Harvest Global Investments has listed an ETF in Hong Kong providing environmental, social and governance-adjusted exposure to China A-shares.
The fund is the second ETF in Hong Kong to provide socially responsible exposure to Chinese A-shares.
The Harvest CSI 300 ESG Leaders Index ETF has listed on the Stock Exchange of Hong Kong with Hong Kong dollar (3108 HK) and Chinese renminbi (83108 HK) trading lines.
The fund uses direct physical replication to track the CSI 300 Harvest ESG Leaders Index, a proprietary index developed in collaboration with China Securities Index.
Thomas Kwan, Chief Investment Officer at Harvest Global Investments, said: “The Harvest CSI 300 ESG Leaders Index leverages Harvest’s proprietary ESG framework to identify ESG factors material to the China onshore market. It provides investors with a more sustainable exposure to China’s A-share market while offering the potential for additional alpha.”
The index is based on the CSI 300 universe which consists of the 300 most representative – as measured by a combination of market capitalization and liquidity – A-shares listed on the Shanghai and Shenzhen stock exchanges.
Companies that have triggered a debt default or been mired in controversy pertaining to corporate governance or environmental violations in the most recent year are excluded.
Harvest then assigns ESG scores to each company remaining in the selection pool. Harvest’s ESG framework is designed to be globally aligned while simultaneously focused on ESG issues unique to China.
ESG scores are derived from over 110 metrics categorized into 13 headline categories: environmental management; green revenues; environmental penalties; product quality; product innovation; human resources management; occupational health and safety; employee benefits; social responsibility; shareholder structure; board structure; executive pay; and accounting governance.
The methodology selects 100 securities to form the final index. Stocks with the highest ESG scores are favoured while keeping the number of constituents selected from each GICS sector proportional to the parent CSI 300.
The weight of each sector is set to equal its corresponding weight in the parent index. Constituents within each sector are weighted by float-adjusted market capitalization subject to a cap of 10%. The index is reconstituted and rebalanced semi-annually.
The largest sector is currently financials at 29.7%. The index also has significant allocations to consumer staples (15.6%), industrials (12.3%), and information technology (11.7%). Notable positions included Kweichow Moutai (7.6%), Ping An Insurance (7.2%), China Merchants Bank (5.0%), Midea (4.6%), and Wuliangye Yibin (3.8%).
Over the past year, it has delivered a return of 29.9%, outperforming the CSI 300 which rose by 25.1%.
The ETF has estimated ongoing charges of 1.35% which includes a management fee of 0.65%. Distributions will be sent to investors on an annual basis.
The fund is the second China A-shares ESG ETF to list in Hong Kong following the Haitong MSCI China A ESG ETF (9031 HK; 3031 HK; 83031 HK), which launched in October last year.
The Haitong fund is linked to the MSCI China A ESG Universal Index which provides broad exposure to Chinese A-shares that are available through the Stock Connect program while weighting constituents in favour of those with higher ESG scores. It comes with an estimated ongoing charge of 1.04% which includes a management fee of 0.60%.
Interest in socially responsible investing continues to grow rapidly. Data from Bloomberg shows that net inflows into ESG ETFs worldwide totaled $58.1 billion in 2020, exceeding their total inflows over the previous seven years.
In China, ESG investing is presently less pervasive, but, according to Harvest, the segment is poised to accelerate, driven by China’s transition towards quality economic growth and its commitment to reach carbon neutrality by 2060. The asset manager notes that this environment will favour Chinese enterprises that implement positive measures in environmental protection, emission reduction, climate change, and social responsibility.
(Index data as of 5 March)