Posted inAsset managers

Principal backs ESG funds to outperform conventional products

China tech, infrastructure and renewables are the potential winners for the second half of the year, says Principal Hong Kong.
Crystal Chan, Principal Asset Management

Historically high inflation, rising interest rates and pessimistic market sentiment may be detrimental to traditional investments, but Principal Hong Kong believes there are tailwinds for funds focused on sustainability.

“Although inflows to traditional investments may continue to slow down, sustainable investments, especially equities, have a proven ability to outperform the general market, especially during volatile markets,” said Crystal Chan, head of investment specialist, Principal Asset Management, in an interview with FSA.

Using Asia as an example, Chan noted the MSCI Asia Pacific ex Japan ESG Leaders index has outperformed its conventional counterpart in 10 out of the 12 years since launch.

The trend is expected to continue in the medium and long term, said Chan, because ESG investment in Asia is still at an early stage, and will be propped up by policy initiatives.

“With the recession risk rising, we foresee the second half of this year to stay volatile, favouring ESG investing because people generally have the perception that ESG investing may provide better downward protection,” said Chan.

Winner sectors

Principal Hong Kong believes that China tech, one of the sectors that was most impacted by policies to clamp down on monopoly behaviour, is showing signs that the worst is behind it.

“This is one of the sectors that will be crucial to stabilising the Chinese economy as it will impact both private investment and employment, prompting policy constraints to loosen,” said Chan.

The asset manager also favours infrastructure and renewable energy stocks in China.

“While infrastructure companies continue to benefit from economic stimulus measures, including large scale infrastructure investments in the second half [of 2022], renewables will be a medium- to long-term beneficiary of national policy goals towards cutting emissions.”

Yet, she also admitted that the Covid-19pandemic may still be a major hurdle to recovery.

Environmental funds dominate

Among the approximately 130 ESG funds recognised by Hong Kong’s Securities and Futures Commission, Chan said more than 65% of them follow the ESG integration approach, meaning they do not choose between environmental, social and governance factors, but instead integrate all three of them into the investment process.

“Among the remaining [funds], 80% of strategies focus on the environment, with many of them thematic funds on climate change, water, forestry and sustainable energy,” said Chan.

She quoted from Morningstar data that China investors have added $11.3bn into climate-focused funds in 2021, almost double the level from the previous year.

But the popularity in environmental funds can also be attributed to the fact there are more environmentally-focused funds in the market.

“There can be tons of things for investors to invest in the ‘E’ factor, [compared with] social or governance factors,” she added.

Part of the Mark Allen Group.