Investors shun Chinese ESG funds in first quarter as markets take a beating on lockdowns, recession fears, Morningstar says

Net inflows into China’s sustainability-themed funds sank 95 per cent to US$214.9 million in the first quarter from US$4.1 billion in the fourth quarter of 2021
Assets managed by ESG funds in China fell 14 per cent quarter on quarter to US$48.8 billion in the first three months of the year

ESG investing

Martin Choi

Published: 10:50am, 12 May 2022

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Chinese investments in funds with a sustainability focus plunged in the first quarter amid pessimism and volatility in the markets, according to Morningstar.

Net inflows into China’s sustainability-themed funds slumped 95 per cent to US$214.9 million in the first quarter compared to US$4.1 billion in the fourth quarter of 2021, according to the asset manager’s tally of 152 domestic funds with a strong focus on environmental, social and governance (ESG) factors.

That was the lowest level since the second quarter of last year, when there was a net outflow of US$928.8 million from ESG funds in China.

“Investors in China were very pessimistic about the overall market environment in the first quarter,” said Rachel Wang, Morningstar’s director of manager research for China in an interview. “Under these circumstances, it’s very difficult for capital to flow into [ESG] funds.”

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The CSI 300 Index, which tracks the 300 largest listed companies in mainland China, had its worst three months since the third quarter of 2015. Stock losses have deepened this year amid recession fears as Covid-19 lockdowns upended supply chains and forced factories to suspend operations.

Overall, assets under management of ESG funds in China fell 14 per cent to US$48.8 billion in the first three months of the year compared to the previous quarter.

“Currently, mainland investors’ appetite for sustainable investments is largely performance-driven. Investors on the mainland haven’t completely understood and accepted ESG factors as an investment theme,” said Wang.

“However, with looming regulations around tightening ESG disclosures for companies and industries in China, awareness among investors about the importance of ESG will gradually grow. Sustainable investments is set to remain a long-term theme that will continue to grow in China.”

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ESG is also expected to play an increasingly important role in China’s commitments to hit peak emissions by 2030 and achieve carbon neutrality by 2060, as well as its goal to reach high-quality and sustainable development, Wang added.

Meanwhile, global sustainable fund inflows in the first quarter fell by almost 36 per cent to US$97 billion compared to the fourth quarter of 2021, according to Morningstar’s Global Sustainable Fund Flows report for the first quarter released last week. This was the sharpest quarterly slowdown in sustainable fund net inflows over the last three years.

“Sustainable funds currently face macroeconomic headwinds, and while there is a decline in net new investments, continued investor appetite remains,” said Hortense Bioy, Morningstar’s global director of sustainability research in the report.

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Swiss bank UBS was also seeing broad appeal for sustainable investments among its clients in Asia-Pacific, despite the short-term volatility in the markets in recent months, which has affected instruments across different markets, Desmond Kuek, head of sustainable finance in the Asia-Pacific region at UBS, said at a media call on Wednesday.

More than half of the investors cited sustainability investments as one of the most attractive sectors to invest in the current geopolitical situation, according to UBS’s Investor Sentiment Survey released on May 4.

Three quarters of investors were optimistic that there would be greater investments into the green energy and technology sectors, according to the global survey of 2,500 investors and 1,000 business owners across 14 markets globally, including mainland China, Hong Kong, the US and the UK.

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