The rise of climate change is pushing thematic investing and sustainable investing into an intersection that is resulting in the rapid growth of thematic exchange-traded funds (ETFs) with sustainability themes among Asian and global investors.

Global passive sustainable funds reached US$250 billion in 2020, more than doubling over the past three years. Europe is the largest market for passive sustainable funds with 75% of the global assets in 2020. There has also been a remarkable growth of thematic investing through ETFs, which have expanded threefold over the last three years, with a notable portion snapped up by retail investors.

More recently, in September 2021, UCITS Thematic ETFs recorded US$475 million of net inflows, after attracting US$559 million in August, with the most popular themes being connectivity, resource scarcity, and e-commerce.

“We’re definitely seeing more intersection between these two specific trends, thematic investing and sustainability investing, with the rise of climate change thematic ETFs. All the themes around clean technology, renewable energy, reciprocity – the total assets under these themes have grown by double digits since the beginning of the year and they have more than doubled from a year ago. So we are seeing a very fast pace of adoption of these themes,” says Morgane Delledonne, director of research at Global X ETFs.

Connectivity themes, which highlight investments in physical connectivity (connecting airports, ports, industrial areas, and city centres) and digital connectivity, continued to attract the largest net inflows this month at US$197 million, with the bulk of net new inflows going into emerging-market internet themes (US$176 million) as investors likely saw buying opportunities in Asian assets amid regulatory-led selloffs, according to the European Thematic ETFs Report, September 2021.

Resource scarcity themes, which highlight investment in supplies required to maintain life, or a certain quality of life, such as clean air and water, recorded strong net inflows in September (US$131 million) after the US Department of Energy released its Solar Futures Study examining the role solar could play in completely decarbonizing the grid by 2050. The report found that the United States could generate as much as 37% of its electricity from solar by 2035 and 44% by 2050, up from its current level of about 3%.

E-commerce themes, which highlight investments in digital trade, saw US$103 million in net inflows during the month, as online retailers prepared for the holiday season, the busiest for their business, according to the report.

“So it’s really to point out that there is a global trend going on – and that is common for Asia, Europe, and the US – towards more sustainable investing and green investing because I think if you take a step back and look at more macro drivers behind these themes, we can definitely see from all these regions, US, Europe, and China, three main priorities that are in common,” Delledonne says.

These macro drivers are: investing in the digital economy to facilitate the transition to a  more digital economy and society; transitioning to a more carbon-neutral economy and that triggers massive investment in clean technology; and building a more resilient infrastructure that is sustainable over the long term.

“I think those are the main drivers at the macro level for the remarkable trends we are seeing in both sustainable investing and thematic,” she says. “But also at the micro level you’ve seen lots of interest from consumers to adopt more responsible use of energy like solar panels for home electricity. And also at the corporate level lots of the top companies in the world are now setting goals for a net-zero goal by 2030, 2050. So all of these are really adding to the targets and making these trends very powerful.”

In Asia, these themes include solar panel, water, wind power, smart city grid, and electrical vehicles. “And all these themes are really linked to the priorities made by certain countries, in particular China, with the 14th Five-Year Plan targeting ecological transition,” Delledonne adds.