Krane Funds Advisors has introduced a socially responsible Chinese equity ETF that invests in companies with high environmental, social, and governance (ESG) ratings relative to their sector peers.
Jonathan Krane, CEO of KraneShares.
The KraneShares MSCI China ESG Leaders ETF (KESG US) has listed on NYSE Arca and comes with an expense ratio of 0.59%.
The fund is linked to the MSCI China ESG Leaders 10/40 Index which is derived from the MSCI China Index universe of large- and mid-cap Chinese A shares, H shares, B shares, Red chips, P chips, and ADRs.
Using insights from MSCI ESG Research, the methodology first excludes companies with business activities in the alcohol, tobacco, gambling, nuclear power, thermal coal, and weapons industries as well as firms that are embroiled in severe ESG-related controversies.
The remaining constituents are assigned an ESG score on a seven-point scale between AAA and CCC based on the most relevant ESG factors by industry and risk exposure. The rating process aims to identify ESG leaders and laggards within each industry.
The index selects the securities with the highest ESG scores while targeting a 50% sector representation versus the parent MSCI China Index. Firms with ratings below BB are not eligible for inclusion.
The index is weighted by market capitalization subject to an individual constituent weight cap of 10% and a sector cap of 40%.
KraneShares argues that the underlying ESG methodology not only identifies more socially responsible investment opportunities but is also an effective filter for capturing companies that are aligned with the “New China” economy – namely, knowledge-intensive companies that stand to benefit from a shift away from manufacturing towards a more services-based economy.
In terms of sector exposures, the index has reduced exposure to consumer discretionary (24.7% vs. 31.4%) and communication services (10.0% vs. 22.8%) stocks compared to the MSCI China Index but greater exposure to healthcare (15.4% vs. 5.6%) and industrial (11.3% vs. 4.8%) firms.
Since its inception in 2013, the index has outperformed the MSCI China Index by 76%. The 5-year annualized return of the MSCI China ESG Leaders Index was 10.5% as compared to 5.3% from the MSCI China Index.
Jonathan Krane, CEO of KraneShares, commented, “Across markets and strategies, investments with high ESG ratings have become a priority to many investors – China is no exception. We are proud to partner with MSCI, a global leader in ESG indexing, to deliver a China-focused ESG strategy to our clients.”
The fund is KraneShares’ first ESG-screened ETF to provide broad exposure to the Chinese equity market.
Investors charmed by the fund might also be interested in the KraneShares MSCI China Environment ETF (KGRN US). This fund tracks the MSCI China IMI Environment 10/40 Index, providing access to Chinese firms that derive the majority of their revenue from environmental themes such as alternative energy, sustainable water, green building, pollution prevention, and energy efficiency. It comes with an expense ratio of 0.80%.