Thematic investing that rides on government policy initiative is always popular in China. The question is whether the theme is going to be a short-term hype or a long-term value proposition.
For China, betting on climate-related changes in the energy sector and industrial upgrade has been fruitful so far.
A case in point is the launch of the SSI State Grid Yingda Carbon Neutral Index in April by State Grid Yingda Group and index provider Sino-Securities Index Information Service (Shanghai) Co. Ltd. State Grid Yingda is a unit of state-owned power utility State Grid Corporation of China, ranked second in the 2021 Fortune Global 500 list with revenue of US$386.62 billion.
The methodology for the SSI State Grid Yingda Carbon Neutral Index is based on the proposition that to achieve carbon neutral in China by 2060, vast resources will be poured into three main areas: reduction of current emissions; comprehensive carbon monitoring and reduction incentive system; and development and adoption of new forms of clean energy.
China is the world’s second largest economy, with a population of 1.4 billion. It’s clear that substantial resources have to be deployed to companies that play a role in the three areas.
Figure 1 illustrates the rationale and detailed sub-areas of choice in the index methodology. Sino-Securities Index has its own environmental, social and governance (ESG) scoring system which allows it to pick stocks in the three areas with genuine environment improvement results.
Data is the most crucial element in determining the quality of the several different ESG scoring systems that are available. But data is rare in China. So teaming up with State Grid is a significant boost to improve the accuracy of Sino-Securities Index’s ESG scoring system.
The SSI State Grid Yingda Carbon Neutral Index consists of 100 stocks which pass the index provider’s ESG screening test, in addition to other criteria. Figure 2 shows the top ten constituents and industry distribution.
So far, the collaboration has paid off well. As of August 31, the index registered an impressive gain of 34.44%, significantly outperforming the minus 7.78% return of China’s CSI 300 index. It will be interesting to see if this outperformance will continue in years to come.
Figure 1: Three areas of interests in SSI State Grid Carbon Neutral Index methodology
Figure 2: Top holdings and industries (as of August 31, 2021)
*Hing S. Tang is a veteran of quant investing and ETF products with more than 23 years of experience managing both active and passive quantitative portfolios. He is now the founder and director of Donkey Ministry.