hang seng indexes company esg annual review

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Hang Seng Indexes – Research Paper www.hsi.com.hk

November 2020

1

Hang Seng Indexes Company ESG Annual Review

Room for ESG performance to improve, particularly A-share universe Our recently completed 2020 sustainability performance assessment of 450 Hong Kong-listed

companies and more than 1,350 A-shares companies that are eligible for trading under the

Northbound link of the Northbound Stock Connect scheme (‘A-shares Companies’) shows that Hong

Kong-listed companies recorded better ESG scores on average (‘Satisfactory’ rating) compared with

A-shares Companies (‘Moderate’ rating).

In addition to our adjustment of the sustainability performance assessment model, the expansion of

the assessment universe is also a key drag on A-shares Companies’ scores compared with 2019.

Among the 12 industries in Assessment 2020, there are larger declines in scores for Conglomerates

and Telecommunications. For the Hang Seng Composite Index (HSCI) universe, there is no material

difference in the scores for the six best performing industries, but this year sees steeper falls in scores

for ‘Healthcare’ and ‘Consumer Discretionary’ among the 12 industries. With growing recognition

from investors that the integration of ESG factors in investment decisions could help them improve

their risk-adjusted returns, we see opportunities for fast-growing technology companies to lift their

sustainability performance and, thereby, potentially become constituents of the Hang Seng

Corporate Sustainability Index (HSSUS).

Exhibit 1: Average ESG Scores for Hong Kong-listed and Eligible A-shares Companies

Source: Annual corporate sustainability assessment performed by Hang Seng Indexes Company and Hong Kong Quality Assurance Agency (HKQAA) Note: Prior to Assessment 2019, less than 300 A-shares Companies were assessed. Beginning in Assessment 2019, the assessment now covers all Northbound Stock Connect eligible A-shares companies

47.2 46.9

52.3

56.5 57.0 56.0

44.7 44.6 46.0

49.0

45.7

43.3

35

40

45

50

55

60

65

2015 2016 2017 2018 2019 2020

ES

G S

core

s (

0 t

o 1

00)

Hong Kong China

Affected by adjustment in assessment model to reflect company's business nature

Highly distorted by expansion of assessment universe since 2019

"Moderate"

"Satisfactory"

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Hang Seng Indexes – Research Paper

www.hsi.com.hk

2

Table of Contents

Executive Summary ............................................................................................................ 3

Hong Kong vs Mainland China: Performance Gap Still Exists ........................................ 4

HKQAA’s Sustainability Performance Assessment Model .......................................................... 4

Improving sustainability performance since 2015 ....................................................................... 5

Hong Kong-listed companies achieved higher ESG scores ....................................................... 6

HSCI Universe – 2020 ESG Results Remain Satisfactory ................................................. 8

No material change in ESG rating but score dispersion increased marginally ........................... 8

Scores for core subjects – bigger improvement for ‘Community Involvement & Development’ . 8

Scores breakdown by industry – larger improvements for Utilities and Telecommunications .... 9

A-shares Universe – Moderate Rating Maintained Despite Lower Scores .................... 11

Assessment expansion key drag on ESG scores ..................................................................... 11

Five out of seven core subjects recorded declines of 3%-15% in scores ................................. 12

Scores fell across all industries ................................................................................................. 12

Benefits of ESG Investing Not Yet Fully Priced In .......................................................... 14

Top ESG performers delivered outperformance in A-shares universe ..................................... 14

HSCI Universe - massive share price outperformance masks awareness of ESG benefits .... 15

Appendix – Hang Seng Indexes Company's Sustainability Indexes Series .................. 17

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Executive Summary

Hong Kong vs Mainland China – Gap Still Exists

Our recently completed 2020 sustainability performance assessment of 450 Hong Kong-listed


Northbound Stock Connect scheme shows that Hong Kong-listed companies recorded better ESG

scores on average (‘Satisfactory’ rating) compared with A-shares Companies (‘Moderate’ rating).

The slight annual decline in average scores for both types of companies largely reflects adjustments

that we made to the weightings of the seven core subjects (as established under the Hong Kong

Quality Assurance Agency (HKQAA) assessment model) for companies operating in different

industries to better reflect their business nature. In addition, the overall result for A-shares Companies

was also affected by the expansion of company universe in the ESG Assessment 2020.

