Investors in Japan, Korea and Taiwan supported a 75% rise in investments into environmental, social and governance (ESG)-linked funds in Asia during the third quarter, which reached a record $8.7 billion, according to fund research provider Morningstar.

The rise was well ahead of the global increase in total ESG assets, which registered a 14% increase during the third quarter to reach $80.5 billion. But the figures also reveal how small Asia Pacific's ESG fund assets are, with the region's growth comprising just one tenth of overall the total volume. 

The rise in ESG fund assets in the region also indicates renewed investor interest, following earlier indications that at least some of the region's asset owners had begun to deprioritising the products

Morningstar research indicates that Japan in particular enjoyed soaring demand for locally domiciled ESG funds in the three months to September. All-told, the country witnessed net inflows of $7 billion to take the country's total to $12.39 billion, or quarter-on-quarter growth of 160%.

The research provider's summary of the report noted that "five out of 13 new funds [in Japan] are for defined-contribution pensions. Although inflows to these funds are not large at inception, flows tend to be stable and longer lasting".

Of particular note was Asset Management One's Global ESG High Quality Growth Equity Fund, which launched in July 2020. It gained $5.5 billion of inflows during the third quarter, well in expectations of the Tokyo-headquartered fund manager. 

Taiwan's net flows were also impressive, with investors on the island accounting for $801.29 million in net inflows, or quarter-on-quarter growth of 51%, taking its total to $2.39 billion. And Korea enjoyed 47% quarter-on-quarter growth, as it registered inflows of $177.83 million. Its total locally domiciled ESG fund assets are now $757.58 million.

"While most ESG funds in Asia take an active equity strategy approach, Taiwan launched 3 fixed income ESG funds in the last quarter,” said William Chow, Morningstar’s director of manager research in the summary. Two focused on emerging markets debt, while the last was targeted at global high yield; likely a sign of fixed income investors seeking to juice their fixed income returns amid lowering interest rates.   

China also enjoyed a large quarterly rise, although this followed large outflows during the second quarter. Chow noted this was down in large part to the fact that new fund launches tend to dominate fund flows in China. 

"While most ESG funds in Asia take an active equity strategy approach, Taiwan launched three fixed income ESG funds in the last quarter,” said William Chow, Morningstar’s director of manager research in a summary of the report. 

GLOBAL GROWTH 

Globally, ESG funds continue to enjoy mounting assets, with overall sustainability funds reaching $1.26 trillion in the third quarter, up 19% over the second. Europe-based funds accounted for by far the majority, surpassing $1 trillion. They also enjoyed the bulk of new inflows, or 76.5% in total. 

According to Morningstar, "The global sustainable fund universe encompasses open-end funds and exchange-traded funds globally that, by prospectus, fact sheet, or other available resources, claim to have a sustainability objective and/or use binding ESG criteria for their investment selection".