Asia-Pacific experiences surge in climate-aware funds

A new report reveals climate-aware funds in the Asia-Pacific region have collective assets worth US$18.6 billion (A$24.1 billion)     

Climate-aware funds have almost tripled their collective global assets in the past year, and experts believe that strong growth in the Asia-Pacific region will continue as demand grows for investments that address climate risk. 

A new report from Morningstar explored the recent surge in climate-aware funds (CAFs), with the financial services firm identifying 400 mutual funds and exchange-traded funds globally that had climate change as a key theme. 

The number of CAFs – which can be divided into several categories including low carbon, green bonds and clean energy/tech – grew by a record 76 last year, which meant collective assets under management grew almost threefold to US$177 billion (A$229 billion) in December 2020.

Europe dominates the CAF market, with 282 funds and US$136 billion (A$176 billion) in assets, while the United States has 42 funds and US$21 billion (A$27 billion) in assets.

There has also been strong growth in the Asia-Pacific, which now represents 10.5 per cent of total CAF assets globally.

The report found that CAF assets in the region have grown from around US$4 billion (A$5 billion) in 2019 to US$18.6 billion (A$24.1 billion).

The bulk of Asia-Pacific’s CAF assets sit in China, which has 38 funds with assets worth US$17.11 billion (A$22.1 billion). Australia has the second most funds in the region with 14 funds and assets worth US$1.17 billion (A$1.52 billion). 

Among the CAFs launched in Australia last year was the Artesian Green and Sustainable Bond, which was Australia’s first corporate-focused, green and sustainable bond fund open to wholesale and retail investors. 

The report noted that this growth comes as “a broad consensus on the need to address climate risk in investment portfolios has emerged”. 

“More investors [are seeing] the green transition to a low-carbon economy as an investment opportunity,” the report said.

“Asset managers are therefore rapidly developing new risk-management solutions, launching innovative products, and retooling existing ones to help investors decarbonise their portfolios and invest in green solutions.”

Seven out of the 10 largest climate-aware funds in China are clean energy/tech funds, which the report said correlates with the nation’s recent commitment to achieve net zero by 2060.

Wing Chan, Morningstar’s director of manager research practice EMEA and Asia, told Pro Bono News these kinds of government interventions were key to future CAF growth in the region.

“Regulations [will lead] the investment industry to respond in kind with more disclosure and more-ambitious targets,” Chan said. 

“China has committed to hit peak CO2 emissions by 2030… In South Korea, interest in sustainability investment increased significantly since the Korean government declared the 2050 Carbon Neutralization Strategy in December 2020.”

The report concluded that the menu of options for climate-aware investors globally has expanded greatly and will continue to grow as asset managers “strive to help reorient capital towards more climate-friendly investments”.

Chan said he believed this growth would also continue in the Asia-Pacific. 

“The growth of climate-aware funds in the Asia-Pacific region is consistent with the rising popularity of thematic funds in recent years, and climate-aware funds is one of several themes that are popular with investors as they become increasingly aware about ESG and the financial impacts of climate change,” he said.

“We think that if there is sufficient investor interest, asset managers will launch climate-aware funds to meet the demand.” 

The full report can be seen here.