HSCI Universe – 2020 ESG Results Remain Satisfactory

Overall, the average ESG score for HSCI constituents remains at ‘Satisfactory or A rating’ in 2020.

Compared with 2019, a larger proportion of companies obtained the higher rating of ‘AA- to AAA’

and there was a decline in the proportion of companies that obtained a ‘A- to A+’ rating. Among the

seven core subjects, the biggest overall improvement was for ‘Community Involvement and

Development’, but there were declines in overall scores for ‘The Environment’ and ‘Fair Operating

Practices’. For scores breakdown by industry in Assessment 2020, there was very little difference in

scores and rankings for the top six best-performing industries. However, we observe steeper declines

in scores for Healthcare and Consumer Discretionary among the 12 industries.

A-share Universe – Moderate Rating Maintained with Lower Scores

The expansion of assessment universe is the key drag on the ESG scores for A-shares _companies

that are eligible for trading under the Northbound Stock Connect scheme. Despite this drag, however,

the average ESG score for A-shares Companies remains at ‘Moderate or BBB rating’ this year.

Among the seven core subjects under assessment, five subjects showed declines of between 3%

and 15% in their average score, with only ‘Community Involvement and Development’ and ‘Corporate

Governance’ recording increases of between 2% and 3%. In terms of scores breakdown by industry,

all industries showed declines, with the largest fall in the score for Conglomerates.

Benefits of ESG Investing Not Yet Fully Priced In

The underperformance of the Hang Seng Corporate Sustainability Index (HSSUS) relative to the

Hang Seng Corporate Sustainability Bench Index (HSSUSB) is due to the former being composed

largely of ‘old economy’ stocks with high sustainability performance scores, while HSSUSB also

includes Chinese ‘new economy’ stocks, which have achieved stronger share price performances

over the past year. With growing recognition from investors that the integration of ESG factors in

investment decisions could help them manage risks more effectively and, in turn, potentially enhance

returns from their investment portfolios, we see opportunities for fast-growing technology companies

to lift their sustainability performance. If HSSUS includes more leading technology companies in the

future, this may enhance its performance relative to that of HSSUSB.

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Hong Kong vs Mainland China: Performance Gap Still Exists

Our recently completed 2020 sustainability performance assessment of 450 Hong Kong-listed


Northbound Stock Connect scheme shows that Hong Kong-listed companies recorded better ESG

scores on average (‘Satisfactory’ rating) compared with A-shares Companies (‘Moderate’ rating).

The slight annual decline in average scores for both types of companies largely reflects adjustments

that we made to the weightings of the seven core subjects (as established under the Hong Kong

Quality Assurance Agency (HKQAA) assessment model) for companies operating in different

industries to better reflect their business nature. In addition, the overall result for A-shares Companies

was also affected by the expansion of universe in the ESG Assessment 2020.

HKQAA’s Sustainability Performance Assessment Model

Hang Seng Indexes Company Limited (Hang Seng Indexes Company) launched the Hang Seng

Corporate Sustainability Index Series in July 2010 to provide benchmarks for sustainability

investment in companies listed in Hong Kong and mainland China (please refer to Appendix: Hang

Seng Indexes Company’ Sustainability Indexes Series for details). Beginning in 2014, Hang Seng

Indexes Company has employed a professional independent assessment organization, HKQAA, to

conduct an annual evaluation of the ESG performance of listed companies in Hong Kong and

mainland China. The sustainability performance assessment model used by HKQAA makes

reference to international guidelines such as ISO 26000 and the Global Reporting Initiative. HKQAA

assesses a company’s sustainability rating (ranging from AAA (reliable) to D (at risk), with score on

a scale of 0 to 100) based on seven core subjects: Corporate Governance, The Environment, Human

Rights, Labour Practices, Fair Operating Practices, Consumer Issues, and Community Involvement

and Development.

Exhibit 2: HKQAA’s Assessment Model and Rating Scale

Source: HKQAA Note: With reference to international standards such as ISO26000 and the Global Reporting Initiative

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In the assessment process, HKQAA will first conduct web-based research through various channels,

including: 1) the company’s public domain website, 2) the company’s annual report and sustainability

reports, and 3) company news from media sources. Upon completion of the preliminary assessment,

HKQAA will send out pre-filled questionnaires to individual companies for review, comment and

confirmation. The final results will be based on the preliminary assessment results, feedback from

companies, accountability rating, country and industry risk ratings and media monitoring (an ongoing

mechanism to identity media commentaries and other publicly available information that may have

an impact on the companies’ reputation and core business).

Improving sustainability performance since 2015

HKQAA recently completed the 2020 sustainability performance assessment, covering the

approximately 450 Hong Kong-listed constituents of HSCI, and the more than 1,350 A-shares

companies that are eligible for trading under the Northbound Stock Connect scheme.

Exhibit 3: Number of Companies Assessed

Source: Annual corporate sustainability assessment performed by Hang Seng Indexes Company and HKQAA Note: Prior to Assessment 2019, less than 300 A-shares were assessed. Beginning in Assessment 2019, the assessment now covers all Northbound Stock Connect eligible A-shares companies

Exhibits 4 illustrates that the proportion of Hong Kong companies that obtain a rating of above ‘BB+’

has been on an uptrend since 2015 (from 55% in 2015 to 99% in 2020). A-shares Companies also

show an increase in the proportion of companies that obtain above ‘BB+’ from 2015 to 2018 (from

65% in 2015 to 87% in 2018), but the results for 2019-20 have been affected by the expansion of the

assessment universe to cover all Northbound Stock Connect scheme A-shares since 2019. In 2019

and 2020, the number of A-shares Companies under assessment increased to 1,237 and 1,352

respectively, from 300 in 2018.

455 464 473 467 443 447

289 298 286 288

1,2371,352

0

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800

1,000

1,200

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2015 2016 2017 2018 2019 2020

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HK A-shares

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Exhibit 4: Sustainability Performance for Hong Kong-listed and Eligible A-shares Companies (2015-2020)

Source: Annual corporate sustainability assessment performed by Hang Seng Indexes Company and Hong Kong Quality Assurance Agency (HKQAA)

Hong Kong-listed companies achieved higher ESG scores

The same as last year, Hong Kong-listed companies (represented by HSCI constituents) recorded

better ESG scores on average (achieving a ‘Satisfactory’ rating with an average score of 56.0, versus

57.0 in 2019) compared with A-shares Companies (which, on average, recorded a ‘Moderate’ rating

with average score of 43.3, compared with an average score of 45.7 in 2019). Within the HSCI

universe, ‘old economy’ stocks obtained higher ESG scores compared with technology and ‘new

economy’ companies, which delivered stronger share price performances.

HK-listed companies

Mainland-listed companies

44.6% 40.9%

7.4%0.4% 0.5% 1.1%

27.9% 34.9%

49.0%

19.3% 15.3% 15.4%

20.7% 18.8%

37.6%

73.4% 77.9% 74.3%

6.8% 5.4% 5.9% 6.4% 6.1% 8.7%

0.0% 0.0% 0.0% 0.4% 0.2% 0.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019 2020

% o

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AAA

AA- to AA+

A- to A+

BBB- to BBB+

BB- to BB+

34.9% 31.9%

13.3% 13.2%21.3% 22.0%

49.1% 54.0%

66.1%

49.3%

60.1% 62.5%

15.2% 14.1%20.3%

37.5%

18.5% 15.4%

0.7% 0.0% 0.3% 0.0% 0.0% 0.1%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 2016 2017 2018 2019 2020

% o

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AA- to AA+

A- to A+

BBB- to BBB+

BB- to BB+

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Exhibit 5: 2020 ESG Score Distribution: Hong Kong-listed vs Eligible A-shares Companies

Source: Annual corporate sustainability assessment performed by Hang Seng Indexes Company and Hong Kong Quality Assurance Agency (HKQAA) Date: August 2020

The slight decline in average scores for both types of companies largely reflects the adjustments we

made to the weightings of the seven core subjects under HKQAA’s Sustainability Rating and

Research (SRR) Assessment Model this year. In 2019, the seven subjects were weighted equally at

0.143. However, for the latest review, we assigned different weightings for companies operating in

different industries to reflect their business nature. For example, we increased the weighting of

‘Corporate Governance’ to 0.186 and decreased the weighting of ‘The Environment’ to 0.128 for

companies in the Financials sector. In contrast, we reduced the weighting of ‘Corporate Governance’

to 0.126 and increased the weighting of ‘The Environment’ to 0.152 for Utilities sector companies.

It should be noted that the overall result for A-shares Companies was also affected by the expansion

of the assessment universe from 1,237 companies in 2019 to 1,352 companies in 2020.

