Despite being challenged by weak investor sentiment in 2022, ESG investing is expected to remain as a long-term trend in the Asia Pacific, and asset managers will continue to work together with distributors to promote these products.

Across the region, net flows into locally domiciled ESG funds during the first half plunged to US$2.3 billion, a mere 7.6% of the total amount raised during 2021. Apart from the challenging market conditions, regulatory initiatives to address greenwashing have also had a part to play in the reduced pace of net inflows in some key markets.

Demand for ESG investing continues to be driven by affluent, high-net-worth (HNW) individuals, and ultra-HNW investors, although some mass retail investors have also shown interest in ESG products. Almost three-quarters of distributors said HNW and ultra-HNW clients drive sustainable investments in Asia.

In markets such as Singapore and Hong Kong, Cerulli has seen exclusive ESG product agreements being inked with key distributors, mainly banks. Typically, these are six-month tie-ups between asset managers and bank distributors to make their funds exclusively available to their clients. Managers must be ready to provide dedicated marketing services to meet the various requirements of the banks, including access to portfolio managers and explanations of fund strategy to bankers or relationship managers.

Cerulli’s survey of managers shows that global, private, and local banks are the key distributors looking to onboard ESG products in Hong Kong and Singapore. This is not surprising, as global banks, especially European ones, were first-movers in onboarding ESG products, and the trend has gradually caught on with private banks as well as local banks, including the Hong Kong-based arms of Chinese banks. ESG-themed funds are also being made available on some online platforms.

In addition to banks, managers in Taiwan and Singapore rely on insurance companies to distribute ESG products. Digital advisors have also expanded their offerings to include sustainability-themed investments, thus offering opportunities to managers that can bundle sustainability with low-cost products.

Cerulli believes investors will allocate a certain portion of their assets to ESG funds as and when markets stabilize, and sentiments are revived. More products will be registered in offshore markets like Singapore and Hong Kong. In other markets, domestic managers are expected to rely on the expertise of global asset managers and seek partnership opportunities.

“Over the long term, we believe that most funds will be ESG-integrated, while product innovation is expected to take place mostly in sustainability-themed strategies,” said Leena Dagade, associate director with Cerulli. “As the number of ESG products increases, positioning of fund ideas and marketing will need to be more focused to gain investors’ interest, while there should be continued dialogue with distribution partners to educate them about ESG and thematic investing.”