Hang Seng Corporate Sustainability Index Series Sustainable & Responsible Investment

Eugenie Chiu

Assistant Vice President

Hang Seng Indexes Company Limited

21 February 2014

Seminar on HKQAA Sustainability Rating

for Hang Seng Corporate Sustainability Index

Series

1

Momentum for a Sustainable Future

Environmental

Corporate

Governance

Social

Corporations

Earth

Society

“Sustainable development

refers to…forms of progress

that meet the needs of the

present without

compromising the ability of

future generations to meet

their needs.” World Business Council for Sustainable Development

2

Corporations are Powerful

In Hong Kong

360,000 corporations in 2013*

2,868,000 employees in 2013*

76% of electricity consumption in 2013#

47% of disposal of solid waste at landfills in 2012^

Sources:

*Quarterly Report of Employment and Vacancies Statistics – December 2013, Census and Statistics Department #Hong Kong Monthly Digest of Statistics – February 2013, Census and Statistics Department ^Monitoring of Solid Waste in Hong Kong - Waste Statistics for 2012, Environmental Protection Department

Corporations are key players in efforts to ensure a sustainable future for societies, nations and the planet

3

5Cs of Sustainability

Corporations

Profitability / Survival Social Costs / Benefits

Corporate Sustainability Corporate

Social Responsibility

Competition Community

Sustainable development goes nowhere

without support from corporations

4

Three Routes to Achieving Corporate

Sustainability

Corporate Sustainability

Through

Regulation and Legislation

•CSR best practice

•Environmental law

•Employment law

•Carbon trading

Through

Corporate Initiatives

•Company values and beliefs

•Global Reporting Initiative

•ISO26000

Through

Incentives

•Recognition through awards

•Responsible investment

5

The Power of Investors in Shaping Corporate

Behaviour

Investor Power

- Through voting rights (less effective)

- Through decisions to buy or sell company’s stocks

Responsible Investment is a driving force in providing

incentive to a corporation to aim for sustainable development

6

Recent Sustainable and Responsible Investment (“SRI”)

Trends

Sources:

- Eurosif European SRI Study 2012

- ASrIA Sustainable Funds Portal

.

Significant increase in number of

SRI funds in Asia

Rapid growth of sustainability-themed investment in Europe

Europe Asia

“Sustainable and responsible investing (SRI) is an investment discipline that considers environmental, social and corporate governance criteria (ESG) to generate long-term competitive financial returns and positive societal impact.”

Bridging the Gap between Companies and Investors

7

Company Investor

Sustainability Index acts as a bridge between companies and investors. It is a tool for translating sustainability ratings into a useful metric for making investment decisions.

Corporate Sustainability Index

November 2013

By HSIL Research

Corporate Actions in the Taiwan Market

Hang Seng Corporate Sustainability Index

Series

Background of Hang Seng Corporate Sustainability Index Series

9

The aim of the index series is to track sustainable leaders in both Hong Kong and the Mainland that

perform well with respect to corporate sustainability.

Hang Seng Investment Management Limited launched a Hang Seng Corporate Sustainability Index

Fund on 8 Aug 2011 to track the performance of the HSSUS.

Hang Seng

Corporate Sustainability Index

Hang Seng (China A)

Corporate Sustainability Index

Hang Seng (Mainland and HK)

Corporate Sustainability Index

Hang Seng

Corporate Sustainability

Benchmark Index

Hang Seng (China A)

Corporate Sustainability

Benchmark Index

HSSUS: Hang Seng Corporate Sustainability Index

44 Companies signed trademark license agreement

10

Positive Market Response to Index Series

Index Concept and Constituent Selection

Eligible Companies

Index Universe

Select constituents according to sustainability ratings of the companies

Sustainability Ratings

Screening: Market Value; Liquidity; Listing History

In addition to traditional screenings, constituents are selected according to their sustainability ratings in the final stage of selection

11

Construction of the Hang Seng Corporate Sustainability Index Series

12

Hang Seng (China A) Corporate Sustainability Benchmark Index

Sustainability Screening

(Benchmark)

Tradability Screening

Sustainability Screening (Tradable)

Hang Seng Composite Index A300 List

One year One year

Fixed CoverageTop 20% companies in terms of

sustainability score

Listing History

Hang Seng Corporate Sustainability Benchmark Index

Top 150 MV: Velocity >0.1% Top 150 MV

Fixed NumberTop 30

Fixed NumberTop 15

Hang Seng Corporate Sustainability Index

Hang Seng (China A) Corporate Sustainability

Hang Seng (Mainland and HK)

Fixed CoverageTop 10% companies in terms of

sustainability score

Universe

Hong Kong China A

Launched on 5 Sept 2011

Launched on 26 July 2010

Roles of HKQAA and Hang Seng Indexes

13

HKQAA’s role:

