The growing interest in sustainable investing is producing an increasing variety of environmental, social, and governance (ESG) funds across the globe – with record inflows, especially in Asia. As per the latest Morningstar global sustainable fund flows report, sustainable funds in Asia, excluding Japan, surged 131% YoY in 2020. In the last four months alone, a record $5bn was invested in sustainable funds in Asia. By the end of 2020, total ESG funds in the region amounted to $25.4bn compared to $810m in 2019.
The rising inflows can be attributed to a change in investor sentiment. Research from EY suggests that investors are moving to a more disciplined and rigorous approach to evaluating companies’ nonfinancial performance. According to the survey, 91% of respondents said that nonfinancial performance played a pivotal role in investment decision-making.
To meet the expectations of investors, companies need to address ESG factors, building “strong connections between financial and non-financial performance”, the EY report states.
Following the increased investor interest, ESG is taking center stage within investment strategies. Asia is expected to be the next frontier in ESG investing. The following profiled funds here offer two distinct options of gaining exposure to Asia’s market, via equity and fixed income. We look at funds from Goldman Sachs, Aberdeen Standard, BlackRock, and Manulife.
Goldman Sachs ESG Emerging Markets Equity Fund
Launched in Luxembourg on 27 Sep 2018, the Goldman Sachs ESG Emerging Markets Equity Fund with a size of $467,76m seeks capital growth over the longer term.* It invests primarily in equity securities relating to emerging market companies, that exhibit a strong or improving ESG leadership.
Managed by Basak Yavuz, Hiren Dasani, the fund uses the MSCI Emerging Markets Index as a benchmark. A team of 30 experienced investment professionals build the portfolio through identifying ESG perspectives and investing in selective sustainable business trading at attractive valuations.
The fund has allocated a big chunk of the total investment in sectors like tech stocks, financial services, and cyclical consumer goods. In continent-wise distribution, Asia- emerging markets contribute a major share of 46.12%, followed by 31.39% in Asia’s industrialized nations.**
The ESG fund rose 20,9% in the last year. Year-to-date, it achieved returns of 8.06%.*
Aberdeen Standard SICAV I – Asian Sustainable Development Equity Fund
Under active research coverage by the investment team, the Aberdeen Standard SICAV I – Asian Sustainable Development Equity Fund aims to achieve long-term growth by investing at least 70% in equities and equity-related securities of companies in the Asia Pacific that are aligned with UN Sustainable Development Goals (SDGs).
Using the MSCI AC Asia Pacific ex-Japan Index as a benchmark, the Luxembourg-domiciled fund is fairly new. It was launched on 20 August 2020. The fund is built by a central team of 20 Aberdeen Standard’s ESG experts as well as ESG analysts within the wider global EM equities team. The open-ended fund invests in companies with a minimum of 20% of their revenue, capital or operating expenditure, or research and development, linked to the UN’s SDGs. The high-conviction portfolio with 30-60 stocks has generated returns of 4.56% since the beginning of the year.*
Managed by David Smith, the fund is mostly allocated in sectors like IT, financial services, industrials, healthcare, and real estate. In country-wise distribution, China has the major share at 30.7%, followed by 14.2% in India and 13.1% in Taiwan.** The fund with a size of $7.2m has a historic yield of 1.20% and 98.9% asset allocation in stock.*
BlackRock Global Funds – ESG Asian Bond Fund
BlackRock also recently launched a new Asia ESG fund, namely the BlackRock Global Funds (BGF) – ESG Asian Bond Fund, on December 09, 2020. The active fund uses a bottom-up credit selection and top-down selection for country and sector allocation. The current fund assets are 20.75m USD.**
The BGF fund seeks to invest at least 70% of its total assets in the fixed income asset class in Asia. With JPM ESG Asia Credit Index (JESG) as a benchmark, the fund aims to deliver comparable yields to traditional Asian credit strategies. The investment approach for the ESG fund is concentrated towards bonds, money market instruments (i.e. debt securities with short-term maturities), and investments with relatively low credit ratings.
Managed by BlackRock’s Asian credit portfolio management team, the fund has allocated 35.18% in industrials, 25.04% in financial sector, 15.06% in property, 13.76% in government related sector. Country-wise, China has the major share at 31.04%, followed by 13.21% in Hong Kong, 8.61% in South Korea, 8.57% in India and 7.10% in Thailand.** The ytd-return is -0.40%.*
Manulife Global Fund – Sustainable Asia Bond Fund
The final fund we review is one of the latest sustainable Asian bond funds on the market. As per Manulife, Asia has compelling investment opportunities in fixed income, as the region is undergoing an important sustainability evolution. Issued on December 21, 2020, the Manulife Global Fund – Sustainable Asia Bond Fund is backed by the company’s Asian credit research and ESG team.
The fund invests at least 85% of its net assets in USD-denominated fixed income and fixed income-related securities of companies or governments/government-related issuers in Asia, who demonstrate strong sustainability attributes. The fund size is at $98,33 m.*
The open-ended fund is led by Murray Collis and supported by the management team of Endre Pedersen, Alvin Ong, Jimond Wong, and Neal Capecci. Keeping JP Morgan ESG Asia Credit Index as the benchmark, the fund has major investments done in countries like Singapore, Indonesia, Malaysia, and South Korea. Taking advantage of the ongoing global trends in sustainable and responsible investing, this fund is mostly allocated in sectors like banking, real estate, and government.
Why consider ESG factors when investing in Asia?
The evaluated funds here provide investors an entry point into Asia’s most dynamic economies leveraging ESG. Depending on preferences, the described funds can be a strong addition to an investment portfolio.
However, one of the key questions for investors is if there is any evidence that ESG strategies generate higher returns or reduce risk in portfolio’s over the long term. A study by Fidelity International suggestes that there indeed is a strong correlation between a company’s relative market performance and its ESG rating. In its report, the asset manager focussed on the first three quarters of 2020 using its own ESG ratings. The study found that stocks with higher ESG scores outperformed those with weaker ESG scores, confirming the company’s assessment that good companies are characterised by prudent management and are more resilient in crises. Fidelity also looked at bond markets in the study and the results for fixed-income securities were similar to those for equities.
* as of June 18, 2021
** as of May 31, 2021