Harvest Global Investments is launching an exchange traded fund in Hong Kong targeting demand from institutional investors in the Asia-Pacific, Europe and the US for sustainable Chinese investments.
The Harvest CSI 300 ESG Leaders Index ETF will debut on the Hong Kong exchange on March 10 and track the index the fund house has developed that incorporates 100 A-share companies it rates highest in terms of compliance to environmental, social and governance standards.
The scoring system gives an equal weighting of 33 per cent to the three factors that comprise ESG and uses 110 data points covering “green revenues”, environmental penalties, human resources management and employee benefits, as well as executive pay and accounting governance.
Thomas Kwan, Hong Kong-based chief investment officer at Harvest GI and head of ESG for Harvest Fund Management, the parent company, said foreign institutions faced challenges singling out onshore ESG strategies in China due to the lack of quality data from mainland companies and different ESG investment approaches.
Harvest GI said it used artificial intelligence to extract data from other channels, such as news reports about companies.
Robert Li, Hong Kong-based senior investment strategist at Harvest GI, said the AI technology would assess daily local news updates on nearly 90 per cent of the A-shares and primarily look for controversial news.
The AI would also use scour sources for controversial governance information related to subsidiaries of the parent firm, flagging any regulatory fines that would then be fed into the ESG scoring system, Li explained.
Kwan said the research would differ from that used to compile indices provided by global providers, which he said did not work when it came to assessment of Chinese companies.
The timing for the product launch also coincides with China’s stated aim to achieve “quality growth” of the economy, according to Kwan, who believes that the concept, if applied to the financial market, is closely related to ESG investments.
In October, the Chinese Communist party’s Central Committee pledged to focus on sustainable growth in the country’s upcoming five-year plan. China has also committed to creating a carbon-neutral economy by 2030.
Harvest GI’s Li said the company would primarily target institutional investors, including those from the Asia-Pacific region, Europe and the US, and would try to demonstrate that ESG investing can generate alpha in China.
Kwan said the company was targeting institutional investors who have already been investing with CSI 300 ETFs and were interested in transitioning some assets into ESG strategies with an A-shares exposure.
Broad-based, China-focused ETFs in Hong Kong suffered heavy outflows in 2020 despite the wider ETF industry recording its best annual inflows for years. A significant number of Hong Kong-listed ETFs tracking China’s CSI 300 Index also suffered from outflows.
Despite its upbeat outlook for the new ESG ETF, Harvest GI declined to address how it would sell the products to US investors, which are still bound by the investment ban executive order signed by president Donald Trump, which is still in place despite a new administration.
The investment ban forbids US investors from making new investments in dozens of Chinese companies, due to their connections with the Chinese military. Among the companies on the list is Hangzhou Hikvision, the surveillance technology company, and semiconductor manufacturer SMIC. Both companies are listed on the Shanghai stock exchange.
While the company says the CSI 300 ESG Leader Index will have no bias in sectors, it is planning to roll out a similar strategy for European investors but will comply with Europe’s stricter rules about not investing in companies that deal in coal, tobacco, weapons and alcohol, Harvest GI’s Li said.
Harvest GI hopes the ETF will reach $100m in assets under management within six months.
The manager is launching the ETF after Hong Kong sustainability-themed ETFs recorded strong inflows in 2020 and amid a wider uptick in the local ETF market.
There are other three other sustainable ETFs in Hong Kong — the Haitong MSCI China A ESG ETF, and Mirae Asset Global Investments’ Global X China Clean Energy ETF and Global X China Electric Vehicle ETF, which were all launched in 2020.
The Global X China Clean Energy ETF, which was launched in January last year, recorded net inflows of $210.1m in 2020. It had $430.4m in assets under management in January, data from Morningstar Direct show.
The Haitong MSCI China A ESG ETF, which was listed in October, captured inflows of $49.3m in 2020, helping to bring assets under management to $57.5m by the end of January.
*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.