(This article first appeared in the Q3 issue of GlobalTrading.)
With Thomas Kwan, Chief Investment Officer, Harvest Global Investments
Briefly describe Harvest Global Investments and outline your role and responsibilities as CIO.
Harvest Global Investments is a fully owned subsidiary of Harvest Fund Management, one of the largest asset management companies in China with almost USD 140 billion in secondary market assets under management. As the international arm of the Harvest Group, Harvest Global Investments has been serving as the global gateway for global investors to access to China’s capital markets and the opportunity to participate in its rapid growth since 2008. As the CIO of Harvest Global Investments, I oversee all investment activities conducted by Harvest Global Investments and lead ESG initiatives for the Harvest Group.
How does a firm build an ESG investment framework?
Harvest combines the strengths of international ESG standards and local factors that could weigh on a Chinese company’s growth sustainability. We developed our proprietary ESG investment framework based on extensive research of global frameworks, and applying local expertise and understanding of material ESG issues and trends in the local market. There are a few key considerations for us to take this approach: first and foremost, we want to improve the overall ESG data accessibility and quality in China to gain insights in a company’s capacity for long-term sustainable development. Second, we want to leverage the ESG framework to generate alpha returns for the portfolios we manage and mitigate market downside risks in China. Last but not least, with a team of seven dedicated ESG specialists in Beijing and Hong Kong, the most among Chinese asset managers, Harvest has demonstrated that insufficient ESG data quality in the market can be supplemented by rigorous,in-depth research performed by in-house ESG data scientists and investment analysts.
How does the Harvest Investment team utilize ESG?
At Harvest, the investment team is a critical component of our ESG research and integration program. Our analysts contribute to our ESG research via inputs into our proprietary ESG model. The model’s output – in the form of ESG scores and insights – is then utilized by sector analysts and portfolio managers in their investment decisions. Our ESG model evaluates non-financial aspects of companies to assess their ability to conduct businesses against various tail risks, including environmental, social, and corporate governance, as well as physical and transitional risks arising from changes in regulations and policy. We also analyze ESG performance from a portfolio perspective, and consider underweighting or divesting significant laggards in order to maintain a relative portfolio ESG level.
What are the challenges, and opportunities, with regard to ESG data in investing?
The ESG disclosure quality of Chinese companies has been low. Chinese listed companies are encouraged to voluntarily publish Corporate Social Responsibility reports, but such reports have been often presented as marketing tools rather than proper ESG disclosures. However, there are vast opportunities ahead as regulators strengthen disclosure requirements and market sentiment on ESG matters evolves. ESG rating agencies are expanding their footprints in China, and they will motivate Chinese companies to increase their focus on ESG issues. In the short term, this may mean changes in business strategies. In the longer term, companies will reconsider their business models to pursue sustainable growth.
As a major investor in China, Harvest sees the evolving perception on ESG as an opportunity. We believe our early mover advantage in integrating ESG research and analysis into the investment process will help us to generate alpha in China’s thriving financial markets, both onshore and offshore.
What is the global framework versus the China framework for ESG?
Global ESG frameworks provide a cross-market benchmark reference when investing across a region. However, like every market, China has its unique local market issues, which are sometimes neglected or even omitted by global ESG frameworks for the sake of comparability. The materiality of ESG issues also vary from market –to –market, depending on a variety of socioeconomic and geopolitical factors. For a deep financial market like China, investors may consider developing their proprietary framework to fully internalize and understand the ESG issues and materiality at work. We are also mindful that some issues in developed markets are not prevalent in China at present, but may become material in the future. In these cases, we refer to development trajectories of developed markets and contemplate how China may develop in the future.
Where does artificial intelligence fit into a discussion about ESG?
Discussion of ESG issues’ impact on investments involve complex and dynamic issues which could be difficult to quantify. Artificial intelligence can improve ESG data quality on at least two facets. First, artificial intelligence can extract and process unstructured data from a variety of public sources to enhance data quality and granularity. Second, artificial intelligence can help portfolio managers systematically identify and understand issues that are increasingly material to investment outcomes, especially during China’s rapid transition towards a sustainable economy. At Harvest, we utilize Natural Language Processing (NLP) techniques to monitor and categorize ESG issues of companies under our coverage. This helps to enhance the breadth and depth of our ESG analysis.
What is the future of ESG in investing in China?
We view ESG as an emerging and integral part of investing in China’s fast evolving financial markets. For the past several years, Chinese regulators have gradually introduced guidelines and requirements for companies and asset managers to enhance awareness on ESG issues. The People’s Bank of China (PBOC), the Chinese Securities Regulatory Commission (CSRC), stock exchanges and the Asset Management Association of China (AMAC) have published guidelines or codes to promote sustainable investing in China. In addition, as China’s continuously expanding middle class population aspires to a higher quality of life, corporations in China must aspire to higher standards. Against this backdrop, we believe ESG-driven analysis will become more mainstream in China over time.