Exhibit 6: Example of Revised Weightings for the Seven Core Subjects – Financials vs Utilities

Source: Hang Seng Indexes Company Date: August 2020

0%

5%

10%

15%

20%

25%

30%

35%

40%

C B

BB

-

BB

BB

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s China: Avg score 43.3 (Moderate)

HK: Avg score 56.0 (Satisfactory)

Weightings for Seven Core Subjects

Industry

Corporate

Governance

Human

Rights

Labour

Practices

The

Environment

Fair

Operating

Practices

Customer

Issues

Community

Involvement &

Development

Financials 0.186↑ 0.126↓ 0.126↓ 0.126↓ 0.155↑ 0.155↑ 0.125↓

Utilities 0.126↓ 0.136↓ 0.174↑ 0.152↑ 0.126↓ 0.158↑ 0.126↓

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HSCI Universe – 2020 ESG Results Remain Satisfactory

Overall, the average ESG score for HSCI constituents remained at ‘Satisfactory or A rating’ in 2020

but there was an increase in the proportion of companies that obtained a rating of ‘AA- to AAA’ and

a decrease in the proportion of companies that obtained an ‘A- to A+’ rating. Among the seven core

subjects, the biggest improvement was seen in ‘Community Involvement and Development’, while

‘The Environment’ and ‘Fair Operating Practices’ both recorded a larger fall in scores. For scores

breakdown by industry in Assessment 2020, there was very little difference in scores and rankings

for the top six best-performing industries. However, we observe steeper declines in scores for

Healthcare and Consumer Discretionary among the 12 industries.

No material change in ESG rating but score dispersion increased marginally

Although there is no material difference between the average ESG scores for HSCI constituents in

2019 and 2020 (Exhibit 7), the proportion of companies that obtained ‘AA- to AAA’ rating increased

to 9.1% in 2020 from 6.3% in 2019, with the growth largely coming from the decline in the proportion

of companies that obtained an ‘A- to A+’ rating in 2020 (74.3% compared with 77.9% in 2019). For

companies that obtained a ‘BB- to BBB+’ rating, the proportion rose marginally to 16.5% in 2020 from

15.8% in 2019.

Exhibit 7: ESG Score Distribution for HSCI Constituents (2020 vs 2019)

Source: Annual corporate sustainability assessment performed by Hang Seng Indexes Company and HKQAA Date: August 2020

Scores for core subjects – bigger improvement for ‘Community Involvement & Development’

Based on the scores of HSCI constituents, the largest improvement among the seven core subjects

was for ‘Community Involvement and Development’, with its score increasing to 57.8 (ranked third)

in 2020 from 53.4 in 2019 (ranked seventh). On the other hand, falls were seen in scores for ‘The

Environment’ (ranked second with score of 58.9 in 2020 versus ranked first with a score of 66.2 in

2019) and ‘Fair Operating Practices’ (ranked seventh with score of 52.1 in 2020 versus ranked third

with score of 58.2 in 2019).

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

C B

BB

-

BB

BB

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AA

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HK 2019 HK 2020

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As different weightings were assigned to the seven core subjects based on industry sector this year,

we calculate that the largest decline in average weighting was for ‘Community Involvement and

Development’ (0.129 in 2020 versus 0.143 in 2019). Overall, this largely offset the impact of the

improvement in score for this core subject. The largest increase in average weighting was for

‘Consumer Issues’ (0.155 in 2020 versus 0.143 in 2019).

Exhibit 8: Average Scores and Weightings for the Seven Core Subjects under the HKQAA SRR Assessment Model (HSCI Constituents)


Scores breakdown by industry – larger improvements for Utilities and Telecommunications

Among the 12 industries in HSCI, Conglomerates remained the best-performing industry (ranked first

in both 2019 and 2020). Sectors with larger improvements in ESG score include Utilities (+1.8 to

58.7) and Telecommunications (+1.5 to 60.9). On the flipside, larger declines in ESG score were

seen for Healthcare (-3.4 to 51.4), Consumer Discretionary (-2.2 to 53.3), Financials (-1.8 to 54.7)

and Materials (-1.8 to 53.1).

