(Yicai Global) May 25 -- ESG (environmental, social and governance) 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. Morgan Stanley Huaxin Fund Management Co. is working on China's first green finance ESG public fund. The firm is a joint venture Morgan Stanley and Huaxin Securities Co. formed in 2010. Yu Hua, the company's chairman, and his team picked out quality listed companies with high ESG ratings and compared data from 2010 to 2017.
The results were surprising.
They found that the individual returns on the three elements of ESG of these companies were not only higher than the returns on the Shanghai Composite Index during the same period but also less volatile. ESG-oriented investments not only outperform the Shanghai Composite Index but also are less risky than the stock market on average, found in their subsequent research. Portfolios with higher ESG ratings tend to offer higher investment returns, further analysis showed. Listed companies that actively protect the environment, respect social values and have standardized governance structure tend to offer higher investment returns. 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.
His company is still in the preliminary stage of selecting environmental, social and governance indicators, Yu told Yicai Global. If a listed company does not disclose ESG information, fund firms may only conduct ESG investment analysis based on corporate information of constituents of the relevant indexes compiled by China Securities Index Co., he added. 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, Yu believes.