China has experienced unprecedented economic and financial expansion over recent years.
Between 1990 to 2018 the average growth of its GDP was 9.4%, increasing from USD 360.9 billion to USD 13.6 trillion while their share of global GDP has swelled from 3.9% to 6.6%. During this rise to prominence the economy has become increasingly liberalized, and its capital markets have undergone far reaching changes with progressively improving access for foreign sources of capital.
Clearly the Chinese stock market is important for asset allocation, and the MSCI China ESG Universal Index forms a core building block for gaining ESG-filtered access to the Chinese economy. The objective of the MSCI China ESG Universal 5% Issuer Capped Index is to increase exposure to those companies demonstrating a certain minimum ESG profile as well as a visible trend of profile improvement. This is combined with seeking to exclude companies which are subject to severe controversies, or those involved in the manufacturing of controversial weapons.
The MSCI ESG Universal Index is a subset of the parent index MSCI China. The MSCI ESG Universal Methodology imposes a fairly light ESG screening, and remains highly correlated to the parent index which makes it a suitable replacement as a core allocation to Chinese stocks.
Investing in emerging market bonds
China has experienced unprecedented economic and financial development over the past decades. From 1990 to 2018, the average growth of its GDP was 9.4%, making it one of the most rapidly developing nations. Its GDP increased from USD 360.9 billion to USD 13.6 trillion, or from having 3.9% share in the global GDP to 6.6%.2
Along the way, the economy has become liberalized while its capital markets have undergone far-reaching changes and have progressively opened up to foreign investments. As of end-2018, the Chinese stock market capitalization has reached 6.3 trillion USD and was only second to the US.3
With its population of 1.4 bn, China is the most populous country in the world. China is heavily involved in geopolitics, which is exemplified by its recent trade tensions with the US. As the second largest economy in the world, China has a large and growing internal market. It therefore has the ability to conduct its own fiscal and monetary stimulus. The Chinese econom may therefore take its own path, and Chinese stocks may in the future exhibit a reduced correlation to other EM countries.
Investment objective
The objective of the MSCI China ESG Universal 5% Issuer Capped Index is to increase exposure to those companies demonstrating both a certain a minimum ESG profile as well as a trend of improving that profile, all while seeking to exclude companies subject to severe controversies or those involved in the manufacturing controversial weapons.
Additionally, the ESG index aims to closely track the parent MSCI China Index. The ESG Universal methodology imposes a fairly light ESG screen, and it is highly correlated to the parent index, which makes it a suitable replacement as a core allocation to Chinese stocks.
After years of focus on economic growth, China has started to pay attention to ESG considerations. For example, the China Securities Regulatory Commission has introduced new requirements that will mandate all listed companies and bond issuers to disclose ESG risks associated with their operations in their annual or semi-annual reports. Therefore, ESG investing in China is likely to gain momentum.
The complete report from UBS Asset Management: 'What are the sustainable options for investors in Chinese stocks?'