• Responsible for undertaking the

Corporate Sustainability

Assessment of listed companies

• Assessment is made under its own

rating criteria and framework with

reference to several international

standards such as ISO26000,

AA1000 and GRI

• Ratings are then delivered to HSIL

as an input for constituent selection

Hang Seng Indexes’ role:

• Responsible for undertaking

screenings such as MV, liquidity

and listing history

• Eligible companies are then

selected according to the above

requirements

• Responsible for selecting the

constituents of the index by their

sustainability ratings provided by

HKQAA

Usage of Sustainability Index Series

Benchmark Index Series

Benchmark the performance of a pool of companies with strong sustainability performance

Stocks selection pool for sustainability investment

Tradable Index Series

Benchmark the performance of a pool of sizable and liquid companies with the best sustainability performance

Investment product development, such as index tracking funds

14

November 2013

By HSIL Research

Corporate Actions in the Taiwan Market

Hang Seng Corporate Sustainability Index

Performance of Hang Seng Corporate Sustainability

Index

600

700

800

900

1,000

1,100

1,200

1,300

Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13

Rebased HSI Rebased HSSUS

2010* 2011 2012 2013Since

Launch*

HSI 10.5 -20.0 22.9 2.9 11.8

HSSUS 11.1 -20.5 20.2 3.8 10.2

HSI 15.2 25.4 16.4 15.3 19.1

HSSUS 14.8 23.7 15.6 14.5 18.0

Return (%)

Ann. Volatility (%)

*Since launch date on 26 July 2010

From 26 July 2010 to 31 December 2013

16

Comparison of ESG Ratings

17

Description ESG Ratings No. of Constituents

HSI only HSI & HSSUS HSSUS only

Stable

AA+ - 3 -

AA - 8 2

AA- - 1 -

Satisfactory

A+ - 2 1

A 6 10 3

A- 4 - -

Moderate

BBB+ 3 - -

BBB 2 - -

BBB- 3 - -

BB+ - - -

BB 8 - -

Unstable B - - -

Vulnerable C - - -

Total 26 24 6

Data as at latest ESG Review (2013)

Comparison in Net Dividend Yield

18

2.5

3.4

3.0 3.0

2.7

3.8

3.2 3.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010* 2011 2012 2013**

HSI HSSUS

%

*Launched in Jul 2010

Comparison in Volatility

19

*Launched in Jul 2010

Indexes

Sharp Ratio

(Since

Launch)

HSI 0.36

HSSUS 0.36

15.2

25.4

16.4

15.3

19.1

14.8

23.7

15.6

14.5

18.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

2010* 2011 2012 2013** Since Launch*

HSI HSSUS%

Weighting Composition of HSI and HSSUS (By Industry)

20

Industry Constituents Wgt (%)

HSI only Both* HSSUS only HSI HSSUS

Financials 6 6 1 46.5 38.2

Properties & Construction 3 6 2 9.8 15.6

IT - 2 - 7.1 12.4

Telecommunications 1 1 - 7.6 9.3

Utilities 1 3 - 4.7 8.3

Conglomerates 1 2 1 3.8 7.5

Energy 5 1 - 10.5 5.0

Consumer Goods 4 1 1 4.3 1.9

Consumer Services 3 2 - 4.9 1.6

Industry Goods 2 - 1 0.8 0.2

Materials - - - - -

Total 26 24 6 100.0 100.0 * Constituents of both HSI & HSSUS

Data as at the end of Dec 2013

November 2013

By HSIL Research

Corporate Actions in the Taiwan Market

The Sustainability Assessment

Performance of Constituents versus Non-Constituents

22

56.3%

60.1%

65.3%

69.3%

44.4%46.1%

48.0%

51.0%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2010 2011 2012 2013

Constituents Non-Constituents

* Constituents/Non- Constituents of HSSUS

Upward Trend in Rating Distribution

23

Over the years, more companies have been rated as ‘Satisfactory’ and ‘Stable’.

*In 2010, the number of companies in Hong Kong assessed was lower, making the percentage appear to be higher.

( ) No. of companies that were assessed

Percentage of companies rated as ‘Satisfactory’ or ‘Stable’ compared with total number of companies assessed

18.6%

13.5%14.2%

15.9%

1.1%

1.5%

3.5%

4.6%

0%

5%

10%

15%

20%

25%

2010* 2011 2012 2013

Stable Satisfactory

(274) (341) (345)(346)

Hong Kong

5.7%6.3%

7.2%

9.7%

0%

2%

4%

6%

8%

10%

12%

2010* 2011 2012 2013

Satisfactory

(300) (285) (299)(291)

China

DescriptionESG

Ratings

Reliable AAA

AA+

AA

AA-

A+

A

A-

BBB+

BBB

BBB-

BB+

BB

BB-

Unstable B

Vulnerable C

Stable

Satisfactory

Moderate

19.7%

15.0%

17.7%

20.5%

5.7%

6.3%

7.2%

9.7%

24

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