China’s reopening will boost Asia-Pacific ESG funds market, analysts say

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Improving sentiment towards China could help Asia-Pacific ESG funds in 2023, BofA report says

The expected introduction of new rules to rein in greenwashing could lead to a decline in the number of ESG funds in China, but will also improve the market

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A Lunar New Year decoration in Beijing. After China relaxed its Covid-19 restrictions in December 2022, ESG funds in Asia-Pacific have rotated back towards equities. Photo: EPA-EFE

Yujie Xuein Shenzhen

Published: 6:00pm, 25 Jan 2023

China reopening its borders and easing its strict zero-Covid policies will drive the growth of environment, social and governance (ESG)-themed investment funds, analysts said. Beijing must also urgently issue policies to regulate greenwashing and disclosure standards.

Last year, ESG funds in Asia-Pacific reduced their exposure to equities by US$5.9 billion, primarily driven by weak investor sentiment towards China due to its strict Covid-19 policies and three years of quarantine requirements, according to a report issued by the Bank of America (BofA) this month. However, after China relaxed its Covid-19 restrictions in December 2022, ESG funds in Asia-Pacific have rotated back towards equities by US$1.5 billion, mainly via mainland China, Hong Kong and India.

“Improving sentiment towards China, driven by consumer demand, fewer earnings downgrades and positive news trends, could help Asia-Pacific ESG funds in 2023,” the report said.

This is significant because ESG funds in the region already have considerable exposure to China. According to Girish Nair, co-head of BofA’s Asia-Pacific ESG research, ESG funds with exposure to China managed US$400 billion in assets as of the end of November 2022, quadrupling 2015 levels. BofA anticipated that these assets would grow by around 16 per cent by the end of the first quarter in 2023.

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Busy Lunar New Year fair brings some relief to Beijing’s small business owners

“We believe sustainable investing still has plenty of potential for continued growth in China, given that sustainable funds represent only a small fraction of the overall China fund universe,” said Dean Wang, associate manager and research analyst at Morningstar China’s Shenzhen office. “From a regulatory standpoint, it is in line with China’s road map towards green finance and capital market stability.”