The Design Of Equity Fund Based On ESG Integration Strategy

The acronym ESG stands for environment,social and governance.And ESG investing which originated from socially responsible investing,is a new style of investing,advocating integrating the three non-financial factors into portfolio selection and management.The investors who use this investment method aim to improve the investment structure,optimize the risk control and harvest the long-term return,at meanwhile,wishing to have a positive impact on the society.With decades of development,ESG investing has become the mainstream in the global asset management industry.At the same time,with the joint efforts of various forces,ESG investing also makes good time in the Chinese market.2019 has seen a few ESG funds established.However,China is still inexperienced in integrating ESG factors into portfolio construction,and ESG funds are relatively scarce in China.This paper designs three equity funds based on ESG integration strategy in order to cater for Chinese investors’ growing demands of ESG investing.Based on the researches of the correlation between ESG and stock return at home and abroad,this paper takes the ESG rating of Chinese listed companies as the ESG synthesis factor which is systematically used in stock selection and equity weighting in portfolio construction.In the process of product design,this paper firstly compare a few different equity weighting methods which are commonly used in practice,and determine the ESG tilting based on capitalization scaling method as the final equity weighting scheme applied to funds.Subsequently,three ESG factor stock selection strategies are developed,namely,long stock strategy based on ESG rating,stock selection strategy based on ESG rating momentum and multi-factor stock selection strategy with ESG rating.Each stock selection strategy is paired with the same equity weighting scheme and the basic elements of the product,consequently establishing three funds based on the ESG integration strategy.Based on historical data,this paper also calculates and analyzes a few performance indicators of the three funds,and uses the Fama and French three-factor model to make regression analysis on the premium of the three funds,so as to judge their investment style and find the contribution source of their performance.Through empirical tests,we can find that except the second fund which dynamically screens ESG up-shifting stocks as the investment target,the first fund with high ESG rating stocks as the investment target and the third fund that integrates the current ESG rating factor with other factors,both have better return,lower risk and higherrisk-adjusted return than HS300 index.As ESG investment funds,both Fund I and Fund III are worth investment,which indicates that the current ESG rating can act as a comprehensive factor signal and be used in portfolio construction.By examining the exposure of the three funds on the Fama-French three factors during the sample period,it can be found that both Fund I and Fund III belong to defensive funds,while fund Ⅱ is slightly radical.And all the funds belong to large-cap value funds in style,preferring to allocate large-cap stocks and value stocks.Among them,only fund III can obtain premium return adjusted by three factor risks at nearly 5% significant level,and fund III also has the largest exposure to negative SMB factor.Alpha factor outside the three factors along with SMB factor explain why fund III has a better average excess return than the other two funds.The paper also designs marketing strategies to better promote the ESG funds.In the end of the paper,the main conclusions and results are summarized,and the limitation and outlook are put forward,hoping to contribute to the research and development of China’s ESG investing products.