However, in recent years, investors in other parts of the world, including Europe and the United States, are increasingly considering other factors too, namely those which bring a positive impact and contribution to the world. This approach is gaining market recognition and is being embraced by institutional investors. In Hong Kong too, many people are starting to express the view that these concepts should be introduced into the MPF system, thereby providing members with more investment choice.
Environmental, Social and Governance (ESG) is one of the emerging investment concepts that has become of increasing interest to investors.
ESG covers three areas: (i) Environmental aspects, involving popular issues such as climate change, depletion of natural resources and carbon neutrality. (ii) Social factors, measuring whether an enterprise respects social values. For companies that make a negative impact on the physical or mental health of the public, or ignore animal rights, they will have an unsatisfactory social score. (iii) Governance factors covering issues such as board composition and the effectiveness of a company’s governance framework.
Nowadays, many ESG ratings platforms, are available, such as MSCI, Asset4 and Sustainalytics. The scoring criteria cover all three factors. For example, a renewable energy company is likely to have a better environmental score, as a result of its contribution in reducing carbon emissions. However, the overall ESG score could still be pulled down in the absence of an effective corporate management policy. In some countries, it is a requirement for companies to publish their ESG progress in their annual reports.
Many investment managers and asset owners now incorporate ESG into their decision-making processes, taking into account the ESG scores of different companies to help them make appropriate investment decisions. Fund managers are now tending to increase the weighting to companies with higher ESG scores, and some managers have created specialist “ESG funds” that only invest in companies with high ESG scores.
Investors’ increasing awareness of social responsibility is one of the reasons why there is increasing interest in, and demand for, ESG investments. Investors hope to promote and advocate various social issues through different methods, such as investing in environmental technology companies to conducting research and development into new products.
It is worth noting that ESG investing can also bring attractive returns to investors, because some quality businesses with high ESG ratings also have other attributes, such as appreciation potential. If so, these companies can often bring better returns to investors and shareholders. As an example, the MSCI Global Index increased by 22.4% in 2021, while the MSCI Global ESG Leaders Index, which only includes companies with relatively high ESG scores, increased by 25.3% over the same period.
Over the last decade, the amount invested in green bonds and ESG-related funds within the MPF system has soared from HK$ 155 million in 2011 to HK$ 13.9 billion in 2021. The MPF Symposium held in November 2021 included a session on digital transformation and the future of sustainable investments. In addition, the MPFA issued "Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds". The purpose of this set of guiding principles is to formulate a management processes of MPF funds from a financial risk management perspective, and to make relevant disclosures to MPF scheme members. The framework cover four elements - governance, strategy, risk management and disclosure. From December 2022 onwards, MPF providers are required to disclose their progress on ESG integration in the MPF schemes’ annual consolidated reports.
We can see that the MPFA is strengthening ESG elements from both an investment and a risk management perspective, whilst at the same time MPF providers are starting to include more ESG themes within their investment portfolios. Members would be encouraged to familiarize themselves with ESG principles and broaden their scope for future investing.
This article in English and Chinese is available for download.
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| Adding ESG elements in MPF to follow the investment trend | .5 MB |
