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Managers to promote more sustainable funds

When it comes to screening managers for ESG practices, distributors in Asia (ex-Japan) ranked the performance of ESG funds at the top, according to a Cerulli report.

Editor’s note: This article was first published on ESG Clarity Asia.

ESG product launches emerged as a key trend last year. Although overall retail demand in the region remains lukewarm, the coronavirus pandemic and a slew of natural disasters have helped to increase investors’ awareness of ESG investing, according to a report by Boston-based research firm Cerulli Associates.

Excluding fund of funds and money market funds, there were 66 ESG products launched in Asia-Pacific in 2019. Another 85 ESG funds were launched between January and September last year, with the most coming from Australia, followed by Japan and China.

Assets of ESG mutual funds have also grown across most markets in the region between 2018 and the first half of 2020. Stronger growth has been observed in ESG ETF assets, which surged more than three times to $4.4bn in June from $1.3bn in 2018. Australia, China and Taiwan are the top three markets by assets, according to the report.

To meet investors’ interest and demand from some private banks, managers in the region are planning to roll out more ESG products. Among Asia (ex-Japan) asset managers surveyed by Cerulli, more than half from Hong Kong, Singapore, Taiwan and India, and more than a third from China and Korea indicated that they plan to promote ESG fund strategies to distributors over the next two years.

According to the report, distributors, including private banks, have started to look at the ESG aspect to some extent, when conducting due diligence of funds. When it comes to screening managers for ESG practices, distributors in Asia (ex-Japan) ranked the performance of ESG funds at the top, highlighting the importance of ESG funds’ performances and track records among investors in the region.

That is followed by the extent of adhering to ESG principles in investment processes and having an ESG policy and framework in place, according to the report.

Given that each market is unique in its demand for ESG, Cerulli believes that foreign managers should select strategies that are best suited for each.

For example, in Hong Kong and Singapore, managers with good brand recognition can consider bringing in established offshore-domiciled funds, while in markets such as Japan, Malaysia, Thailand and Indonesia, managers can try to form partnerships with local managers in areas such as subadvisory, feeder funds or fund of funds.

“Product differentiation could help to broaden the options available for investors. Most ESG products in the region are equity funds, as it is easier to implement ESG methodology in equity, underscoring a need to fill product gaps. In addition to climate-focused funds, managers could also explore products focusing on other sustainability themes,” said Siau Kean Yung, analyst at Cerulli.

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