China fares worse than peers in regional ESG fund slowdown

As Asian growth sputters, Chinese sustainable funds lost billions in the second quarter

China fares worse than peers in regional ESG fund slowdown

The second quarter saw net outflows of US$1.4 billion from Chinese environmental, social, and governance funds, a much greater slowdown than experienced by other sustainable funds in the area.

Morningstar's most recent report on sustainable funds showed that net inflows to ESG funds in the Asia-Pacific region, excluding Japan and China, fell for the second consecutive quarter, reported the Financial Times. Flows declined by US$929 million from April to June, compared to US$1.27 billion in the first quarter.

Taiwan brought in the largest net inflows for the quarter with US$91 million, followed by Hong Kong with US$129 million.

Apart from China, regional markets in South Korea, India, and Indonesia experienced the largest net outflows in the second quarter.

Data for China indicated net outflows of US$1.4 billion in the second quarter, a sharp contrast to the US$208 million in net inflows the nation saw in the first quarter. These figures were not available until after the report's release.

With net outflows of US$1.06 billion in China, environmental sector funds outperformed all other sectors. Morningstar credited this to market volatility and investors taking profits in May and June.

The Asia-Pacific region's sharp decline in inflows reflected slowing patterns in other regions of the world.

Globally, only US$32.6 billion in net new flows went to sustainable funds in the second quarter compared to US$87 billion in the first quarter, a 62% decrease.

With US$307 billion in inflows, Europe made up 94% of all net worldwide inflows for the second quarter, although this was nevertheless a 57% decrease from US$71.7 billion in the first quarter.

With 10.8% and 6.3% of the assets in the area, respectively, South Korea and Taiwan continue to be the two Asian nations outside of China and Japan with the largest markets for ESG funds.

Hortense Bioy, Morningstar’s global director of sustainability research, stated: “Amid investor concerns over a global recession, inflationary pressures, rising interest rates and the conflict in Ukraine, sustainable funds net inflows plummeted in the second quarter, [but] fared better than the broader market.”

According to a report from the consultancy Cerulli, sustainability-themed ETFs in Asia saw a doubling of their total combined assets to US$10.5 billion in 2021; nevertheless, some of these launches have failed due to the development of many competing ETFs in China.

“ETFs have been a popular channel for asset managers to put forth the ESG/thematic ideas to reach investors in China and the popularity of funds of specific themes has been influenced by the Chinese government’s commitment to pursue economic transformation,” said Jackie Choy, Morningstar’s director of ETF research for Asia.

Considering the current environment, he continued, "We wouldn't be surprised to see more ESG/thematic ETF debuts that ride on the latest economic development or regulations."