While ESG investing has yet to become mainstream in China, regulators’ green initiatives, especially the commitments to have carbon emissions peak by 2030 and reach carbon neutrality by 2060, have helped the concept gain traction.

Both ESG-integrated funds and sustainability-related thematic funds grew in 2020. Excluding money market funds, total ESG mutual fund and exchange-traded fund (ETF) assets under management (AUM) more than tripled in 2020 to reach US$28.5 billion, while net inflows reached US$10.5 billion.

In addition to the growth in asset size, China’s ESG market saw an expansion in product variety in 2020. Commercial banks and banks’ wealth management subsidiaries issued 13 ESG-themed wealth management products (WMPs) garnering assets of RMB12.3 billion in 2019, 44 ESG-themed WMPs in 2020 raising assets of RMB21.2 billion, and 21 ESG-themed WMPs for the year ended July 2021.

Cerulli’s survey shows that onshore managers intend to give ESG strategies high priority when promoting products to retail-oriented distributors over the next few years. Some managers told Cerulli that in addition to the China’s bullish stock market performance last year, the COVID-19 pandemic has enhanced the public’s social responsibility awareness and made more investors consider ESG strategies. For example, a number of thematic bonds and thematic bond funds were launched in early 2020 to support regional economic growth post-COVID-19, focusing on social responsibility rather than profit making as the top priority.

However, Cerulli’s survey also found that FMCs in China onboard ESG strategies to raise their brand profiles and fill product gaps. Asset managers indicate that ESG strategies are most sought after by institutional investors, followed by private banks representing the needs from high-net-worth individuals, and lastly, by retail investors.

According to the research, retail investors express limited demand for ESG adoption, with ESG-based investing ranked as the second-least important product feature sought by them. However, an in-depth look at the top 10 ESG funds by AUM between 2019 and June 2021 shows that the proportion of retail investors outweighed that of institutions in all the 10 funds. For example, individuals held more than 90% each of the biggest sustainability-related thematic fund, ChinaAMC Energy Innovation Equity fund, and the biggest ESG integration fund, Zhong Ou Responsible Investment Allocation, as of June 2021, according to Eastmoney statistics.

“ESG investing in China faces a long journey ahead, due to the low but rising awareness among institutional and retail investors, and evolving ESG evaluation systems and data,” said Ye Kangting, senior analyst with Cerulli. “However, Cerulli believes that global managers can tap into their international expertise to grow the market. Those that conduct consistent investor education and deliver credible performances should be able to break into the huge market successfully.”