In recent years, China’s A-share ESG fund has developed rapidly and the market attention has increased rapidly. By March this year, the number of A-share biased public offering ESG funds had doubled compared with the end of 2019.
Meanwhile, some active partial stock ESG fund’s position configuration also appeared a unique scene. Heavy positions, many Baijiu stocks long “bang bang”, ESG fund “drunk” obvious.
In contrast, several mature ESG funds overseas have strict regulations on the inclusion of enterprises with negative social impact such as alcohol and tobacco. So why are China’s ESG funds frequently “drunk” analysts believe that, first of all, the prohibition threshold set by institutions when allocating ESG funds is not high; Secondly, with the long-term net worth management of China’s public funds, investors pay more attention to whether public products can earn excess returns; In addition, many fund managers believe that ESG has three dimensions: environment (E), society (s) and corporate governance (g), and corporate governance is the most important consideration when they choose stocks at present
So, can ESG fund have both return on investment and social responsibility? Although the performance return of China’s ESG fund is flat at present, the overall return of ESG investment in overseas markets with long development years is commendable.
a-share ESG fund frequently “drunk”
China’s ESG investment is still in its infancy, but the policy support is strong, and the industry scale is also growing rapidly Tianfeng Securities Co.Ltd(601162) points out that from the end of 2019 to March 2022, the number of A-share biased public offering ESG funds doubled to 208; The scale reached 255.7 billion yuan, an increase of 27%.
With the rapid development of public offering ESG funds, the positions of some theme funds have appeared counter intuitive allocation, and even frequently “drunk”.
takes the ESG thematic fund of a large public offering in Southern China as an example. The top three heavy positions in late 2021 were Baijiu shares, and the top ten heavily loaded stocks accounted for five of the Baijiu shares.
Looking back at the end of 2020, the fund’s top ten heavy stocks were three Baijiu shares, a beer share. At the end of 2019, the first phase of the fund’s release showed that the top ten big positions of the fund were four Baijiu shares.
The fund has been issued for more than two years, and the top ten heavyweight stocks have undergone significant adjustment. However, many Baijiu stocks always appear in the front row of fund positions.
In terms of return performance, the performance of the fund in 2020 is quite good, which not only far exceeds the performance of the Shanghai and Shenzhen 300 index in the same period, but also is very prominent in common stock funds. However, since 2021, due to the rotation of the market style, the performance of the fund has lagged behind the average value of the index and similar funds.
securities reporter China noted that as of the end of 2021, the ESG theme fund’s heavy Baijiu stock was not uncommon, which seemed to be not in line with the ESG concept of investors.
how to invest overseas ESG funds
By studying the two representative funds Parnassus and Calvert in the United States, we may have a deeper understanding of ESG fund allocation.
Western Securities Co.Ltd(002673) pointed out in the research report that Parnassus, the pioneer of pure ESG mutual fund, has two basic principles when making investment: the first is to exclude companies with controversial business activities and poor ESG risk management; the second is to prohibit investment in companies with more than 10% of their revenue from fossil energy, alcohol, gambling, nuclear energy, tobacco or weapons.
Calvert, the earliest social responsibility investment fund established in the United States, created a set of index system by itself. The risk exposure of the fund to tobacco is zero, and the fossil fuel storage, carbon emission and toxic substance emission of stocks are far lower than the average level of Russell 1000 growth index.
By the end of 2021, the front positions of Parnassus endeavor fund, which has the best return, include Jiaxin wealth management, Cisco, Verizon communications, Merck, Intel and so on.
The front positions of Calvert equity fund include Thermo Fisher technology, Microsoft, alphabet Google, Danaher danach, MasterCard, etc.
It is not difficult to see from the position situation that many of the heavy positions of us ESG funds are information technology and communication service enterprises with low-carbon attributes. At the same time, ESG fund strictly avoids carbon intensive industries, especially those enterprises that rely heavily on traditional energy.
China ESG preference G index
Overseas ESG funds started earlier and developed relatively mature. While fully selecting stocks and capturing high returns in the market, we have never abandoned the general principle of ESG. Although the portfolio of outstanding corporate performance and social responsibility is prohibited by different standards, it is also prohibited to include outstanding corporate performance and social responsibility.
