Is a New China Tech & Finance ESG ETF Set to Take Off?

A new ETF gives investors the opportunity to invest in sustainable Chinese technology and financial services stocks. The Harvest CSI 300 ESG Leaders Index ETF [83108.HK] tracks 100 A-share companies that perform highly for environmental, social and governance standards — giving equal weighting to each concern.

“The Harvest CSI 300 ESG Leaders Index leverages Harvest’s proprietary ESG framework to identify ESG factors material to the China onshore market. It provides investors with a more sustainable exposure to China’s A-share market while offering the potential for additional alpha,” said Thomas Kwan, chief investment officer at Harvest Global Investments.

What’s in Harvest’s latest ETF?

The ETF is based on the CSI 300 Harvest ESG Leaders Index, which is made up of 300 Chinese companies. Harvest then excludes companies that have been caught up in corporate governance controversies, before assigning an ESG score to the companies for the final ETF holdings. Criteria for exclusion include ESG issues that are specific to China.

The top three sectors in the fund are Financials (29.51%), Consumer Staples (15.83%) and Information Technology (14.71%), as of 15 March 2021.

Ping An Insurance Company of China [2318.HK] is the biggest holding, representing 7.74% of the fund. The insurer’s share price is up 3.1% so far this year, having slumped in mid-February. Among the analysts offering price targets on Yahoo Finance, the stock has an average HKD99.27 price target — representing a 2.71% upside on the current share price (as of 17 March’s close).

Second-placed holding Kweichow Moutai [600519.SS] specialises in the production and sale of Moutai baijiu, a distilled Chinese liquor. Kweichow Moutai’s share price has surged 101.43% in the past 12 months as China’s mutual fund managers pump money into the company (as of 17 March’s close). However, over the past three weeks, the stock has lost $111bn following a sell-off triggered by valuation concerns and the prospect of tighter monetary policies from the Chinese central bank.

Further down the list is BOE Technology [000725.SZ], representing a 2.15% weighting. BOE Technology is a leader in manufacturing displays, like those used in smart TVs. BOE Technology is trading relatively flat this year, having surged 26% last year.

Where next for ESG investing in China?

Harvest’s latest ETF has been launched at a time when ESG investment is set to grow in China, in part thanks to government intervention. China’s Communist Party has pledged for sustainable growth in its latest five-year plan, including a promise to go carbon neutral by 2030. According to the World Economic Forum, China’s government is expected to increase its investment in renewable power, electric vehicles and battery storage under this plan.

Harvest’s latest ETF isn’t the only one looking to piggyback on this shift in policy. It joins the Haitong MSCI China A ESG ETF [9031 - Type ETF], the Mirae Asset Global Investments’ Global X China Clean Energy ETF [9809 - Type ETF] and the Global X China Electric Vehicle ETF [9845.HK] as ESG ETFs with a Chinese focus. Should the investment come through, these ETFs could give investors exposure to government-backed growth in the country.

The China Technology investment theme

ETFs with exposure to the Chinese technology sector have also been gaining increased investor attention. Last month saw the launch of the CSOP Star 50 Index ETF, which gives exposure to the SSE STAR 50 Index. This tech-heavy, Nasdaq-like index was set up to promote innovative Chinese companies in the technology and biotech sectors.

Yet over the past month, the China Technology investment theme has dropped circa 17%, according to our thematic ETF screener. The Global X MSCI China Information Technology ETF [CHIK], KraneShares CSI China Internet ETF [KWEB], and Invesco China Technology ETF [CQQQ] all saw declines in the 20% region. However, last week the investment theme managed to gain 1.44%.

To some extent, these drops are part of the wider tech selloff happening across all markets and they follow heavy outflows in 2020. Spooking investors last year was, of course, the coronavirus and US-China relationship tensions weighed on sentiment. However, the rollout of a vaccine, China resuming its ambitious growth plans and a new president in the White House could all lead investors to once again back the superpower.