ESG Insights (Oct 2022): Weathering the Downturn with the HSI ESG Index

Weathering the Downturn with the HSI ESG Index

Hang Seng Indexes Company has appointed the Hong Kong Quality Assurance Agency (‘HKQAA’), a professional independent assessment organisation, to annually evaluate the sustainability performance of listed companies since 2014. The ESG rating model is designed to assess a company’s management system maturity and risks with regard to sustainability performance, capturing both general and industry-specific criteria in seven core subjects.

The most recent sustainability assessment covered approximate 575 Hong Kong-listed companies and over 1,500 A-shares companies that are eligible for northbound trading under the Stock Connect scheme. In addition to being a useful indicator of a company’s ESG performance, the sustainability assessment ratings are a key selection criterion for inclusion in our ESG indexes, such as the Hang Seng Corporate Sustainability Index Series and the Hang Seng ESG 50 Index. The ratings are also key components of our ESG integration indexes, for instance the HSI ESG Index.?

The HSI ESG Index (‘HSIESG’) leverages companies’ ESG ratings to enhance the overall ESG exposure on a portfolio level.?Instead of selecting constituents with outstanding ESG performances using a best-in-class strategy, the HSIESG includes all constituents in the Hang Seng Index, and adjusts the constituents’ free-float market capitalisation weights based on their ESG ratings to avoid excessive tracking error. The weights of constituents with relatively higher ESG scores are tilted upwards, while those with relatively lower ESG scores are tilted downwards. As shown in Exhibit 5, the HSIESG outperformed the HSI between December 2018 and August 2022 by 1% on an annualised basis, with a modest tracking error of 2.5%.

To analyse the resilience of the HSIESG during market downturns, we investigate various downside risk metrics, as shown in Exhibit 6. The lower downside risk and maximum drawdown of the HSIESG suggests the index has a relatively more defensive character compared to the HSI. In addition, the ‘tail-risk’ towards the left side of the return distribution is also lower for the HSIESG, as evident by the lower 95 percentile Value-at-risk (VaR) and expected shortfall.

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The information contained herein does not constitute any express or implied advice or recommendation by Hang Seng Indexes for any investments. Investment involves risks. Prospective investors should seek independent investment advice to ensure that any of their decisions is made with regard to their own investment objectives, financial circumstances and other particular needs.?Prospective investors should also note that value of securities and investments can go down as well as up and past performance is not necessarily indicative of future performance.

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