Market Views: Will sustainable fund inflows in Asia Pacific continue to plunge?
Sustainable fund inflows in Asia Pacific, excluding China and Japan, fell 25% in the second quarter of the year, but analysts observe that the numbers paint a brighter picture than global inflows to sustainable funds and the broader international market.
The second quarter saw $929 million of net inflows to sustainable funds in the region, down from $1.27 billion recorded in the first quarter, according to new data from Morningstar.
In comparison, global sustainable funds attracted $32.6 billion of net inflows in the second quarter of 2022, a decline of 62% relative to the revised $87 billion in the first quarter.
A slump in net new money into sustainable funds has occurred across the world. US-domiciled sustainable funds lost $1.6 billion, marking the first quarter of outflows in more than five years.
The organic growth rate of the global universe of sustainable funds also contracted to 1.3%, down from 3% in the first quarter of 2022.
Macroeconomic headwinds, including inflationary pressures, spiking interest rates, a global energy crisis, and the threat of a global recession became far more acute in the second quarter, creating volatile conditions for all global fund markets, according to Morningstar.
However, flows in sustainable funds have held up better than those in the broader market. In comparison, the overall global fund universe suffered outflows of $280 billion in the second quarter of 2022, after registering net inflows of $141 billion in the first quarter, said the report.
In light of these insights, this week AsianInvestor asked asset managers how they view the fall in capital flows to sustainable funds in Asia Pacific and their outlook for the sector.
The following contributions have been edited for clarity and brevity.
Simon England-Brammer, head of Emea & Apac institutional, Global Client Group
The reduction in flows over Q2 is consistent with overall fund flows given tighter financial conditions this year so this should be looked at from a relative lens versus all other asset classes.
Longer term, we see regulations driving the continued push towards sustainable investments particularly in Europe and European based wealth platforms that want to continue to enhance their offerings in this space to meet regulations as well as client demand. In Asia, the verdict is still out as to whether there will be secular drivers towards sustainable funds given that there are limited regulatory drivers and investors are primarily return seeking.
Our research found that climate risk is among the most influential themes for portfolios across Apac, with 89% of investors indicating they are addressing or planning to address the theme in their portfolios over the next five years. We still believe that taking a sustainable investment approach not only leads to higher returns over the long term but also a better future for all of us.
Tomomi Shimada, Apac lead sustainable investing strategist
JP Morgan Asset Management
Over the short term, despite the market turbulence and a slowdown in flows, sustainable funds have held up better than the broader market globally, and especially in Europe. Part of the reason why Asia sustainable fund flows are moving differently to Europe can be explained by the common misconception in the Asia market that sustainable investing and ESG (environmental, sustainable and governance) integration comes with the sacrifice of financial returns.
In our view, the goal of using ESG information in the investment process is to generate better risk adjusted returns over the longer term, by making better informed investment decisions. There may be short-term volatilities, but sustainable investing essentially helps to make sure our investments are best positioned to navigate the structural long-term changes that the economy is going through.
We believe that Asia will see stronger flows into sustainable funds, but with a lag. Real uptake of sustainable investing in the region would require policy makers, citizens, companies and the investment community to all embrace the spirit of sustainable investing and ESG integration. Over the mid-long term, with the growth in investor interest, commitments by governments and stringent regulations, we expect an increase not only in the volume but also in the variety of ESG funds.
Xuan Sheng Ou Yong, green bonds and ESG analyst
BNP Paribas Asset Management
From my view, the reduced absolute amount of inflows to these funds are naturally a consequence of the negative macro conditions this year. In these periods of heightened volatility and uncertainty, investors are very cautious and quite likely to put hold off deciding on investments with a multiple year investment horizon, while instead opting for cash and equivalents for time being. We can see this somewhat reflected in the strength of the USD.
However, we should also see what is happening to the broader universe of funds. Based on what we see, while most sustainable funds see reduced amounts of inflows, most conventional funds are seeing outflows! It suggests that at least on a relative basis, investors have a higher conviction in sustainability, despite the negative macro environment, and despite the slight growth orientation of sustainable funds (at least in equities) when value factor is supposedly the safer bet during inflationary periods.
Going forward, I think the flows will remain positive, and this is particularly needed given the challenges of our times and how these issues have manifested so quickly today (e.g., unprecedented heatwaves and floods across the world).
Andrew Hendry, head of distribution, Asia ex-Japan
Janus Henderson Investors
The fall in gross and net flows in Asia has been broadly in line with the market overall as individual investors become increasingly hesitant to put money into the markets with each additional negative market signal. Sustainability has been hit particularly badly by negative sentiment on account of two factors.
Firstly, many sustainability funds have been thematic in nature - EV, energy transition - and thematics have been hit harder by markets as they are by their nature less diversified. This is equally applicable to other thematics the most noted being ARK’s funds.
The second factor is more disappointing in that investor’s nascent confidence in being able to make money and do good through sustainable investing has been dented by the losses they have suffered. In the face of an absolute loss of their savings, sustainability considerations have been put firmly at the bottom of priorities as they seek out return and protection for the second half of this year. These two factors foretell continued poor flows over H2 for sustainable funds with narrow themes.
David Smith, senior investment director, Asian equities
Although it’s true the second quarter saw slightly lower inflows than the first, there are a few very encouraging datapoints data-points to take note of. First, whilst flows in absolute terms were off from first quarter, they held up better than flows to conventional products. And second, it was noticeable that the slowdown in Asia was less marked than that we saw globally, which is encouraging for the region.
More importantly, it’s worth looking beyond quarter-on-quarter dynamics to focus on the overall direction, which I don’t think has changed. We’re still seeing strong interest in sustainability and sustainable funds globally, certainly in Asia, and I don’t foresee that going away any time soon. There’s strong and growing interest in the way that we as investors can integrate ESG insights to help clients, and if anything these conversations are more focused than ever before.