ESG Mainstream Investment Strategies (II)

Picking up from the previous issue, ESG mainstream strategies include negative exclusion, positive screening, and integration strategies. Among them, integration strategy is the most popular investment strategy.

The integration strategy is to incorporate ESG factors into the traditional financial analysis model for investment decision making. ESG factors are complementary to the financial analysis model and can be used as risk factors in investment decisions.

According to the 2021 J.P. Morgan survey, 84% of investors considered ESG factors in their investment decisions in 2021, but only half of them established a systematic investment framework; more than 90% of investors preferred ESG integration strategies, followed by shareholder behavior and negative rejection.

Combined with recent years occurred in the domestic investment cases related to ESG management related to improper related. The most recent case is the decision by the Norwegian Sovereign Wealth Fund, the world's second largest sovereign wealth fund, to exclude Yunnan Baiyao Group Co. from the government's Pension Fund Global Fund on December 22nd, due to unacceptable risks of the company causing serious environmental damage.

In addition, this year, a lot of fuss has been made about the Ali zipper door incident. Some people have analyzed three vulnerabilities in Ali from its ESG report. First, Ali will report a large part of the report focused on public welfare, 63 pages of content, public welfare content accounted for 44 pages, accounting for about 70%; with the environment department that tube of content 6 pages, 3 pages of employee content, and less than 1 page of customer content, about the supply chain management of the situation is not mentioned.

This imbalance in content not only reflects Ali's one-sided understanding of the connotation of ESG, but also reflects the serious shortcomings of Ali's ESG management. Some people have linked Ali's "sexual assault door" to the serious failures of Ali in terms of employee behavior and ethics.

And this point, in the MSCI rating of Ali, clearly mentioned. MSCI believes that Ali's performance in corporate governance and business ethics, seriously lagging behind the industry average.

You can see that ESG investment strategies are not just focused on the financial information of the company, but also on the management of the company, environment-related content.

The global ESG investment scale continues to grow rapidly, with CARG reaching 13% in 2012-2020, a growth rate significantly higher than the growth scale of overall capital management. According to J.P. Morgan's research, ESG investment strategies are still dominated by institutional investors, but the proportion of individual investors incorporating ESG investment strategies is gradually increasing. Especially after the global climate issue has received widespread attention, individual investors have also gradually introduced ESG investment strategies.

ESG product allocations are dominated by equities and bonds, with equities accounting for more than 1 ?% and bonds for more than 30%.

(4) Whether ESG investment strategy is effective

ESG investment strategy has been fully validated in overseas markets, which is demonstrated by the research findings of different domestic research institutions, where ESG investment strategy returns and stability are better than the benchmark index.

The research of CITIC Securities found that: the cumulative excess returns of MSCI USA ESG FOCUS, MSCI USA SELECT, and MSCI USA ESG LEADERS released by MSCI in the U.S. relative to its MSCI INDEX from Aug. 31, 2018, to Aug. 31, 2021, were 2.3%, 11.1%, and 3.7%, and the excess returns have been trending steadily higher over time.

Huatai Securities research found: to 2000 since the overall view of the FTSE Russell Global Social Responsibility Benchmark Index and the FTSE Russell European Social Responsibility Benchmark Index performance is better than its parent index. Specifically, the FTSE 4 GOOD Index has an annualized return of 4.6%, while the benchmark has an annualized return of 4.1%; the FTSE European Social Responsibility Index has an annualized return of 2.3%, while the benchmark index has an annualized return of 0.8%

In the domestic market, as the implementation of ESG strategies has not been a long time, in addition, the domestic ESG rating system is not perfect enough, which led to the difference between the performance of the ESG strategies in the country is greater.

According to the research of CITIC Securities: from August 31, 2018 to August 31, 2021, in addition to the Harvest ESG Index with 13.4% excess return relative to CSI 300, the cumulative excess returns of CSI 300 ESG Leader, CSI 300 ESG Benchmark, and CSI 300 ESG Value are -8.7%, -4.6%, and -10.8%, respectively, and the MSCI China ESG Index has a cumulative excess return of -5.2% relative to the MSCI China A-Share International Pass.

And that the main reason is that the domestic ESG fund volume is small, clear ESG investment strategy of 26 products, the scale of only 29.7 billion, it is difficult to enhance the effectiveness of ESG at the level of capital flow; ESG evaluation research is not deep enough.

My analysis, in addition to the small volume, is that the current domestic ESG theme fund may not really incorporate many ESG factors, more "pan-ESG" concept, in addition to the domestic ESG research is not deep enough, has not formed a unified standard of information disclosure and evaluation. This can be seen in the WIND ESG ratings and individual stock trends.

Overall, CSI 300 outperformed WIND and CSI 500, which can be logically analyzed. Most of the CSI 300 are large companies, and many of them are state-owned enterprises, which are much better than small companies in terms of management, social and environmental protection.

However, from the distribution point of view, the rating system is not rigorous and scientific enough. Below is an intercept of some of the rating results and the trend information.

(5) Practices of Global Leaders

We talk about "double carbon" in China, and in the international market, we talk about "responsible investment and ESG investment", which has become an important investment strategy of global mainstream PE organizations. In the international market, we talk about "responsible investment" and "ESG investment", which has become an important investment strategy for global mainstream PE firms. We have found the following three major trends in the benchmarking of headquartered companies:

Firstly, they have actively joined the United Nations Principles for Responsible Investment (UN PRI) and complied with framework standards such as Task Force on Climate- related Financial Disclosure (TCFD) and other standards. KKR, BlackRock, Blackstone and other leading companies are all signatories to the UN PRI and comply with the relevant investment principles. As of September 30th, 4,375 institutions have signed on to the UN PRI, with total assets under management exceeding $120 trillion.

More than 60 domestic organizations, including ICBC and Ping An, have become signatories to UN PRI. In addition, there are nearly 2,800 organizations around the world that have signed on to support TCFD, covering 89 countries and regions, with a total market value of more than $251,000 USD. More than 20 domestic financial institutions, including Industrial and Commercial Bank of China, Agricultural Bank of China, Bank of China, Huaxia Bank, China Southern Fund, EFD Fund, etc., have signed up to support the TCFD.

Thirdly, we are actively promoting our own carbon-neutral portfolios to become carbon-neutral. At present, a number of international financial institutions and securities institutions have taken the lead in realizing carbon neutrality at the operational level. Among them, Goldman Sachs achieved operational carbon neutrality in 2015 and intends to achieve portfolio carbon neutrality by 2030; JP Morgan, UBS and Morgan Stanley will achieve operational carbon neutrality in 2020, 2021 and 2022 respectively, and announced that they will achieve investor-level carbon neutrality by 2050. 128 institutions have signed on to the Net Zero Asset Managers Initiative. The Net-Zero Banking Alliance (NZBA) was launched on April 21, 2021, and has attracted participation from 43 major global banking institutions.