2020 2019

Core Subjects Score Ranking Avg Weighting Score Ranking Avg Weighting

Labour Practices 59.1 1↑ 0.144 59.8 2 0.143

The Environment 58.9 2↓ 0.152 66.2 1 0.143

Community Involvement and Development 57.8 3↑ 0.129 53.4 7 0.143

Corporate Governance 57.0 4−− 0.142 54.6 4 0.143

Consumer Issues 55.4 5↑ 0.155 53.6 6 0.143

Human Rights 53.8 6↓ 0.136 53.7 5 0.143

Fair Operating Practices 52.1 7↓ 0.142 58.2 3 0.143

1.000 1.000

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Exhibit 9: Score Distribution by Industry Sector (HSCI)


YoY Ch in

2020 2019 Industry 2020 2019 Avg Score

1--- 1 Conglomerates 68.3 68.2 0.0

2--- 2 Telecommunications 60.9 59.5 1.5

3↑ 6 Utilities 58.7 57.0 1.8

4↓ 3 Properties & Construction 58.4 59.3 -0.9

5--- 5 Industrials 57.3 57.3 0.0

6↓ 4 Information Technology 56.9 57.8 -0.9

7↑ 8 Consumer Staples 56.4 56.0 0.5

8↓ 7 Financials 54.7 56.5 -1.8

9↑ 12 Energy 53.7 54.1 -0.4

10↓ 9 Consumer Discretionary 53.3 55.5 -2.2

11↓ 10 Materials 53.1 54.9 -1.8

12↓ 11 Healthcare 51.4 54.8 -3.4

Average: 56.0 57.1 -1.1

Ranking Average Score

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11

A-shares Universe – Moderate Rating Maintained Despite Lower Scores

Expansion in the size of the assessment universe was the key drag on ESG scores for A-shares

companies that are eligible for trading under the Northbound Stock Connect scheme in both 2019

and 2020. Despite this, the average ESG score for A-shares Companies remained at ‘Moderate or

BBB rating’ in 2020. Among the seven core subjects, five subjects showed declines of between 3%

and 15% in their average score, with only ‘Community Involvement and Development’ and ‘Corporate

Governance’ recording increases of 2% to 3%. In terms of scores breakdown by industry, all

industries showed declines, with relatively larger falls in the scores for Conglomerates and

Telecommunications.

Assessment expansion key drag on ESG scores

As distorted by the expansion of the assessment universe and adjustments in the weightings of the

seven core subjects, the average ESG score for A-shares Companies fell to 43.3 in 2020 from 45.7

in 2019. In terms of score distribution, only one out of 1,352 Northbound Stock Connect eligible A-

shares Companies obtained an ‘AA-’ rating in 2020 (no A-shares Companies obtained an ‘AA-‘ rating

in 2019) . For companies that obtained an ‘A- to A+’ rating, the proportion dropped to 15.4% in 2020

from 18.5% in 2019, mostly reflecting the increase in the proportion of companies that obtained a

‘BB- to BB+’ rating (22.0% in 2020 from 21.3% in 2019) or ‘BBB- to BBB+’ rating (62.5% in 2020 from

60.1% in 2019).

Exhibit 10: ESG Score Distribution for Northbound Stock Connect Eligible A-shares Companies (2020 vs 2019)


0%

5%

10%

15%

20%

25%

30%

35%

C B

BB

-

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BB

+

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B-

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% o

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China 2019 China 2020

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12

Five out of seven core subjects recorded declines of 3%-15% in scores

Among the seven core subjects, only ‘Corporate Governance’ (ranked second with score of 50.0 in

2020 versus ranked third with score of 48.6 in 2019) and ‘Community Involvement and Development’

(score of 39.6 in 2020 versus score of 38.7 in 2019 with rankings unchanged at sixth) reported higher

scores in 2020. However, the drop in average weightings for these subjects to 0.132 and 0.128

respectively in 2020 (from 0.143 for both in 2019) mostly offset the impact of the higher scores.

The declines in scores for the remaining five core subjects was in the range of 3% to 15%, with the

largest declines recorded by ‘Fair Operating Practices’ (score of 41.4 in 2020 versus 48.9 in 2019)

and ‘The Environment’ (score of 33.4 in 2020 versus 38.2 in 2019). As the average weighting for

‘The Environment’ surged substantially to 0.162 in 2020 from 0.143 in 2019, this accelerated the

impact of the decline in the score.

Exhibit 11: 2020 Score for Northbound Stock Connect Eligible A-shares Companies


Scores fell across all industries

Exhibit 12 shows that all of the industries experienced declines in scores. The largest declines were

recorded for Conglomerates (-7.3 to 39.7, ranking dropped from third in 2019 to 12th in 2020) and

Telecommunications (-4.6 to 41.9, ranking dropped from sixth in 2019 to ninth in 2020).

