Retail investors have gained interest in ESG-based investing after the pandemic led to a rise in awareness of sustainable themes, a survey of fund distributors by Boston-based research and consulting firm Cerulli Associates found.
The increased popularity was fuelled by factors such as low carbon emissions due to less travel, increasing use of digitalisation, flexible working hours, as well as regulatory and governmental initiatives.
But more importantly, the “increasing evidence of performances” of ESG funds has been the most significant reason for distributors to onboard these products.
“ESG is not mandatory from the point of view of due diligence teams and has been rated among the least important factors in product selection, yet distributors are increasingly evaluating ESG aspects even while onboarding non-ESG-related products,” said Ken Yap, Cerulli’s Asia managing director.
‘Managers need to adapt’
The other major reasons to onboard ESG funds include meeting demand from clients, and raising the firm’s ESG profile among investors.
“Currently, the focus is on using ESG as a differentiating factor or to raise brand profiles, although it is likely that over the long term, more funds will incorporate ESG considerations,” said Asia associate director Leena Dagade.
“Managers need to adapt so as not be left behind, by boosting their ESG data systems, resource capabilities, and client education activities.”
When screening managers for ESG-related products, the surveyed distributors ranked the performance of managers’ various ESG funds followed by the existence of an ESG policy and framework as the most important criteria.
Knowledge-sharing initiatives from managers and ESG-specific expertise of the investment team were rated among the most important factors when conducting due diligence on ESG funds.
Regional trends
Both demand and supply for ESG-related products have increased in other Asian markets, outside of the traditional wealth management hubs of Hong Kong and Singapore.
In China, there are increasingly more funds invested in new energy vehicles and renewable energy, while the Korean government intends to invest $35.4bn (£26bn, €30bn) in renewable energy and green mobility projects over the next five years.
Across Asia, 64% of fund managers surveyed indicated plans to roll out ESG funds over the next two to three years. In China, 43% intend to unveil local ESG-themed products — although that is far less than in Hong Kong and Singapore, whereas 80% of managers plan to bring ESG products to the market.
Meanwhile, in Singapore, Korea, and Taiwan, managers are keener on launching ESG-themed global equity and bond products, perhaps recognising that accurate ESG data is more available for global than for Asian companies.
While ESG is mainly used as a differentiating factor or to raise brand profiles, Yap believes more funds will incorporate ESG considerations and comply with ESG standards in the long term. But he recommends that managers expand their fund themes beyond climate change and renewable energies, and offer products with other features such as equality, inclusive growth, and gender diversity.
“There is also a possibility for managers to look into fund launches centred around the United Nations sustainable development goals, ranging from diversity and inclusion, alternative food resources, and responsible food consumption and production to sustainable cities and education sectors,” he added.
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