Fund Solutions

Matthews Transitions Asian Funds to Article 8

Re-categorisation marks latest shift to bolster sustainable investment and analytical resources, as focus on smaller firms offers greater impact for investors.

US-based investment management firm Matthews has moved its last six UCITS funds to Article 8 to better meet demand from European investors seeking investment opportunities in Asia and emerging markets.

The shift means Matthews’ funds now comprise 14 Article 8 funds, and one Article 9 fund, as designated under the EU Sustainable Finance Disclosure Regulation (SFDR). Article 8 funds are meant to promote environmental and/or social characteristics, while Article 9 refers to products with sustainable investment objectives and which meet the standard of “do no significant harm”.

“We recognise the growing investor demand in Europe and the UK for more explicit sustainable investment solutions, and we want to ensure our clients can access Asia and emerging markets through a wide breadth of sustainable strategies,” Kathlyn Collins, Head of Responsible Investment and Stewardship at Matthews, told ESG Investor. “We also believe that responsible investing and a deep understanding of corporate governance and sustainability factors can lead to better-informed investment decisions and more effective management of associated risks.”

While the reclassified funds will not make any new sustainable investments, they will promote environmental and social characteristics through a lower greenhouse gas emissions intensity profile against the benchmark. They will also have fewer holdings in companies with significant exposure to the fossil fuel sector, and promote engagement with companies around potential environmental and social issues.

“We consider the formal classification of these funds as Article 8 a natural step in the evolution of our investment process across our Luxembourg UCITS product offerings and line-up,” Collins added.

Companies that ignore consumer preferences may miss out on business opportunities, she warned, while those failing to account for regulatory risks could face higher costs and risk damaging their brands.

“Conversely, companies with strong or improving ESG track records may find it easier to attract capital from institutional capital market participants,” she said.

Advancing Asian opportunities

Founded in 1991, Matthews has more than three decades of investment experience in Asia and launched its first dedicated sustainable strategy in the region in 2015. Since then, the manager has continued to build out its investment and analytical resources.

This included the addition of a responsible investment and stewardship team both in San Francisco and Hong Kong, with dedicated on-the-ground sustainability analysts, as well as significant investments in training, systems, process and oversight.

Collins leads the responsible investment and stewardship team that conducts sustainability research, using ESG information and data to identify risk and opportunity in current and prospective portfolio companies and assisting in decisions made by Matthews’ broader investment team.

The team also monitors the sustainable investment landscape and ESG-related regulations pertinent to the firm’s investment universe and product offering, working across departments to develop scalable and compliant strategies.

“As incomes rise across Asia, domestic consumers will naturally seek to improve the quality of their lives, creating opportunities for businesses alert to this trend,” said Collins. “Asian Governments are also focused on improving their economic growth, which may involve closer regulation of environmental and social issues. We believe Asia’s response to ESG challenges will have a major effect on businesses worldwide.”

Smaller companies, bigger impact

Two of the six investment vehicles re-categorised as Article 8 – the Matthews Asia Small Companies Fund and China Small Companies Fund – will now focus on small-scale companies. The other reclassified entities were the Matthews China Small Companies Fund, Asia Dividend Fund, China Dividend Fund and Asia Innovative Growth Fund.

“Smaller companies often don’t have high profiles in the sustainable portfolios of investors,” said Collins. “But many in emerging markets and Asia are already playing key roles in rapidly expanding global supply chains, such as vital chemicals and components to global electric vehicle battery makers.”

Smaller companies are also making inroads in areas ranging from energy transition, industrial digitalisation and agricultural technology, to recycling and waste management. Collins also highlighted that small companies offered several advantages in the sustainable investing space that their bigger peers didn’t – including greater leverage for responsible investors.

“In our experience, the most exciting small sustainable companies are often hiding under the radar and require nuanced and complex analysis,” she added.

While the lack of available information on certain Asian businesses may prove off-putting for some, a significant opportunity exists for active asset managers willing to put in the effort to discover local gems.

“The size of capital markets in some emerging markets – like Pakistan, Bangladesh and Vietnam – can mean that local market leaders often fall within the small-cap category, and fall under the radar of the broader investor community,” Collins highlighted.

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

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