Calastone Q&A: ‘We have only seen inflows into ESG funds’

Head of Asia Leo Chen says marketing and regulation have driven uptake

Interest in ESG funds is rising and shows no sign of stopping as inflows remain positive. Here ESG Clarity talks to Leo Chen, head of Asia at Calastone, about the drivers behind this and popular asset classes for Asia investors.

Please outline ESG fund flows over the past few years in Asia. How does this compare to non-ESG fund flows?

The explosive interest in ESG has been a global phenomenon. Across our entire global network last year, ESG equity funds gathered $32.1bn in new capital, equivalent to $3 in every $5 of new cash committed to equity funds of all kinds. This compares to $10.8bn in 2020 and just $309m in 2019. The trend has been driven by UK and European investors in particular, but it is now taking off in Australia and parts of Asia.

In Hong Kong inflows to ESG turned positive for the first time in 2021 and were less than a third of the total net inflow to equity funds. In Taiwan flows turned positive in 2020 and grew again in 2021, while in Singapore, the net inflow almost tripled in 2021 year-on-year and contributed two fifths of the total net inflow to equities.

In 2022 this trend has continued. In our latest global report, ESG (+$1.1bn) makes up a significant portion of fund inflows despite the bear market:

Source: Calastone

What has driven ESG fund flows in recent years?

Asset managers have devoted a huge marketing drive to ESG funds over the past two years and that has certainly driven awareness and uptake. In addition, regulators in Asia have also been promoting and advocating ESG regulation, compliance and ESG disclosures in recent years. Of course, this also reflects the huge and growing demand from investors who want their investments to align with their values.

Do you see this momentum changing?

If we look across the rest of the world, ESG fund inflows overall continue to gather pace on average, but with today’s bear market, the future is a little more uncertain.

That said, ESG is coming from a very low base – assets under management remain a tiny fraction (less than 4%) of equity funds overall – and it is in a clear structural growth phase. That means there is a both a strong bias among investors towards buying and also a relatively small pool of assets that could suffer selling activity.

Which asset classes have been the most popular?

In common with investors elsewhere, Asian investors favoured equity income and ESG funds in particular, but they also added to their Asia-Pacific holdings for the first time in three years and broke trends with peers elsewhere by buying North American equities too. In each of these categories they showed a greater preference for actively managed funds. They were net sellers of index funds, especially the global category.

Where have there been outflows?

Overall, we have only seen inflows into ESG funds, unlike many other categories of non-ESG funds.