by Qontigo
Postal Savings Bank of China (PSBC), one of the Asian nation’s largest lenders, has introduced its wealth management unit’s first ESG product with an investment vehicle that tracks an optimized STOXX index by Qontigo.
The investment product’s equity tranche replicates the STOXX® PSBC China A ESG Index, which selects shares with a superior sustainability profile from within the largest 300 securities by free-float market capitalization in the STOXX® China A 900 Index. The index applies exclusionary screens for companies in breach of the UN Global Compact Principles and related norms, and those involved in controversial weapons, tobacco or thermal coal. PSBC’s investment product separately includes a fixed-income tranche.
The index
While the STOXX PSBC China A ESG targets a portfolio with a higher sustainability profile, it seeks at the same time to maintain similar risk characteristics to its benchmark. The stocks selection and weights are determined using the Axioma Portfolio Optimizer to maximize the overall ESG score of the index, subject to predicted risk, tradability and diversification constraints.
A benchmark for ESG investing in China
Driven both by client demand and regulation, ESG adoption in China is quickly catching up after lagging that in pioneer countries. Among other initiatives, authorities in the country are stepping up efforts to have companies report on their sustainability credentials.
“We are excited to have completed our first collaboration with PSBC, one of the top players in China’s wealth-management industry, for a unique solution in that market,” said Rick Chau, Managing Director for Sales, Asia/Pacific, at Qontigo. “The STOXX PSBC China A ESG Index efficiently addresses the objective of enhancing the portfolio’s ESG profile, without generating excessive risk, turnover or sector biases. We foresee the index to become a benchmark for ESG performance among the country’s largest companies and to facilitate investor stewardship.”
In an event in Beijing last March, PSBC Vice President Xu Xueming said ESG investments, particularly those based on an objective and quantitative evaluation process, are key to foster the ‘green’ development of economies. An index-based solution also helps all parties gauge the ESG performance of companies, helping the promotion of better corporate practices, he added.
“After months of preparations following the announcement of the STOXX PSBC China A ESG index in March this year, PSBC Wealth Management is now launching the first wealth management product linked to the index to provide investors an investment plan in the high-quality China A-share market,” said Andrew Wu, Chairman at PSBC Wealth Management Corp. Ltd. “PSBC Wealth Management will, as always, be committed to serving the real economy, assisting the country’s key strategic layout, and meeting people’s wealth management needs.”
Designed for efficient trading
Among specific constraints built into the STOXX PSBC China A ESG, its aggregate portfolio ESG score must be at least 20% higher than the benchmark’s. Its predicted risk must be equal or lower, based on Axioma’s China Medium-Horizon Fundamental Equity Factor Risk Model. The index must hold and not underweight any stock in the top third by ESG score, and can hold but not overweight any stock in the bottom third, with such mandates feeding into the optimizer. Securities with no ESG score are not eligible for selection.
There are also caps to the weights assigned to single stocks and ICB Supersectors relative to the benchmark. Finally, there are limits to portfolio turnover and thresholds to liquidity, to ensure efficient replicability and tradeability.
In backtested data, the STOXX PSBC China A ESG has returned 35 percentage points more than the STOXX China A 900 in the last six years (Exhibit 1).
Exhibit 1 – Performance
As of Oct. 7, 2022, the STOXX PSBC China A ESG consisted of 123 securities.
For information on the index in Chinese, please visit a dedicated page.
