As highlighted by a year-to-date loss of 8.61% for the MSCI China Index — far worse than the decline experienced by the MSCI Emerging Markets Index — Chinese equities are struggling in 2023.
There’s a silver lining to the current slump being endured by Chinese stocks and related ETFs. It’s that some potentially attractive names can be had at compelling valuations. Additionally, the recent struggles of Chinese stocks could shine a light on the combination of the asset class and ESG principles.
Enter the KraneShares MSCI China ESG Leaders Index ETF (KESG). The fund is near- and long-term relevant for multiple reasons. One is that China is the world’s leading producer of and biggest spender on renewable energy.
Examining China ETF KESG’s Catalysts
A case can be made that China is making strides when it comes to the “E” in ESG. Still, there are other reasons to consider KESG. One is that many investors are recently awakening to the potential potency of China and ESG. Another is that the market for ESG investments China isn’t nearly as saturated as it is in some parts of the West.
“This is a product of several interrelated factors: (i) as an emerging concept in China, ESG has only recently received attention; (ii) inexperience is particularly acute among retail investors – historically dominant in onshore stock markets – whose sole focus is on returns (and then, often short-term returns) when selecting financial products; (iii) even among ESG-aware investors, there persists a view that integrating ESG into investments comes at the expense of returns by unnecessarily raising costs and transferring scarce resources away from activities which maximise shareholder wealth,” noted Alastair Seaton, director sustainable investments at RAYS Capital Partners.
Seaton highlighted some other relevant factors that could bode well for KESG over the long term. For example, initial research into the matter confirms there are benefits to the China/ESG combination. Plus, Chinese companies that can be accurately described as ESG improvers can deliver impressive returns to investors. There’s also the notion that Chinese investors are responsive to ESG data.
“Chinese investors do respond to ESG information, which is improving in quality and coverage. Much has been made of ESG ‘data issues’ when investing in China and the same challenges apply to academic research studying the effect of ESG issues on company operational and financial performance,” concluded Seaton.
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