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 environmental, social, and governance (ESG) investing.
Assets of ESG mutual funds have grown across most markets in the Asia-Pacific region between 2018 and the first half of 2020. Stronger growth has been observed in ESG exchange-traded fund (ETF) assets, which surged more than three times from US$1.3 billion in 2018 to US$4.4 billion in June 2020. Australia, China, and Taiwan are the top three markets by assets.
ESG product launches have emerged as a key trend. Excluding funds of funds and money market funds, there were 66 ESG products launched in the Asia-Pacific region in 2019. Between January and September 2020, 85 such products were launched, with the most coming from Australia, followed by Japan and China, based on research firm Cerulli Associates' methodology.
To meet investors’ interest and demand from some private banks, managers in the region are planning to roll out ESG products. Among Asia ex-Japan asset managers surveyed by Cerulli, more than half from Hong Kong, Singapore, Taiwan, and India, and more than one-third from China and Korea indicated that they plan to promote ESG fund strategies to distributors over the next two years.
Distributors such as private banks have also 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 ranked the performance of ESG funds at the top, highlighting the importance of ESG funds’ performances and track records among investors in the region.
Given that each market is unique in its demand for ESG, Cerulli is of the opinion 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 sub-advisory, feeder funds, or funds 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.
“As ESG investments in the Asia-Pacific region are still underdeveloped compared with Western markets such as Europe and the US, they have great potential to grow into a huge segment, given the region’s huge population and an underserved asset management market. It may be a slow process, but foreign managers should start early to build up their ESG business in anticipation of future growth.”