Asia ESG fund flows show new trends despite Q3 decline
Global sustainable funds saw a fall in inflows in the third quarter, reflecting prevailing market conditions and investor sentiment according to Morningstar’s Global Sustainable Fund Flows: Q3 2023 in review.
Similarly, Asia ex-Japan's sustainable fund market faced headwinds, with the region's sustainable fund assets falling by 4.2% to $2.74 trillion in the third quarter. That's slightly down from $2.86 trillion in Q2 2023.
Morningstar
Factors such as market volatility, macroeconomic pressures, rising interest rates, inflation concerns and recession fears contributed to the decline.
Nevertheless, there were notable recoveries in Singapore and South Korea due to regulatory advancements during the quarter, according to Boya Wang, ESG analyst at Morningstar.
"These regulatory advancements included Korea's Sustainable Development Act enacted in July 2022 and Singapore's publication of a circular on the Disclosure and Reporting Guidelines for Retail ESG Funds, which came into effect from January 2023,” Wang told AsianInvestor.
“These developments provided a supportive framework for sustainable investing and contributed to the positive inflows witnessed in the region,” he said.
TRENDS AND INNOVATION
The deceleration of ESG fund flows is likely to be carried into 2024 due to the economic headwinds mentioned above, but some encouraging trends and innovations are emerging, according to Wang.
“The low carbon transition theme is emerging as it offers better chance for risk diversification compared to solutions and clean-tech focused strategies, which may be of critical importance in times of turbulence and recession,” he said.
The launch of innovative funds, such as the iShares MSCI Asia ex Japan Climate Action ETF, has also driven significant flows and attracted investors seeking climate-focused investment opportunities, according to Wang.
"The iShares MSCI Asia ex Japan Climate Action ETF offers a new investment platform to look into companies committed to reducing carbon emissions," he said.
The ETF allows sustainability-focused investors to access companies in various sectors that incorporate low carbon objectives, providing better risk diversification.
“This innovative fund has driven significant flows in the region and is particularly attractive to investors seeking exposure to climate-focused investment opportunities," said Wang.
APAC CHALLENGES
While Singapore and South Korea showed signs of recovery, other regions within the Asia Pacific such as Taiwan and Hong Kong domiciled sustainable funds faced specific challenges.
"These two regions are directly affected by the sluggish economic recovery from China, and in particular, the disappointing performance of the mainland stock markets," explained Wang.
"In a broader context, sticky high interest rates in the West and a strong dollar will add pressure on this region, impacting investor sentiment and contributing to outflows from sustainable funds."
For Asia ex-Japan, China dominates the sustainable market, accounting for over 67% of the region's assets, placing it third globally in terms of market size.
Wang noted that there are currently some specific obstacles that are responsible for the slowdown in the introduction of new sustainable funds in the Asia Pacific region.
"The economic slowdown in China, as well as the fear of economic recession in the West, will have a spillover effect in the region, weighing on the region's equity and bond markets,” said Wang.
“In addition, the alignment of disclosure standards and methodologies remains a main obstacle despite recent advancements in Singapore, Hong Kong, and Korea.”
However, the market is witnessing a regulatory convergence between the Asia Pacific region and Europe creating the potential for risk diversification through low-carbon transition themes. This offers opportunities for asset managers to navigate the evolving landscape of sustainable investing in Asia, according to Wang.
“From January 2024, Hong Kong-listed companies will be stipulated to disclose climate risk-related data, another catalyst for data transparency and ESG strategy integration for both asset managers and investors," he said.