The recent agreement between China and the U.S. to work together towards environmental and sustainability goals highlights changing priorities for the Asia-Pacific region and a commitment to ESG principles.
There are many countries within the Asia-Pacific region that will be drastically affected by global warming and climate-driven catastrophic events, and as such, there is an increased focus by countries within the region on sustainability. The number of signatories from Asia on the Principles for Responsible Investment, a set of ESG-focused principles created by investors for investors, has increased 23% in the last year to 421, reports Responsible Investor.
“As institutional investors, we have a duty to act in the best long-term interests of our beneficiaries. In this fiduciary role, we believe that environmental, social, and corporate governance (ESG) issues can affect the performance of investment portfolios (to varying degrees across companies, sectors, regions, asset classes and through time,” per the PRI signatories’ commitment.
China has included Green Investment Principles in its Belt and Road Initiative that is creating sustainable growth and development in the areas that the initiative reaches. That, in combination with regulatory mandates from the China Securities Regulatory Commission that created a standardized format for disclosures from public companies and made ESG data more readily available, has reflected China’s increasing focus and promotion of ESG practices and reporting.
Outside of mainland China, Hong Kong Exchanges and Clearing Limited has mandated ESG reporting disclosures as of 2019, and the Green and Sustainable Finance Cross-Agency Steering Group is driving climate-related reporting mandates along with the Task Force on Climate-related Financial Disclosures for any and all sectors that climate sustainability might relate to by 2025. The Steering Group is co-chaired by the Hong Kong Monetary Authority as well as the Securities and Futures Commission of Hong Kong.
Gaining Exposure to China’s ESG Momentum With KESG
While China’s ESG movement is seen to still be trailing that of Europe, the country continues to make gigantic strides towards sustainability practices and reporting, something that investors can capitalize on with the KraneShares MSCI China ESG Leaders ETF (KESG).
The fund seeks to track the MSCI China ESG Leaders 10/40 Index, an index that is free float-adjusted and market cap-weighted and includes companies with high ESG ratings compared to their peers within their industries. The index includes all types of publicly issued shares from Chinese issuers from all market caps and screens out any issuers that have any controversies according to the UN Declaration of Human Rights, the International Labor Organization Declaration on Fundamental Principles and Rights at Work, and the UN Global Compact. The index also screens out any companies that are involved in alcohol, tobacco, civilian firearms, gambling, nuclear power, and conventional and controversial weapons.
The index is comprised of securities from the following sectors: consumer discretionary, industrials, financials, communication services, healthcare, real estate, utilities, consumer staples, information technology, materials, and energy. Securities included make up the top 50% market cap of their sector, and no single security can make up more than 10% of the underlying index, while no sector accounts for more than 40% of the index.
As of the end of October, sector allocations were consumer discretionary at 42.94%, financials at 14.39%, healthcare at 11.03%, and several smaller allocations.
KESG has an expense ratio of 0.58%.
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