In the midst of a wave of headlines highlighting U.S. Attorneys General and State Treasurers taking aim at asset managers and banks for their practices related to environmental, social, and governance (ESG) integration, a differing narrative is unfolding in Mainland China’s financial district. On March 21, 2024, the Shanghai Stock Exchange (SSE) is making significant strides in sustainable finance with the introduction of the SSE Star ESG Index.
Set to comprise fifty (50) carefully selected stocks from the SSE Science and Technology Innovation Board, this new index will focus on companies that have received top China Securities Index (CSI) ESG evaluations on the STAR board, marking a significant move towards sustainable investment practices within China’s financial landscape.
The sector breakdown, based on Karbon Offsets analysis of the constituent list, shows the indices will not follow in lockstep with the SSE Science and Technology Innovation Board 50 Index (SHH: 000688). In comparison to S&P 500 ESG Indices, which are respectively in lockstep with the S&P 500, SSE Star ESG Indices’ sector breakdown will comprise 57.50% technology entities, 20% industrial, 12.5% healthcare, 7.5% basic materials, and 2.5% consumer cyclical. See chart below (SSE Star ESG Index Sector Breakdown).
In contrast to the methodology of the S&P 500 ESG Index, which captures 75% of the float-adjusted market capitalization (FMC) weighted of each Global Industry Classification Standard (GICS), the SSE Star ESG Index follows a more expansive approach. It includes stocks and Chinese Depositary Receipts (CDRs) ranked in the top 90% on the SSE Science and Technology Innovation Board. This ranking is based on average daily trade value over the past year, emphasizing the most traded stocks and CDRs.
The top ten constituents with large market capitalization in the indices consist of names such as Hygon Information Technology Co., Ltd., Semiconductor Manufacturing International Corporation, Shenzhen Transsion Holdings Co., Ltd. and others. See table below.
The SSE Star ESG Index doesn’t stop there; it employs a comprehensive methodology, considering various criteria to determine the inclusion of securities. The focus on average daily trade value reflects a commitment to capturing the market’s sentiment and liquidity in shaping the composition of the index.
As sustainability becomes an increasingly integral aspect of investment strategies worldwide, the SSE Star ESG Index might just position itself as a noteworthy player, aligning with global ESG trends while carving out its unique niche within the Chinese market. This move not only demonstrates China’s commitment to responsible investing but also introduces an alternative perspective in the evolving landscape of ESG integration.