2020 2019

Core Subjects Score Ranking Weighting Score Ranking Weighting

Labour Practices 50.9 1 --- 0.148 52.8 1 0.143

Corporate Governance 50.0 2 ↑ 0.132 48.6 3 0.143

Human Rights 45.5 3 ↑ 0.139 46.7 4 0.143

Consumer Issues 45.0 4 ↑ 0.150 46.1 5 0.143

Fair Operating Practices 41.4 5 ↓ 0.141 48.9 2 0.143

Community Involvement and Development 39.6 6 --- 0.128 38.7 6 0.143

The Environment 33.4 7 --- 0.162 38.2 7 0.143

1.000 1.000

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13

Exhibit 12: Score Distribution by Industry Sector (A-shares Companies)


YoY Ch in

2020 2019 Industry 2020 2019 Avg Score

1--- 1 Financials 47.7 49.7 -2.0

2↑ 5 Energy 45.5 46.5 -1.0

3↑ 8 Utilities 45.1 45.7 -0.6

4↓ 2 Properties & Construction 44.9 47.3 -2.4

5↓ 4 Industrials 44.0 46.9 -2.9

6↑ 7 Materials 43.1 45.8 -2.7

7↑ 9 Information Technology 42.4 44.5 -2.2

8↑ 10 Consumer Discretionary 42.2 44.2 -1.9

9↓ 6 Telecommunications 41.9 46.5 -4.6

10↑ 12 Healthcare 41.2 43.5 -2.2

11--- 11 Consumer Staples 41.2 44.1 -2.9

12↓ 3 Conglomerates 39.7 47.0 -7.3

Average: 43.3 45.7 -2.5

Ranking Average Score

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14

Benefits of ESG Investing Not Yet Fully Priced In

A growing number of companies understand that incorporating ESG considerations into their long-

term business strategy requires much more than making noise about being ‘a good corporate citizen’.

Taking a broader-based approach strengthens a company’s ability to manage its risks in relation to

its stakeholders, including employees, customers, investors and communities. This increasing

awareness of the benefits of considering ESG factors is also visible in the investment community.

Including ESG factors in investment analysis and decisions can help investors manage risk better,

which could, in turn, lead to improved returns from their investment portfolios.

However, due to investors’ strong interest in the good earning growth potential of many ‘new

economy’ stocks’ in the recent economic conditions, the market has seen significant outperformance

by ‘new economy’ stocks versus ‘old economy’ stocks over the past 12 months. As such, even ‘old

economy’ stocks with higher ESG ratings have been largely unable to deliver outperformance in

share price.

Top ESG performers delivered outperformance in A-shares universe

The Hang Seng China A Corporate Sustainability Benchmark Index (‘HSCASUSB’) is composed of

companies that rank in the top 10% in terms of sustainability performance score among A-shares

companies that are eligible for trading under the Northbound Stock Connect scheme. The Hang Seng

China A Corporate Sustainability Index (‘HSCASUS’) includes the 30 stocks with the highest ESG

scores within the universe of HSCASUSB. Exhibit 13 illustrates that HSCASUS has delivered a better

performance compared with HSCASUSB over the past 12 months (HSCASUS +23% vs HSCASUSB

+19%) and 24 months (HSCASUS +28% vs HSCASUSB +24%).

Exhibit 13: 24-month Performance: HSCASUS vs HSCASUSB

Source: Hang Seng Indexes Company Date: 30 October 2020

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HSCASUS HSCASUSB

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15

HSCI Universe - massive share price outperformance masks awareness of ESG benefits

Exhibit 14 compares the performances of HSSUSB, which includes companies ranking in the top

20% for sustainability performance score among HSCI constituents, and HSSUS, which consists of

the 30 highest-scoring constituents of HSSUSB in terms of sustainability performance. While tracking

the same theme, the relative performances of HSSUS and HSSUSB were significantly different to

the relative performances of HSCASUS and HSCASUSB.

