Sustainable investing has never been more relevant since China declared its grand plan to build a greener economy in September 2020, according to Morningstar. “Local asset managers are catching up to the ESG wave with speed and look to capitalise on this increasingly significant global trend.”
China sustainable funds saw strong flows in the first three quarters of 2021, attracting RMB81.8bn in net inflows. This was mainly driven by the strong growth of environmental sector funds and impact funds, which netted RMB60.8bn ($8.47bn) and RMB22.4bn, respectively, in flows over the same period.
“Chinese investors’ appetites for these sustainable strategies are largely influenced by market conditions and fund performance rather than decisions over the characteristics and benefits of ESG investing,” Rachel Wang, director of manager research of China at Morningstar, said in a report.
At the end of the third quarter of 2021, assets invested in China-domiciled sustainable funds reached a record of RMB339bn, up from RMB190bn at the end of 2020, the firm’s data showed.
As of 30 September 2021, there were 138 open-end and exchange-traded sustainable funds available to Chinese investors, and nearly all of these were equity strategies. There were only two fixed-income sustainable offerings available in China, and both were green bond funds.
Passive surge
Actively-managed products accounted for 78.5% of sustainable assets as of September 2021. However, the number of sustainable index funds and ETFs has grown considerably over the past three years and now stands at 55, according to Wang
The subsequent growth in the number of passive sustainable strategies has been dominated by environmental sector funds. Thirty-eight of the 55 passively managed sustainable funds were sector funds as of 30 September 2021.
In the first three quarters of 2021, the market saw a record number of 54 new sustainable products hit the shelves, 43 of which were environmental sector funds and impact funds focusing on the low-carbon economy or carbon neutrality, according to Morningstar.
Historically, sustainable fund flows have aligned with periods of strong market performance, such as the strong bull markets in 2015 and 2020. The popularity of environmental sector funds and impact funds in 2021 was also driven by the “stellar performance of the electric vehicle and renewable energy sectors”, with the CSI Electric Vehicles Index and the CSI New Energy Index gaining 44% and 48.3%, respectively, in the first three quarters of 2021, according to Wang.
In contrast, Wang pointed out that integrated ESG funds saw outflows of RMB1.4bn in the first three quarters of 2021. Many growth-oriented, quality-focused ESG funds suffered in 2021 when the quality-growth investment style was out of favour, and the blue-chip CSI 300 Index lost 6.62% year to 30 September 2021.
Despite growing nearly twofold in size, sustainable funds remain tiny compared with the overall China fund universe, accounting for only about 1.6% of funds overall and 1.4% of total asset under management.
However, the Chinese regulators have been promoting greater ESG adoption among asset managers as part of the country’s road map to green finance. Several large fund houses have moved toward more ESG-informed investing and built out ESG capability over the past three years.
