Notable differences exist between investing in China and investing in the West. Because of these differences, an environmental, social, and governance (ESG) investment framework that works in the Chinese market would have its own unique features and requirements.
Harvest Global Investments, the Hong Kong unit of the US$130 billion Harvest Fund Management Group, recognized this market reality early on, and is taking these considerations into account when building its own ESG investment framework. The group became a signatory to the United Nations Principles of Responsible Investing (PRI) in March last year.
First, in building its ESG framework, Harvest Global uses the traditional approach of focusing on factor pillars that are available in the annual report or public disclosures of a company that it may consider investing in.
In addition, Harvest Global recognizes that in China there are other factors that asset managers may traditionally see from the perspective of governance but may not be quantifiable, for example, capital discipline or how a company’s management utilizes its capital.
“Even if a company has a very good management structure the question still revolves around whether they are using their capital in a way that does not hurt the interests of minority shareholders. These are things where we believe first-hand information is very important,” says Sisi Liu, ESG specialist at Harvest Global Investments.
Liu leads an ESG specialist team that is building an ESG framework for the integration of the firm’s ESG investments at the group level. She reports to Harvest Global’s chief investment officer, Thomas Kwan, who is spearheading the group’s ESG integration program.
Harvest Global’s ESG integration program is based on a three-year road map, which is already on its second year. The first year involved building the ESG infrastructure that would harness the resources and expertise of analysts within the firm. The second year, which is the current year, involves building the ESG database and research capabilities. The third year will involve identifying impact investment targets.
When building its ESG framework, Harvest Global started with a strong focus on governance issues unique to the Chinese market. To do this, it has built a comprehensive proprietary governance framework that uses quantitative and qualitative methods. It also integrates views from the firm’s investment analysts.
“The reason why we wanted to have a more China adopted framework for governance is we believe international ESG raters sometimes use the global framework to see China and we don’t think that should always be the case,” Liu says.
To help its analysts get a real view of a company’s governance and management behaviour, Liu’s team has designed a questionnaire that looks into its corporate culture and leadership. The analysts then give a governance rating to a company using both quantitative and qualitative criteria. The rating is reviewed regularly to keep them from becoming obsolete.
Harvest Global also has an environmental framework that looks into a company’s exposure to environmental risk in terms of policy exposure, geographical exposure, resource efficiencies, and other criteria. This framework also looks into how the company’s management is managing environmental risk.
Since transparency is still a big issue among Chinese corporates, Harvest Global also looks into data disclosure as part of its ESG framework by utilizing government data and third-party data instead of just relying on the company’s voluntary disclosures.
“Availability of data is a bigger problem for the social factor. There are a lot of problems involved here as the data disclosure and the data availability is very poor. We have data partners whom we work with to address this problem, but it’s a work in progress,” Liu says.