Exhibit 14: 24-month Performance: HSSUS vs HSSUSB


A major factor explaining this difference is the fact that HSSUS is mainly composed of ‘old economy’

stocks (e.g. companies in sectors such as Conglomerates, Properties & Construction and Utilities)

with higher sustainability performance scores, while HSSUSB also includes Chinese ‘new economy’

stocks (e.g. Technology and Healthcare), which often have stronger share price performances but

lower sustainability performance scores. As shown in Exhibit 15, Information Technology, Industrials

and Consumer Discretionary generated positive returns of between 13% and 93%. The fact that only

8% of HSSUS constituents are classified under these industries, compared with 24% of constituents

for HSSUSB, this arguably explains the outperformance of HSSUSB versus HSSUS. Moreover,

HSSUS’s higher exposure to industries with underperformance such as Conglomerates (-37%),

Utilities (-19%), and Properties & Constructions (-13%) has also dragged its performance versus

HSSUSB.

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31

-Oct

-19

31

-De

c-1

9

29

-Fe

b-2

0

30

-Ap

r-2

0

30

-Ju

n-2

0

31

-Au

g-2

0

31

-Oct

-20

HSSUS HSSUSB

-


www.hsi.com.hk

16

Exhibit 15: % Index Weighting for HSSUS and HSSUSB versus 1-yr Performance of HSCI Constituents by Industry


With growing recognition from investors that the integration of ESG factors in investment decisions

could help them manage risks more effectively and, in turn, potentially enhance their returns from

their investment portfolios, we see opportunities for fast-growing technology companies to lift their

sustainability performance. If HSSUS includes more leading technology companies in the future, this

will enhance its relative price performance versus HSSUSB.

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Cong

lom

erat

es

Ener

gy

Tele

com

mun

icat

ion

s

Uti

liti

es

Fin

anci

als

Pro

per

ties

&C

on

stru

ctio

n

Cons

umer

Sta

ples

Cons

umer

Dis

cret

iona

ry

Mat

eria

ls

Ind

ustr

ials

Hea

lthc

are

Info

rmat

ion

Tech

nol

ogy

% Index Weighting

HSSUS HSSUSB

-60%

-40%

-20%

0%

20%

40%

60%

80%

100%

Co

ng

lom

era

tes

En

erg

y

Tele

com

mun

icat

ion

s

Util

itie

s

Fin

anci

als

Pro

per

ties

& C

on

stru

ctio

n

Cons

umer

Sta

ples

Cons

umer

Dis

cret

iona

ry

Mat

eria

ls

Ind

ustr

ials

Hea

lthc

are

Info

rmat

ion

Tech

nolo

gy

1-yr Performance

-


www.hsi.com.hk

17

Appendix – Hang Seng Indexes Company's Sustainability Indexes Series

Exhibit 16: Hang Seng Indexes Company’s Sustainability / ESG Indexes Development

Source: Hang Seng Indexes Company

Hang Seng (Mainland and HK)

Corporate Sustainability Index

Total: 60 Companies

Hang Seng Corporate

Sustainability Index

(Top 30 ESG Rating)

Hang Seng (China A) Corporate

Sustainability Index

(Top 30 ESG Rating)

Hang Seng Corporate Sustainability

Benchmark Index

(Top 20% ESG Rating of

Hang Seng Composite Index)

Total Number: 89

Hang Seng (China A) Corporate

Sustainability Benchmark Index

(Top 10% ESG Rating of

Stock Connect Eligible A-shares)

Total Number: 135

Benchmark Series

Tradable Series

Hong Kong Mainland China A-Shares

HSI HSCEI

HSI ESG

HSCEI ESG

for weighting adjustment

Expanded the coverage from 300 A-shares to over 1,200 A-shares in 2019 yearly

review

HSIL’s Sustainability / ESG Indexes…Started from 2010

Hang Seng ESG 50 Index

(Top 50 ESG leaders

with relativ ely high

market cap listed in

HK)

-


www.hsi.com.hk

18

Disclaimer All information contained herein is for reference only. Hang Seng Indexes Company Limited (“HSIL”) ensures the accuracy and reliability of the information contained herein to the best of its endeavours. However, HSIL makes no warranty or representation as to the accuracy, completeness or reliability of any of the information contained herein and accepts no liability (whether in tort or contract or otherwise) whatsoever to any person for any damage or loss of any nature arising from or as a result of reliance on any of the contents of this document, or any errors or omissions in its contents and such contents may change from time to time without notice. All information contained herein does not constitute any express or implied advice or recommendation by HSIL 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. © Hang Seng Indexes Company Limited 2020. All rights reserved.

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