Updated: Apr 6, 2020
Sustainable Investing has been a fast growing investment theme over the past decade. Whilst the development of this theme is a relatively mature investment theme across European markets, Hong Kong continues to ride the upward wave in sustainable investing following increased investor demand for sustainable options in Asian markets. Sustainable investing is still in its infancy in the Asian market but Hong Kong is one step ahead in its efforts to meet potential market demand with the launch of the Hang Seng's sustainable indices series in 2010 and the Hang Seng ESG Index Series in 2019. This article will mainly focus on the Hang Seng Corporate Sustainability Index Series, which will be compared to the market leading sustainable index, the Dow Jones Sustainability World Index.
What is Hang Seng's Sustainability Index Series?
The Hang Seng Corporate Sustainability Index Series is the official benchmark for sustainability investments in Hong Kong and is composed of five indexes, which is divided into the Tradeable series and Benchmark series. According to the HS official website, The tradeable series is made up of three indexes, namely, Hang Seng Corporate Sustainability Index ("HSSUS"), Hang Seng (China A) Corporate Sustainability Index ("HSCASUS"), and the Hang Seng (Mainland and HK) Corporate Sustainability Index ("HSMHSUS").
The Benchmark series include the Hang Seng Corporate Sustainability Benchmark Index ("HSSUSB"), and Hang Seng (China A) Corporate Sustainability Benchmark Index ("HSCASUSB").
The HSSUS and HSSUSB include Hong Kong-listed companies that perform well with respect to corporate sustainability, while HSCASUS and HSCASUSB include Mainland listed companies that perform well with respect to corporate sustainability. The HSMHSUS is a cross-market index that covers corporate sustainability leaders in Hong Kong and on the Mainland.
Hang Seng Corporate Sustainability Benchmark Index is made up of 89 constituents while Hang Seng (China A) Corporate Sustainability Benchmark Index consists of 124 constituents. You might be wondering how the constituents are selected from the universe of stocks.
What is the selection process for inclusion into the Sustainability Index Series?
Constituent selection is based on a robust process that includes consideration of the results from a sustainability assessment undertaken by Hong Kong Quality Assurance Agency (HKQAA), an independent and professional assessment body, using its proprietary sustainability assessment, research methodology and rating framework.
As for the Hang Seng ESG Index Series, the ESG scores are also based on the overall sustainability performance scores compiled by the Hong Kong Quality Assurance Agency (“HKQAA”).
Although the Hong Kong Quality Assurance bureau is a local body, international standards are also used in assessing the sustainable development management of companies. The Bureau also references the ISO 26000 social responsibility guidelines, GRI standards and accountability principles to build the review methodology of Hang Seng sustainable development index series.
The whole process takes about nine months each year for the HKQAA authorities to conduct preliminary assessment, the evaluated companies to provide feedback, and the bureau to then score, rate and summarize the report.
These sustainability performance scores are the results of rigorous assessment in both general and industry-specific criteria covering seven core areas: Corporate Governance, Human Rights, Labour Practices, Environment, Fair Operating Practices, Consumer Issues, as well as Community Involvement and Development.
This selection process ensures that stocks in the Hang Seng Corporate Sustainability Index Series are objective, reliable and of high invest-ability, which is an excellent benchmark for index funds that wish to track indexes with the investment theme of corporate sustainability.
How does this compare with the market leader Dow Jones Sustainable Index?
The Dow Jones Sustainability™ World Index comprises global sustainability leaders as identified by SAM. It represents the top 10% of the largest 2,500 companies in the S&P Global BMI based on long-term economic, environmental and social criteria.
The Dow Jones Sustainability World Index, which goes by the ticker W1SGI, was launched on Sep 8, 1999. The indices are a partnership between S&P Dow Jones Indices and RobecoSAM. 2019 marked the 20th anniversary of the DJSI World as the global standard for measuring and advancing corporate ESG practices. Since its pioneering launch in 1999, the DJSI World has achieved iconic status as the global standard for measuring and advancing corporate ESG practices. It was the first global index to track the largest and leading sustainability-driven publicly listed companies.
The indices serve as benchmarks for investors who integrate sustainability considerations into their portfolios and provide an effective engagement platform for investors who wish to encourage companies to improve their corporate sustainability practices.
It Integrates the assessment of economic, environmental and social criteria with a strong focus on long-term shareholder value and focuses on best-in-class companies, with a yearly review of component selection and the continuous monitoring of companies.
As of 2019, the DJ Sustainability world index comprised of 317 constituents representing the top 10% of companies, representing the best in class selection in terms of sustainability from 58 different industries for inclusion in the Sustainability World Index.
