Sustainable investing, the integration of ESG factors into investment analysis, helps mitigate risks, drive long-term financial returns for investors, and create an effective lever to shift companies toward greater environmental and social responsibility. Building on 10 years of sustainable investing experience in its home country of Japan, Sumitomo Trust and Banking sought a partner to help apply its investment model to China, where ESG risks are high.
China has a more complicated ESG landscape for many reasons, including its relatively basic environmental and social regulations in certain areas, low levels of ESG information disclosure, and few financial professionals with knowledge of ESG factors. Sumitomo’s objective was to create a sustainable investment fund composed of Chinese equities. The formation of this fund required in-depth understanding of the Chinese market and the identification of high- and low-performing companies based on ESG factors. Sumitomo asked BSR to support this project with research and advice on ESG integration in China.
We identified the lack of credible and comprehensive ESG data in China as the major barrier to running a successful ESG fund. In response, we created a customized monthly ESG news screener that analyzed publicly traded companies across more than 90 ESG issues. To provide the information Sumitomo needed to make investment decisions, the news screener incorporated both international norms and standards for financial analysis and China-specific context. The system covers developments related to China’s main sustainability concerns, tracks local regulations and laws, and is available in both Mandarin and English.
To help Sumitomo react quickly to changes in the performance of portfolio companies and other associated investment risks, we created a real-time news feed that delivers color-coded information on high-risk developments. This additional layer of information helps measure how portfolio companies are actually performing rather than merely which ESG data they are disclosing.
Because screening services alone are not sufficient for analyzing and measuring companies’ ESG awareness, management quality, and performance, we provided Sumitomo with in-depth research on specific portfolio companies, events, and ESG issues. The research findings served as strategic inputs for Sumitomo’s stock selection.
In March 2010, Sumitomo successfully launched the “China Good Company” stock fund, the first sustainable investment fund offered in the country by a non-Chinese financial institution. Within 12 months of operation, the portion of A-shares in the fund outperformed the market benchmark by 4.5 percent. This new investment model and good performance has attracted significant attention and serves as a role model for domestic and international investors in China. For the next step, Sumitomo is looking for opportunities to go beyond ESG information analysis and will leverage the company’s shareholder rights to engage with its portfolios to nurture sustainable performance in the long run.