Global investment in sustainable funds plummeted more than 40 per cent in the second quarter amid investors’ concerns over persistent inflation, rising interest rates and recession fears, according to funds researcher Morningstar.
The net new investments in sustainability-themed funds reached US$18 billion globally in the second quarter, compared with US$31 billion in the first quarter of 2023.
This was, however, better than the performance of the overall global fund universe, which saw net outflow of US$37 billion, versus inflow of US$77 billion in the previous quarter.
“Market volatility and global macroeconomic pressures, including persistent inflation, climbing interest rates and fears of recession, contributed to this retreat,” according to Morningstar.
Hong Kong was also affected by sustainable fund outflows, witnessing the fourth largest decrease in Asia after Japan, India and Singapore at US$22 million, but significantly less than the US$117 million seen in the first quarter. Japan was the worst affected, with outflows nearly doubling to US$1.9 billion from US$961 million in the previous quarter.
Short-term outflows in Hong Kong-domiciled sustainable funds are likely to be driven by investor sentiment and performance of the local market, according to Bryan Cheung, associate director of manager research at Morningstar.
“This is understandable when Chinese equities have significantly underperformed on the back of its disappointing economic recovery and continued weakness in the property sector,” said Cheung.
The Hang Seng Index was the world’s fourth worst-performing equity benchmark in the second quarter, slumping 7.3 per cent.
Despite the sustainable fund segment losing traction, 11 new funds were launched in mainland China in the second quarter, accounting for almost 70 per cent of new launches in the region during the period.
Asia ex-Japan, Europe and Canada were the only three regions that attracted new money into sustainable funds in the June quarter.
The overall reduced inflow is “a result of the continuously challenging macro backdrop”, said Hortense Bioy, Morningstar’s global director of sustainability research. Climate is still the most popular sustainability theme among new product launches, both in Europe and the US, she added.
Europe continues to dominate the sustainable fund landscape, with 84 per cent of global sustainable assets. The inflow of funds into Europe slowed by more than 40 per cent quarter on quarter in the June quarter to US$20 billion.
A significant drop in new fund launches in Europe also led to a slowdown of the global sustainable fund sector. A total of 106 sustainable funds were launched in the past quarter, continuing a downtrend since the last quarter of 2021, when nearly 350 funds were launched.
Sustainable fund assets, on the other hand, recovered steadily, inching back towards the historic high of US$3 trillion seen at the end of 2021.
Sustainable funding will keep expanding, with the current annual funding tripling by 2050, according to Standard Chartered’s estimates. But there remain risks that could dampen interest, including resistance against environmental, social and governance (ESG) regulation, uncertainty around ESG data and ratings, and uncertainty around ESG fund managers’ ability to outperform broader benchmarks, the bank said.
In April, Hong Kong Exchanges and Clearing proposed new climate-related disclosures that will become mandatory in 2024. But the business sector expressed concerns that some quantitative disclosures would be quite challenging, especially scope 3 emissions, those that pertain to a company’s entire supply chain.
Source : SCMP