The number of products and the money invested in sustainable index mutual funds and exchange-traded funds (ETFs) have more than doubled over the past three years, with European and US investors leading the way with 95.8% of these assets globally, according to a recent report.
The report by Morningstar also found that there were 534 sustainable index funds and ETFs with collective assets under management of US$250 billion as of June 30 2020 worldwide.
“In Asia, the speed and enthusiasm with which investors have embraced sustainable investing has varied, and this is reflected in the low uptake of passively managed sustainable funds," says Jackie Choy, Morningstar’s director of ETF research, Asia. “Nevertheless, China is now the largest market in passively managed sustainable funds outside of the US and Europe, followed by Australia and Taiwan.”
“As the menu of passive sustainable funds has grown in size and complexity, so has the due diligence burden for investors," Choy added. "Key considerations include a fund’s sustainability focus, approach, sector and geographic biases, tracking error, and fees.”
Assets in passive sustainable funds domiciled outside of Europe and the US, as of June 30 2020, totalled US$10.5 billion, representing only 4.2% of global assets. The growth in the past three years has been driven mainly by net inflows into new product launches, especially in Australia, Canada, and China.
In China, 16 of the 20 passive sustainable funds have targeted an environmental theme. Six of these target China A-shares involved in the new energy vehicle industry.
Taiwan only houses three passively managed sustainable funds, two of which were launched in 2019. Despite the tiny menu, the total assets under management of these products totalled US$1.2 billion as of the end of June 2020.
In Japan, investors have further endorsed passive sustainable investing, with country’s massive Government Pension Investment Fund investing in environmental, social and governance (ESG) indexes in the form of mandates, which have increased by 63%, as of March 2020, from a year ago to 5.7 trillion yen (or US$52.8 billion).
However, by far the greatest adoption of sustainable funds has been in the US and Europe. Europe remains the largest market for sustainable passive funds, accounting for more than three-fourths of global assets. The US represents 20%, up from 13% three years ago.
The uptake has been driven by changing attitudes from both investors and fund providers. This asset growth reflects a growing recognition that ESG factors can be material to long-term financial performance as companies face greater scrutiny from consumers, regulators, and employees alike over their ESG practices.
In some regions, particularly in Europe where sustainable investing has been most enthusiastically embraced, regulatory changes have been largely supportive. They include required disclosures and, in some cases, an explicit minimum ESG requirement for sovereign wealth and public investment vehicles. European regulators have also moved to place ESG considerations at the heart of the financial system and to support the move toward a greener European economy.
As well, the Covid-19 pandemic crisis has further highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations.