(Yicai Global) May 3 -- Morgan Stanley Huaxin Fund Management Co. is working on China’s first public fund based on companies’ environmental, social and governance indicators after its own research showed that ESG-aligned investments outperform Shanghai’s stock index and are less risky than the stock market in general.
“Completing the green finance mission does not conflict with achieving investment returns,” Chairman Yu Hua told Yicai Global.
Yu said his company, which was formed in 2010 by Morgan Stanley and Huaxin Securities Co., is still in the preliminary stage of selecting environmental, social and governance indicators. ESG is a principle the United Nations advocates that encourages the incorporation of externalities into fund companies’ investment decisions. More than 1,700 institutions in 50 countries have adopted ESG principles, managing assets of over USD60 trillion.
During their research, Yu and his colleagues chose quality listed companies with high ESG ratings and compared data from 2010 to 2017. They found that the individual returns on the three ESG elements of these companies were not only higher than the returns on the Shanghai Composite Index during the same period but also less volatile.
Portfolios with higher ESG ratings tend to offer higher investment returns, further analysis showed.
If a company has good internal management and is recognized by investors, its employees are respected, all stakeholders’ interests are reasonably treated, and a consensus can be reached on corporate decisions, its operation will tend to be relatively smooth, Yu explained, adding that, from a long-term investment perspective, it is possible for socially responsible firms to yield both economic and social benefits.
“We tested several portfolios,” Yu said. “Luckily, we found listed companies that actively protect the environment, respect social values and have standardized governance structure tend to offer higher investment returns.”
As listed companies are required to disclose ESG information and the fund industry association releases ESG evaluation systems, the infrastructure of ESG-oriented investment will become more sophisticated and such an investment strategy will become more effective, he added.
Editor: Ben Armour