South-east Asia’s ESG funds record second consecutive quarter of outflows
Investors were mainly placing their money with fixed-income funds based in the EU
ENVIRONMENTAL, social and governance (ESG) funds in South-east Asia recorded a second consecutive quarter of net outflows in the second quarter of 2024, even as non-ESG funds pulled in more money.
This is because investors were mainly placing their money with fixed-income funds based in the European Union, which is the region that saw the most capital flow into funds tagged with the sustainable label, noted Christopher Wong, client portfolio strategist for South-east Asia at Fidelity International.
Most of South-east Asia’s ESG funds are equity funds, and would have naturally missed out.
Over the second quarter of 2024, ESG funds domiciled in Indonesia, Malaysia, Thailand and Singapore lost US$25.3 million, according to data from Morningstar.
This was smaller than the US$79.8 million that flowed out of ESG funds in the same period a year ago, but larger than the US$246,900 outflow recorded in the previous quarter.
With the exception of the European Union, which saw US$11.8 billion in sustainable fund flows, most other regions also experienced outflows in Q2.
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In contrast, non-ESG funds in South-east Asia continued to experience net inflows. They put on US$2.2 billion in Q2 2024 – more than US$1.5 billion in the quarter a year ago, but a decline from US$13.3 billion of inflows from the previous quarter.
Wong noted that flows towards non-ESG funds have been mainly in money market and fixed-income-related strategies.
“This was likely due to investors looking to lock in attractive levels of yields before the turn of the interest rate cycle,” he said.
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On the other hand, outflows from ESG funds were mainly from ESG-related equity strategies, which tend to dominate funds based in this region. This is likely due to the funds underperforming broader markets as a result of subdued economic growth and expectations of lower interest rates.
After months of sending out rate-cut signals, the US Federal Reserve did eventually lower the interest rate by 50 basis points on Sep 18 – the first cut in four years.
However, while ESG fund flows into South-east Asia are generally more muted than in the EU and United States, Elree Winnett Seelig, global head of ESG of markets at Citi, said that they have generally been stable at around 5 per cent of total assets under management.
“This stability implies a core market for sustainable products, perhaps with less sensitivity to return volatility,” she added.
Notwithstanding muted activity in ESG fund flows, she noted that these markets are dominant in direct energy transition investment across most categories including renewables, electrified transport and power grids.
Fund performance
Both ESG and non-ESG funds reported negative returns in the quarter. ESG funds averaged a negative 0.9 per cent, versus a negative 1.5 per cent in Q2 2023.
Non-ESG funds did slightly better, with a negative 0.2 per cent. They returned a negative 3.3 per cent in Q2 2023.
Wong pointed out that the direction of the economy and Fed interest rate policies were the more significant factors affecting market returns.
As ESG funds tend to be associated with growth-oriented stocks, these funds generally underperformed broad markets due to the higher interest rate environment.
“They have longer-dated paybacks, and those tend to be more adversely impacted in a higher interest rate environment. Further, market breadth continued to be narrow during the quarter with a handful of mega-cap stocks driving returns, especially in the US. ESG funds which do not hold or have little exposure to these stocks would have been impacted,” he added.
Wong said investors would continue to be more interested in fixed-income related strategies, which tend to be categorised as non-ESG funds, as the interest rate-cut cycle gets underway.
Fed policymakers projected the benchmark interest rate would fall by another 50 basis points by the end of this year.
However, he added that investors would be better served by adopting a long-term financial plan that’s suited to their needs, instead of trying to predict near-term political or market cycles.
“We believe that investors should focus on long-term fundamentals.”
Seelig believes that ESG investing is entering a new phase, underpinned by new rates, as well as a new geopolitical, political and regulatory environment.
She added that energy transition will be the next big structural trend that would influence economic production and market performance going forward.
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