E Fund Management has launched a new ETF in Hong Kong providing socially responsible exposure to the city’s equity market.
The ETF aims to deliver at least a 20% improvement in ESG risk rating compared to the headline Hang Seng Index.
The E Fund (HK) HSI ESG Enhanced Index ETF (3039 HK) has been listed on the Stock Exchange of Hong Kong with a management fee of 0.20%.
The fund is linked to the HSI ESG Enhanced Index which is based on the parent Hang Seng Index, the city’s main stock market barometer.
The Hang Seng Index represents the largest and most liquid Greater China companies trading on the Stock Exchange of Hong Kong. Primary and secondary share listings, as well as real estate investment trusts (REITs), are all eligible for inclusion.
Following a recent overhaul in its construction methodology, the Hang Seng Index has expanded its number of constituents, enhanced its sector diversification, and embedded new rules aimed at preserving the representation of local firms in an index that had become increasingly dominated by Mainland-domiciled companies.
The HSI ESG Enhanced Select Index, meanwhile, screens out stocks from the Hang Seng Index universe based on various norms and values-based criteria before reweighting the remaining constituents so as to enhance the overall ESG profile.
The process begins by removing known violators of UN Global Compact principles as well as companies with business operations linked to controversial weapons, tobacco, or thermal coal.
Companies are also assigned ESG risk ratings from ESG analytics firm Sustainalytics, and firms with ESG risk ratings that rank in the top 10% of the Hang Seng universe are also removed from the selection pool.
The remaining constituents are initially weighted by float-adjusted market capitalization and then adjusted to increase the weight of stocks with lower ESG risk ratings and decrease the weight of stocks with higher ESG risk ratings.
The index is reconstituted and rebalanced on a quarterly basis.
As of the end of August, the index contained 61 constituents compared to 69 for the parent Hang Seng. Just over one-third (34.2%) of the index was allocated to the financials sector which was broadly in line with the parent index; however, there was notably lower exposure to information technology stocks (22.0% vs. 28.9%) and higher exposure to properties & construction (18.2% vs. 7.9%).
Notable positions included HSBC (8.2%), AIA (8.2%), HKEX (7.8%), Tencent (7.7%), Ping An Insurance (5.0%), and Link REIT (4.5%).