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ESG ETFs gain traction in Apac

Both inflows and AUM of the asset class have grown exponentially, according to a Cerulli Associates report.
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Asia Pacific investors are increasingly shifting to the passive approach when it comes to sustainability, with ESG ETFs gaining more attention in the region, said the Boston-based consulting firm in a report.

Although ESG-themed ETFs only comprise 4% of overall ETF assets in Apac, the number of funds launched leaped to 31 in the first half of 2021, while only 25 funds were introduced in 2020.

Managers in key markets in the region are launching more ESG-themed ETFs to provide cost-efficient access to responsible investing products and to differentiate themselves amid stiff competition, said Cerulli.

“The pace of ESG ETF launches in the Asia Pacific is expected to persist, as investors seek cheaper alternatives to invest sustainably,” said Ng Hao Qin, associate analyst, Cerulli.

“Although there are concerns that such funds may not be sufficient for implementing a sustainable investing strategy, some of them have proven to have well-documented ESG processes or practices, while retaining their advantages of providing transparency, liquidity, and flexibility for investors.”

The net inflows into ESG ETFs in Apac in the first half of 2021 exceeded $1.7bn, while more than $2bn flowed into the asset class each year in 2020 and 2019.

In terms of AUM, Apac ETFs investing in sustainability soared by 108.5% year-on-year in 2020, and a further 33.2% by the end of June 2021.

Regional breakdown

Australia, China, and Taiwan are the key contributors to the region’s ESG-themed ETFs growth, with 86.8% of the region’s assets domiciled in these countries in 2020.

In Australia, ESG ETFs’ AUM grew to $4.9bn the middle of 2021 from $156.2m at the beginning of 2016.

Driven by Beijing government’s ambition to reach carbon neutral by 2060, China’s sustainability ETF AUM jumped to $2.9bn by the end of 2020 from $15m in 2016.

In Taiwan, the AUM in ESG and sustainability-themed ETF rose to $1.7bn in 2020 from $101.4m in 2018.

Advantages of ETFs

Asset managers told Cerulli that ETFs are easier to implement given managers’ ESG capabilities, while others said ETFs provided more flexible, liquid, and lower-cost investment options, which makes them choose the passive instrument over sustainable mutual funds.

ETFs are also attractive to young investors as they provide opportunities to invest in low-cost, sustainable ideas against the Covid-19 pandemic backdrop.

Cerulli also saw a rise in robo-advisory services over the past decade, which offer low-cost investment products to retail clients in Asia.

For example, robo-advisors in Singapore are now offering thematic investing, including ESG-themed funds, in addition to traditional goal-based investing.

It is a common belief that active mutual fund managers are typically more involved in ESG engagement compared with ETF managers, which makes it easier to influence companies to improve their ESG performances.

However, Cerulli noted that not all ESG ETFs solely rely on a straightforward negative screening process, as some proactively incorporate stocks which they deem to have improved ESG ratings, while some have well-documented ESG processes and practices.

Part of the Mark Allen Group.