Asia ESG Indexes Outperform in 2021

Which stocks drove the returns?

Kate Lin, CAIA 02 March, 2022 | 11:45
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Globally, out of 116 unique Morningstar ESG-oriented indexes, 66, or 57%, outperformed their non-ESG equivalents in 2021. The longer-term performance of ESG indexes paints a more encouraging picture. Over the five-year period ending 2021, 88 of the 110 Morningstar ESG indexes with five-year histories outperformed.

Dan Lefkovitz, Morningstar’s indexes strategist, says that the mixed results were partly attributed to the reversal of energy stocks, which rode generated strong returns in 2021. The ESG indexes tend to be light on the carbon-intensive energy sector. Moreover, other than sector tilts, security selection and other factors like geographic allocation and yield-curve positioning all help explain ESG index performance, he adds.

Generally, over the past year, Asia ESG indexes all delivered an excess return versus their non-ESG counterparts, but to a smaller extent than the global and the U.S. markets.

Having said that, the longer-term performance of different Asia indexes seems to make a case for siding with companies that have a better ESG profile. Asia ex-Japan ESG Index was able to outperform the broad-based regional index by 1.59% every year between 2017 and 2021. The 2021 outperformance was most notable in the Morningstar Asia Pacific index, outpacing its non-ESG equivalents by 1.74%.

The excess return in Asian ESG stocks also echoes sustained inflows into ESG-aware fund products. Sustainable funds available for Asian investors experienced steady fund inflows throughout 2021, adding a total of US$16 billion in new assets. This puts the aggregate size of sustainable investment products at around US$14.4 trillion.

“In Asia, ESG screens have been successful in delivering a competitive risk/return profile over the past five years. All of Morningstar’s Asia-focused sustainability indexes both outperformed their non-ESG equivalents and lost less during down markets from 2017-2021,” says Lefkovitz. “That is important because of the persistent perception that ESG-based investing requires a performance sacrifice.”

 

Region

2021 Excess Return

5-Year Excess Return (Annualized)

5-Year Downside Capture Ratio

Global

2.24

0.65

95.63

US

2.70

-0.19

96.01

Asia Pacific

1.74

0.91

94.36

Asia Pacific ex-Japan

0.85

0.90

90.61

Asia

1.11

0.79

94.68

Asia ex-Japan

0.27

1.59

93.70

Regional performances are based on their respective Morningstar Sustainability Indexes. Data as of Dec. 31, 2021. A downside capture ratio above 100% implies greater losses than the market during losing periods; a downside capture ratio below 100% suggests lesser losses.

 

 

Capital preservation is critical to long-term investment success. Other than identifying names that could provide excess returns above an appropriate broad-based benchmark, downside protection is a gauge that investors should not overlook.

“Contrary to conventional wisdom, investing based on environmental, social and governance criteria does not necessarily mean sacrificing return. Nor is it a guaranteed route to market-beating performance. Sustainable investors should be encouraged to see that long-term ESG performance has been competitive and linked to lower risk,” he added.

With downside capture ratio, an indicator that combines a variety of risk measures, Morningstar finds that constituents in the Asia version of Morningstar sustainable indexes were seen partially protected from the downside. Downside capture was most prominent in the Asia Pacific ex-Japan region among all Asia indexes.

 

Outperforming Constituents

In Asia ex-Japan, stocks like Taiwan Semiconductor Manufacturing (2330), Hong Kong Exchanges and Clearing (00388), Tencent (00700), South Korea’s Hyundai Mobis (012330) and India’s Infosys (INFY) contributed to Morningstar’s ESG indexes’ outperformance from 2017-2021.

The Chinese technology stocks suffered from a regulatory crackdown, but returns over the five-year period are strong. This does not deter the likes of Tencent being among drivers of Asia and wider emerging market indexes over the past five years.

 

Performances of other relevant sustainable indexes

Morningstar Sustainable Environment Indexes Risk/Return Record vs. Large-Mid Cap Equivalent

Region

2021 Excess Return

5-Year Excess Return (Annualized)

5-Year Downside Capture Ratio

Global

0.92

1.37

99.29

US

-1.05

0.73

98.18

Global ex-US

-1.13

0.15

98.55

Asia ex-Japan

-0.04

1.64

91.51

Morningstar Low Carbon Risk Indexes Risk/Return Record vs. Equivalent Large/Mid-Cap Index

Region

2021 Excess Return

5-Year Excess Return (Annualized)

5-Year Downside Capture Ratio

Global

1.09

0.50

98.01

US

-0.17

0.15

98.86

Global ex-US

0.95

0.28

97.76

Asia ex-Japan

2.17

0.40

93.85

Morningstar Sustainability Dividend Yield Focus Indexes Risk/Return Record vs. Equivalent Morningstar Dividend Yield Focus Index

Region

2021 Excess Return

5-Year Excess Return (Annualized)

5-Year Downside Capture Ratio

Global

-0.06

2.87

90.29

US

3.35

5.38

71.29

Global ex-US

3.08

1.71

97.28

Developed Asia Pacific ex-Japan

-2.23

-2.10

117.72

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Hong Kong Exchanges and Clearing Ltd335.60 HKD0.00Rating
Hyundai Mobis Co Ltd206,000.00 KRW0.00
Infosys Ltd ADR19.58 USD0.00Rating
Taiwan Semiconductor Manufacturing Co Ltd471.50 TWD0.00Rating
Taiwan Semiconductor Manufacturing Co Ltd ADR80.80 USD0.00Rating
Tencent Holdings Ltd317.40 HKD0.00Rating

About Author

Kate Lin, CAIA

Kate Lin, CAIA  is a Data Journalist for Morningstar Asia, and is based in Hong Kong

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