ESG risk assessment is material to investors. It can tell the risks a company carries from a non-financial angle, and how well a company can weather internal and external shocks. Evaluating your ESG risk exposure helps you understand how the invested capital interacts with the physical world, and forms a long-term case for better-managed risk and sustainable returns.
In the Hong Kong fund market, the population of ESG-aware funds continues to proliferate and inflows into these funds have been seeing momentum. Since the beginning of 2020, seven more such funds are distributed, bringing the total to 63. The latest launches include Ninety One GSF Global Environment, Allianz Food Security and Aberdeen Standard SICAV I Asian Sustainable Development Equity.
However, most of the fund market remains ‘non-ESG intentional’, which means the portfolio managers are not obliged to express their investment conviction factoring in ESG issues.
While the ESG intentional offerings still have room to grow, some investors opt for conventional funds or wish to hold onto these funds, in which they have been investing for years. This doesn’t mean you cannot gauge the potential risks from an ESG standpoint.
Here are four tools you can apply to evaluate your funds with an ESG lens. The metrics are illustrated with the China Equity category rated by Morningstar analysts.
1. Morningstar Sustainability Rating – The Rating is a straightforward roll-up of the underlying ESG Risk Ratings of companies in the portfolio. The top 10% of funds in the category are classified with 5 globes.
The Rating can be used together with the Analyst Rating. The latter forms expectations of how a fund will perform over a full market cycle when compared to a relevant benchmark index or similar funds based on three key “pillars”—People, Process, and Parent.
2. Percent of AUM with ESG Risk –Thepercentage of totalassets that are allocated to a certain ESG Risk Classification.
3. Portfolio Risk Score by ESG Category – The Risk Scores measure the degree to which a company's economic value may be at risk driven by the respective factors and unmanaged by the company. The lower the score means the lower the unmanaged risk exposure.
4. Low Carbon Destination – To receive the designation, a fund must have a 12-month average Portfolio Carbon Risk Score below 10 and a 12-month average Fossil Fuel Involvement of less than 7% of assets.
To draw a close, we also filter a list of non-intentional ESG funds with five globes. They are also awarded Morningstar Analyst Rating of Bronze or better.
©2021 Morningstar. All rights reserved. The information, data, analyses and opinions presented herein do not constitute investment advice; are provided as of the date written, solely for informational purposes; and subject to change at any time without notice. This content is not an offer to buy or sell any particular security and is not warranted to be correct, complete or accurate. Past performance is not a guarantee of future results. The Morningstar name and logo are registered marks of Morningstar, Inc. This article includes proprietary materials of Morningstar; reproduction, transcription or other use, by any means, in whole or in part, without prior, written consent of Morningstar is prohibited. This article is intended for general circulation, and does not take into account the specific investment objectives, financial situation or particular needs of any particular person. Investors should consult a financial adviser regarding the suitability of any investment product, taking into account their specific investment objectives, financial situation or particular needs, before making any investment decisions. Morningstar Investment Management Asia Limited is licensed and regulated by the Hong Kong Securities and Futures Commission to provide investment research and investment advisory services to professional investors only. Morningstar Investment Adviser Singapore Pte. Limited is licensed by the Monetary Authority of Singapore to provide financial advisory services in Singapore. Either Morningstar Investment Management Asia Limited or Morningstar Investment Adviser Singapore Pte. Limited will be the entity responsible for the creation and distribution of the research services described in this article.
.jpg "Kate Lin")
