feel that Hong Kong could be at risk of losing competitive edge as investors like us who are interested and not finding the products locally would look elsewhere, resulting in capital outflows.”

According to Mr. Chan, the fact that there are few funds in Hong Kong that specifically list ESG in their mandates does not necessarily mean other funds do not incorporate ESG factors in their investments.

Many large asset management companies have incorporated ESG factors into their investment process, with particular focus on governance. For instance, Mr. Chan says companies in Asia have started to pay attention to the interests of minority shareholders, which could have a significant impact on investment outcomes.

However, ESG funds are still a relatively new concept to many local investors, and changing their mind-sets about the funds’ performance takes time.

Mr. Chan says that in the past, picking stocks based on ESG relied mainly on negative screening, where stocks that did not comply with the factors were screened out, leaving a narrow field with returns that may not be attractive.

Now, the process is more advanced, with positive screening of stocks with high ESG scores, which at the same time selects companies with good quality, and hence better yields.

“Our analysis shows that on average, an ESG fund does not necessarily perform poorer than other funds,” says Mr. Chan.

A more diverse investment base also helps to boost interest in ESG funds; Mr. Chan observes that millennials and women tend to pay more attention to ESG factors in their investments.

Ms. Yung also sees millennials in particular show strong values-based preference for environment and social outcomes.

“We find millennial sentiment is strong and individuals are interested and want to become active investors in this space; however they may not know where and how to get started.”

“We do believe there are opportunities for local fund managers to develop ESG strategies given their proximity and potentially better understanding of local companies and local investors,” she says.

Mr. Chan believes the focus should not be narrowed on the number of ESG fund available in Hong Kong. “The investment universe can actually be widened if we take a look at if a company incorporates any ESG factors into their investment, allowing more investment options,” he says.