In contrast, China’s ESG funds are frequently “drunk”, indicating that investment institutions have not set a very strict principle of prohibiting inclusion in the allocation of ESG funds.
Xiong Wanfang, a postdoctoral fellow at the Chinese University of Hong Kong (Shenzhen), who has participated in the design of several ESG evaluation systems, told the Chinese reporter of securities companies that the long-term net worth management of China’s public funds pays attention to interval performance and relative ranking. Investors generally lack the mentality of long-term investment, pay more attention to short-term income, and the concept of social responsibility investment has not yet been formed.
“Investors are more interested in whether public offering products can earn excess returns. It can be said that ESG’s concept has not been deeply rooted in the hearts of the people in China. Therefore, when allocating, institutions will also put the return on investment in a more important position, and the control of the image and reputation of the invested enterprise is not so strict.” Xiong Wanfang said.
Xiong Wanfang also said that Baijiu liquor was selected for many ESG funds, and it is probably because several head Baijiu enterprises have done better in corporate governance.
ESG has three dimensions: environment (E), society (s) and corporate governance (g). Xiong Wanfang revealed that when communicating with many fund managers, they all said that corporate governance is the most important consideration when they choose stocks at present.
The better corporate governance performance of an enterprise often means that the fundamentals of the enterprise are also better, which is closer to the traditional stock selection method. It is still based on the return on investment, which has little to do with the contents of “green”, “environmental protection”, “social responsibility” advocated by ESG.
Xiong Wanfang said that ESG’s rating is a complex system, with different emphases, “there is a lot of room for adjustment”. In consideration of performance, some institutions can achieve the effect close to the traditional investment analysis method by increasing corporate governance (g), select stocks by screening the fundamental performance of enterprises, and the position of ESG portfolio finally allocated may not be significantly different from that of non ESG funds.
In addition, objectively speaking, the public indicators of environment (E) are not complete enough, and the rating is difficult. Corporate governance (g) is the easiest to track and quantify at present; The lack of environmental (E) and social (s) data also makes it more difficult for the portfolio to screen investment targets that are more in line with the image of ESG.
feelings and rewards can be balanced in the long run
In terms of return performance, the performance advantages of A-share public offering ESG all theme funds are not prominent at present. An industry veteran believes that the investment strategy of ESG theme funds in the A-share market still needs to be further improved. Moreover, there is still a long way to go for Chinese managers and investors to understand ESG investment.
According to Han Xianwang, chief economist of huitianfu fund, ESG investment regards the company as a channel and node to realize social and environmental responsibilities. It pursues environmental, social and economic sustainability from the perspective of all mankind, which is not small different from other ordinary investments.
“The vast majority of Chinese investors still pursue financial returns.” Han Xianwang believes that “how to balance financial indicators and non-financial indicators of ESG investment is a very important issue at present.”
In other words, how to cultivate investors’ preferences, make more and more investors accept ESG investment philosophy and reduce the differences between financial return and social responsibility is an urgent problem to be solved in the development process of China’s ESG fund.
However, compared with the mature market of ESG investment, investing in companies conducive to social sustainable development does not need to sacrifice earnings. On the contrary, ESG funds with higher ratings can obtain better earnings performance than the market.
For example, ESG theme funds in the United States can be said to be quite brilliant in terms of return performance. Morningstar divides sustainable funds into quartiles according to the rating of the fund. The average returns of the four part funds rated by Morningstar from high to low in 2021 are 29%, 24%, 20% and 26% respectively.
the key to the difference may be “long-term investment”. Wu Jiaqing, chairman of MSCI Greater China operation decision-making committee, once said that after more than ten years of demonstration by MSCI, the fact that ESG investment has alpha has been generally recognized. “Historical experience has proved that companies with high performance rating do have better return on investment than companies with low performance rating.”
Wu Jiaqing analyzed that ESG is currently a condition that overseas investors must consider when making investment decisions. Many institutions do ESG rating and investment not only out of feelings, but also not just government requirements. “Investors will feel that if I make these investments, my return will be very good.”
In Wu Jiaqing’s view, ESG, as an investment product, can actually have both feelings and returns. It is a long-term sustainable investment.
