South-east Asia ESG funds record net inflows in Q3 2024, reversing two quarters of outflows

ENVIRONMENTAL, social and governance (ESG) funds in South-east Asia reversed two consecutive quarters of outflows, recording net inflows for the third quarter of 2024.

However, on a year-on-year basis, capital flows into ESG funds domiciled in Indonesia, Malaysia, Singapore and Thailand fell 48.2 per cent to US$138.3 million in the quarter, from US$267.2 million, indicated data from Morningstar.

Amid wider geopolitical uncertainties, fund managers told The Business Times, the focus on securing yields have led investors to prefer large-cap index stocks, as well as fixed income or money market funds – investment products that typically do not come with an ESG label.

Consequently, net inflows into non-ESG funds more than doubled for the quarter, attracting capital flows of US$2.7 billion, compared with US$1.2 billion in the same period a year ago.

Non-ESG themes, such as the need to lock in falling interest rates, have dominated the investment agenda in 2024, especially in the second half of the year, said Victor Wong, head of sustainability office at UOB Asset Management.

Besides fixed income and money market funds, investors also channelled their capital towards multi-asset funds, as well as broad-based equities in Asia given improving views on the region led by monetary easing in China, said Christopher Wong, client portfolio strategist for South-east Asia at Fidelity International.

With the uncertainty and volatility in the market, Janet Shum, sustainable investing specialist for Asia-Pacific at Citi Wealth, said that many investors have been taking a more cautious and wait-and-see approach and are re-allocating away from equities to bonds in developed markets outside South-east Asia to secure yields.

Selective

In addition, investors’ concerns about greenwashing have made them more selective in asset managers as they seek transparency and robustness in the investment processes as well as evidence of effective active stewardship, said Shum.

The on-year decrease in net inflows in Q3 2024 were also a result of base effect, as one of the largest contributors to capital flows to the region was a new ESG financial product – the iShares MSCI Asia ex-Japan Climate Action exchange-traded fund – that was launched in September last year, noted Fidelity’s Wong. He added that net inflows in Q3 2024 would have been higher than the same period a year ago if this exchange-traded fund (ETF) were excluded.

Despite the on-year decline, UOB’s Wong noted that investors are not redeeming their ESG-themed funds, as they understand that these are long-term investment instruments and are prepared to hold on regardless of short-term changes in sentiment. 

“We also believe that the broader ESG trend remains intact, as both institutional and retail investors increasingly consider sustainability factors in their long-term investment strategies, and value the importance of responsible investment practices. Regulatory developments, corporate sustainability disclosures and consumer demand for responsible business practices are expected to support ESG investing in Asean over the longer term,” he added.

Shum also added that the sustainable investments universe in South-east Asia is broader than open-ended and ETFs domiciled in the region.

“We see capital flows into other asset classes and areas. For example, many projects or companies contributing to sustainable development in Asean are early-stage or small and medium-sized enterprises, which are attracting funding from the philanthropic and private markets – for example, venture capital, microfinance, private equity and private debt – as well as public funding support for infrastructure,” she added.

While ESG funds may have seen lower amounts of net inflow in Q3 2024, the returns were much higher than last year, averaging a three-month return at 16.96 per cent – an improvement from -3.54 per cent a year ago.

ESG funds performed better than non-ESG funds, which managed an average quarterly return of 14.74 per cent, reversing from -1.85 per cent this time last year.

Notwithstanding the re-election of former US president Donald Trump – who is a well-known climate sceptic – fund managers foresee continued investor interest in ESG investing, with long-term capital flows into sustainable investments for South-east Asia.

Oil and gas stocks had surged, while renewable energy stocks had slumped in the immediate aftermath of Trump’s election victory earlier in November. Besides being a climate sceptic, Trump had previously said that he will expand oil and gas production, and withdraw the US – once again – from the Paris Agreement.

Fundamentals

While markets may react in the short term to political events, Fidelity’s Wong said that they tend to be driven by fundamentals over time and that investors focus on long-term fundamentals rather than try to predict near-term outcomes.

Despite concerns that Trump will not be supportive of policies that further the ESG agenda and may even roll back some existing policies, such as the Inflation Reduction Act which provides tax incentives for clean-energy technologies, UOB’s Wong said that global initiatives to address climate change remain.

This includes the adoption of rules governing the global trading of carbon markets, as well as the setting of a new climate finance quantum that developed countries are obligated to provide for developing countries at the recently concluded United Nations’ COP29 climate summit.

“We expect these developments to drive the momentum in sustainability,” said UOB’s Wong.

Beyond global developments, there continues to be persistent interest among institutional investors in South-east Asia to incorporate ESG into their investment mandates, he added.

In addition, more affordable renewable energy sources, record power demand requiring multiple sources of energy, as well as growing disclosure requirements will push businesses towards climate mitigation and adaptation, said Shum.

“For 2025, we anticipate a growing alignment between financial returns and sustainable investment principles as ESG-related opportunities in sectors like renewable energy, technology and green infrastructure expand. These trends are expected to complement traditional investment strategies, rather than compete with them,” said UOB’s Wong.