In 2019, a total of 3,519 companies were invited to participate in the assessment for inclusion into the index. And a total number of 2,296 companies were analyzed for inclusion.
New additions in 2019 into the index include companies such as technology company Alphabet Inc, CVS Health Corp, Reckitt and Benckiser Group PLC. Deletions from the index include Citigroup Inc1, Royal Dutch Shell PLC, and 3M Co.
What is Corporate Sustainability Assessment (CSA) performance?
The SAM Corporate Sustainability Assessment (CSA) results, derived from analysis of financially material ESG factors, alongside S&P DJI’s robust index methodology, form the basis of the construction and maintenance of the entire DJSI series. The CSA follows a strict rules-based methodology. After applying a range of financially relevant and industry specific ESG criteria, a Total Sustainability Score is assigned to each company. Based on this Total Sustainability Score, those companies that rank within the top 10% of their industries are included in the DJSI World, following a best-in-class approach.
The CSA continues to evolve, and raising the bar each year, the CSA is continuously enhanced to identify and measure under-researched or under-reported financially material ESG factors. This process improves the detection of such companies that are well-positioned to address future sustainability-driven challenges and opportunities. The CSA now produces approximately 1,000 data points per company, and is the basis for the determination of DJSI inclusion.
Will we see the inclusion of more companies from mainland China in the DJSI?
At present, the selection threshold of DJSI component stocks is relatively high for enterprises in Greater China as a whole, and so far, the selected companies are mainly from Hong Kong and Taiwan.
For example, constituents currently in the emerging market index include: Taiwan Semiconductor Manufacturing Co Ltd, Ping An Insurance (Group) Co of China Ltd, Chunghwa Telecom Co Ltd (Taiwan) and Cathay Financial Holdings (Taiwan).
However, in recent years, the CSA performance of mainland Chinese enterprises has continued to improve, and the number of selected enterprises has certainly increased, which reflects the increasing attention of mainland Chinese enterprises and the investors driving the requirement to improve the performance of sustainable development.
It was great to see that more than 360 companies from mainland China, Hong Kong and Taiwan were invited to participate in this assessment for inclusion in 2020 and this likely to increase in the coming years as companies in Hong Kong and mainland step up in the efforts to improve their ESG reporting (see our related article on changes to mandatory disclosure reporting in Hong Kong).
In terms of applicable specific indexes, enterprises from mainland China are invited to participate in the world index (DJSI World Index) and the emerging markets index (DJSI emerging markets index); enterprises from Hong Kong and Taiwan are invited to participate in the world index (DJSI World Index) and Asia Pacific Index (DJSI Asia Pacific Index).
Sustainability Index Performance in 2020
We know Covid-19 triggered a global sell-off in the financial markets this year, but what can be said about the magnitude of losses experienced by the Hang Seng sustainability indices and the DJSI. According to our analysis, the results are mixed; sustainability indices are not immune to the global sell-off, however, only one index seemed to perform better than the overall index. Read on to find out which index performed better than the overall market index.
From our analysis tracking the 3 month performance of the indices in the Sustainability Series, the Hang Seng China A Corporate Sustainability Benchmark Index experienced a 12 per cent drop compared to the 18.6 per cent drop seen on the overall Hang Seng index, from mid-January to the end of March 2020. It was the only index of the five in the series that performed slightly better than the Hang Seng index. On the other hand, the Hang Seng Corporate Sustainability Index seemed to decline more than the benchmark index, with a 21.5 per cent decline in price level from 103.55 to 81.30 over the same time period. The Hang Seng Corporate Sustainability Index ("HSSUS") saw a 19.3 per cent decline, over this time period, slightly higher than the overall drop in the Hang Seng Index.
As for the Dow Jones Sustainability Index, the DJSI dropped 22.8 per cent compared to the 26.7 per cent decline in the Dow Jones Industrial average over the 3 month time period (mid-Jan to end of March 2020).
According to a recent article by ESG Research at HSBC, climate and sustainable investments outperformed as pandemic struck. Ashim Paun, Co-head from ESG Research at HSBC stated that climate-focused stocks outperformed others by 7.6 per cent from December and by 3 per cent since February. He believes that ESG factors are important in understanding how companies and sectors are exposed to this global crisis. Perhaps its too early to tell, but certainly, an analysis that consists of an ESG framework will become an increasingly useful tool for companies and shareholders to identify and assess risks that can be used to create long-term value for shareholders, stakeholders and society alike.
Written by (Lena Chen)
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