Global investment in sustainable funds experienced a sharp decline of more than 40 per cent in the second quarter, amid growing concerns among investors about inflation, rising interest rates, and recession fears, according to Morningstar, a funds researcher. Net new investments in sustainability-themed funds amounted to US$18 billion globally in Q2, compared to US$31 billion in the previous quarter.
Morningstar attributes the decline in sustainable fund inflows to market volatility and global macroeconomic pressures, including persistent inflation, climbing interest rates, and recession fears. The overall global fund universe also saw a net outflow of US$37 billion in Q2, in contrast to a net inflow of US$77 billion in the previous quarter.
Hong Kong experienced outflows in sustainable funds, with the fourth-largest decrease in Asia, amounting to US$22 million. However, this was significantly lower than the US$117 million outflow recorded in the first quarter. Japan was the worst affected, with outflows nearly doubling to US$1.9 billion in Q2 from US$961 million in the previous quarter. Bryan Cheung, associate director of manager research at Morningstar, attributes short-term outflows in Hong Kong-domiciled sustainable funds to investor sentiment and the performance of the local market, particularly amid underperforming Chinese equities.
Despite the overall decline in sustainable fund inflows, mainland China saw 11 new fund launches in Q2, accounting for nearly 70 per cent of new launches in the region during the period. However, Asia ex-Japan, Europe, and Canada were the only three regions that attracted new money into sustainable funds in the June quarter.
Europe continues to dominate the sustainable fund landscape, holding 84 per cent of global sustainable assets. However, the inflow of funds into Europe slowed by more than 40 per cent quarter on quarter in Q2 to US$20 billion. Additionally, there was a significant drop in new fund launches in Europe, contributing to the slowdown of the global sustainable fund sector. In the past quarter, only 106 sustainable funds were launched, continuing a downtrend since the last quarter of 2021, when nearly 350 funds were introduced.
On the positive side, sustainable fund assets have been recovering steadily and are inching back towards the historic high of US$3 trillion seen at the end of 2021. Standard Chartered estimates that sustainable funding will continue to expand, with current annual funding potentially tripling by 2050. However, the bank also identifies potential risks that could dampen interest, including resistance against environmental, social, and governance (ESG) regulation, uncertainty surrounding ESG data and ratings, and concerns about ESG fund managers' ability to outperform broader benchmarks.
In April, Hong Kong Exchanges and Clearing proposed new climate-related disclosures that will become mandatory in 2024. However, the business sector has expressed concerns that some quantitative disclosures, especially scope 3 emissions, which pertain to a company's entire supply chain, could be challenging to implement.
Despite the challenges, sustainable investing remains a significant focus for investors, governments, and financial institutions worldwide, as they seek to address climate change and promote ESG principles to achieve long-term economic and environmental goals. As the global economy continues to grapple with uncertainties, investors will closely monitor market conditions and regulatory developments to make informed decisions and contribute to sustainable financial growth.
