Chinese institutions put ESG ETFs on most-wanted list

Exchange traded funds that focus on environmental, social and governance themes have become the top choice for Chinese institutions investing in the vehicles, despite enduring doubts over performance.

Mainland Chinese and Taiwan investors rank ESG ETFs as their top choices for new products, while Hong Kong investors rank it as their third-most desired ETFs, a new survey from Brown Brothers Harriman shows.

More than 300 institutional investors, financial advisers and fund managers, including 146 respondents across the three markets of the mainland, Hong Kong and Taiwan, were questioned for the survey.

A total of 80 per cent of the surveyed mainland investors said they planned to allocate between 11 per cent and 20 per cent of their assets into ESG ETFs over the next five years.

This is significantly higher than the proportion of investors in Hong Kong, at 49 per cent, and Taiwan, at 39 per cent, that plan to allocate the same amount to ESG ETFs over that timeframe.

The proportion of mainland Chinese investors who do not plan to invest in ESG ETFs dropped from 10 per cent in the previous survey in 2020 to just 5 per cent.

This strong demand for ESG ETFs comes after record global inflows into these strategies in 2020, totalling $89bn, compared with just $28bn in 2019, according to the survey.

However, in China at least, there appears to a shortage of ESG ETF strategies to meet the emerging investment demand.

There are only about 15 ESG-labelled ETFs in the onshore market as of April, most of which were listed after 2019. This compares with more than 100 ESG-linked public funds in China managed by 50 asset managers as of September last year.

Among the mainland respondents to the survey, 92 per cent planned to increase their allocation to ESG investment strategies, not limited to ETFs, which is an increase from the 82 per cent giving the same response in the previous report last year.

All but 2 per cent of Hong Kong respondents said they would allocate to ESG strategies, while 84 per cent of Taiwan respondents said they planned to do so.

While interest in ESG ETFs grows, however, investors still expressed concerns about the performance of ESG ETFs.

In 2021, 42 per cent of mainland Chinese investors identified the performance of ESG ETFs as a potential worry. This compares with a total of 60 per cent of respondents who indicated this could be a concern in 2020.

“There’s a perception in the marketplace that if you put these [ESG] screens over the top, if you look at ESG products specially, that it’s going be detrimental to performance and I think this isn’t unique to greater China,” said Chris Pigott, head of Hong Kong ETF services at Brown Brothers Harriman.

Pigott noted that 40 per cent of investors surveyed in BBH’s global research, including investors from Europe and the US, also highlighted performance concerns.

Aside from ESG ETFs, cryptocurrency ETFs ranked as the second most popular strategy that respondents from China, Taiwan and Hong Kong would like to see more of in the market.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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