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MPF schemes are also offering ESG funds

July 25, 2023

Understand ESG funds and their differences from traditional fund deployment and other thematic funds. This article in English and Chinese is available for download.

In case you were not aware, ESG funds have recently been introduced by some providers within the MPF market, and some existing MPF funds have been transformed into ESG-themed funds. This move provides members with more investment options generally and it caters to those whose investment preference is to follow this latest investment market trend.

ESG has become the most talked-about investment trend in recent years and involves integrating three non-financial elements of Environment (E), Social (S), and Governance (G) into investment strategies. Apart from generating investment returns for retirement planning purposes, ESG funds also help to promote sustainable corporate development.

MPFA promotes the concept of ESG investments

Back in 2021, the MPF Authority (MPFA) issued the "Principles for Adopting Sustainable Investing in the Investment and Risk Management Processes of MPF Funds" to MPF trustees to assist them in integrating ESG factors into the investment and risk management of MPF funds from a financial risk management perspective and to help them make relevant disclosure to MPF scheme members. The investment horizon of MPF funds stretches over several decades, making them vulnerable to ESG risks which are evolving long-term investment risks, so ESG risks should be considered an important part of the investment and risk management process.

Different from traditional fund deployment

The classification and investment strategy of most MPF funds are primarily based on their region or asset class. However, for ESG-themed funds, the manager must evaluate a company's sustainability based on ESG ratings and then decide whether it is suitable for inclusion in the investment portfolio. At the same time, existing “traditional” funds can also incorporate ESG elements into their investment policies and goals and convert over time into ESG-themed funds.

ESG funds differ from other thematic funds

Thematic funds that concentrate on a single industry or capture long-term growth opportunities already exist in the MPF universe. Typically, these funds are focused on a particular theme. This characteristic is a double-edged sword and can bring higher investment returns under the correct market trend, but are subject to more underlying risk. However, investors' attention and perception of specific themes may cause volatility in thematic funds. Additionally, some themes may be influenced by policy changes or become outdated over time, which can diminish investment performance.

ESG funds are different from other thematic funds. The investable scope for ESG funds is often wider, which can help diversify risks and is not subject to regional or industry limitations. Moreover, ESG funds are more diverse, and they may have different investment goals, styles, and ESG strategies. For instance, some ESG strategies primarily exclude specific unethical industries (such as tobacco and gambling), while other strategies integrate ESG elements (such as the proportion of toxic substances emitted by corporates) and traditional financial indicators as the investment goals of the fund. Some strategies aim to create positive ESG impact on society while pursuing investment returns. It is essential for members to understand how the fund incorporates ESG factors into the fund strategy to determine whether it aligns with their own investment preferences and beliefs.

Understand risks before investing

ESG funds have undoubtedly broadened the fund selection for MPF members, enabling them to simultaneously plan for their future retirement and promote sustainable corporate development. Nevertheless, members should not merely follow trends. Rather, they should understand the investment scope and objectives of a particular fund, and most importantly, evaluate if the risk level of a fund aligns with their own risk tolerance level.

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Senior Director & Business Development Lead, Greater China

Head of Retirement, Hong Kong & Macau

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