Asia continues to lag other regions for integrating ESG principles with investing; better data and stronger regulatory requirements will help institutional investors, market observers say.
The rules-based index, which will be managed by Standard and PoorÆs, comprises of up to 32 stocks involved in a number of environmentally conscious industries ranging from renewable energy, water and waste management to businesses in ethanol, geothermal and alternative fuels.
The index will be rebalanced semi-annually and will ensure that money will be redistributed by taking profits from the companies that have performed. Additionally, the index will also be re-weighted on an annual basis to reflect changes in the market capitalisation of each sub-sector and to also reflect actual relative growth in each sector.
Within this basket, there are eight official sub-sectors, each comprised of up to four companies in order to offer diversified exposure to investors. Although some oil, gas and coal firms would be applicable to the overall philosophy of the index, ABN Amro decided not include companies form these sectors.
In a testament to how far behind corporate Asia is regarding environmental issues, the index components all come from Europe and North America.
ôAlthough there are plenty of oil, gas and coal companies involved in renewable energy and green projects, we wanted the index to track sectors that have a more visible impact on climate control and the environment,ö says Matthew Wong, ABN AmroÆs head of private investor products in Asia and head of global markets in Hong Kong.
According to ABN Amro, its new index was launched not only as a socially responsible project but to also properly reflect the emerging business opportunities within the renewable-energy space, which saw its total global revenue increase by 26% in 2006 to $38 billion.
ôThis sector is undoubtedly a high-growth story and emerging business opportunity for investors,ö says Wong. ôReturns will be high in the medium and long term. We donÆt expect to see anything resembling the internet bubble happening to the renewable energy sector any time due to its long growth story.ö
Since 2005, a simulated backtest points out that stocks in the index have significantly outperformed both the S&P 500 in US dollar and euro terms. Raw-energy data also projects renewable energy will provide 35% of the planetÆs energy needs by 2030 and produce 70% of all electricity generation by 2050.
The bank plans to make the index available on several regional exchanges, with the Singapore Stock Exchange (SGX) expected to happen first and the Hong Kong Stock Exchange (HKEX) following soon after. It will also use the index to target investors in Japan.
ôThe SRI market is a huge market globally, but Asia is lagging behind,ö says Wong. ôInvestors are savvy about investment opportunity and increasingly care more about the environment, but it will require a long education process for regional investors to fully understand the benefits and upside potential of SRI investing.ö
Outside of the newly launched climate change and environment index, ABN Amro maintains a number of eco-themed structured products, which presently has over E1 billion in retail assets under management. Under this umbrella, the firm sponsors other indices such a renewable energy index, a solar energy index, a natural gas index and a water index.
The firm estimates its water index has attracted over $1 billion in interest and has proven a major success with investors in China.
ôThe concept of the water index has washed well in China and investors really seem to like the concept of investing into water processing and waste management,ö says Wong.
Outside of China, the firmÆs asset management arm has also jumped on the green bandwagon, launching a dedicated SRI fund in India. ABN Amro Asset ManagementÆs India Sustainable Development Fund, which was launched earlier in the month, invests in Indian firms that meet global standards for environmental, social and corporate governance (ESG) issues.
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