Far from being a short-term trend, sustainable investing is set to become a long-term growth story for the Asia-Pacific region, a new report finds.
Other than banks, insurers and digital advisers are also likely start onboarding environmental, social, and governance (ESG) products on their shelves this year, bolstered by strong demand from wealthy investors, Cerulli Associates says.
Three-quarters of distributors in Asia ex-Japan said in a survey that high-net-worth and ultra-high-net-worth clients are driving sustainable investments in the region, and that some mass retail investors have also “shown interest” in ESG products, Cerulli says.
While net flows into locally-domiciled ESG funds plunged to US$2.3 billion during the first half of 2022, or just a little over 7% of the total amount raised during 2021, Cerulli says it does not expect ESG investing to fall out of favour in the region. The below-average numbers from the first two quarters of 2022 can be attributed to regulatory initiatives across the region that aims to address greenwashing. Challenging market conditions also had an effect on lower capital deployed to ESG products during the period.
Leena Dagade, Cerulli’s Singapore-based associate director, says research also indicates that over the long term, most funds will be ESG-integrated already, and innovation will instead take place in sustainability-themed strategies.
“As the number of ESG products increases, positioning of fund ideas and marketing will need to be more focused to gain investors’ interest, while there should be continued dialogue with distribution partners to educate them about ESG and thematic investing,” Degade adds.
Meanwhile, in terms of innovations in distribution models, Cerulli says some fund managers, particularly in Singapore and Hong Kong, are looking to gain a foothold by inking exclusive ESG product distribution agreements with local banks.
This new distribution model will typically see banks exclusively distribute an asset management company’s product for a period of up to six months, Cerulli says, adding that the model means bank clients have exclusive access to some products.
On the other hand, Cerulli says asset managers in Taiwan and Singapore are looking to tie up with insurance companies to distribute their ESG products.
The firm has also noticed a rise in digital advisers expanding their offerings to include sustainability-themed investments. Since digital advisers typically cater to retail investors with small investable funds, these types of partnerships allow fund houses to experiment with bundling sustainability-linked products with low-cost offerings.
An example of a digital adviser branching out to ESG products is StashAway, which introduced two new products in February 2022 – the Environment and Cleantech Thematic Portfolio and the Responsible Investing Portfolio.
Both portfolios are made up of exchange-traded funds (ETFs) from some of the world’s top fund managers, such as iShares (managed by BlackRock), Amundi, ARK Invest, Global X, and VanEck. The products are currently available to StashAway clients in Singapore, Malaysia and the Middle East, as well as in Hong Kong and Thailand.
In the same report, Cerulli says it is confident more APAC investors will allocate a portion of their assets to ESG funds as soon as markets stabilize. In turn, this will see more products registered in offshore markets like Singapore and Hong Kong.