Climate-focused mutual funds in China saw a decline in assets and product launches last year despite an uptick in inflows, with the funds prone to huge volatility because of speculative trading, according to Morningstar.
Assets of mutual funds and exchange-traded funds (ETFs) with a climate-related mandate in China, the world’s largest emitter of greenhouse gases, declined by 16 per cent to US$37.6 billion in 2023, a report from the US financial services firm showed.
While inflows into climate-related funds rose nearly 50 per cent to US$3.4 billion year on year in 2023, driven by those focusing on climate solutions, clean energy and tech, new fund launches fell 44 per cent to 36 in the same period, the data showed.
“In China, the deceleration of flows and product launches continues,” said Wang Boya, an ESG analyst at Morningstar. These flows tend to exhibit greater volatility, as new subscriptions are often driven by the speculative behaviour of local retail investors, he added.
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“Due to the central leadership’s commitment to their ‘dual carbon’ goal, sectors and companies associated with renewable energy and energy-efficient technologies and services have become a hotspot for investors,” he told the Post.
In China, price rallies are often initiated by local institutional investors, whose purchases are often mimicked by China’s vast legion of 220 million retail investors via ETFs or direct share purchases.
This tendency has been aggravated over the past few years by the poor performance of the domestic stock market, along with bottom-fishing trading by fund managers and retail investors, he said.
China’s CSI 300 Index had one of its worst years in its 32-year history. It lost 11 per cent in 2023 after a 22 per cent slump in 2022 and a 5.2 per cent drop in 2021.
“As such, fund managers have become quite similar to retail investors as the latter has been desperate to make up for their locked-in investment losses over the past few years.”
Globally, assets in climate funds rose by 16 per cent in 2023 to US$540 billion, driven by continued inflows, product launches and market appreciation, according to Morningstar.
Europe accounted for 84 per cent of these assets, while China and the United States ranked second and third, with market shares of 7 per cent and 6 per cent, respectively.
Investor preferences vary across regions. European investors are focused on climate transition funds, while those from China and the US prefer thematic, alpha-generating opportunities in climate solutions and clean energy.
Flows into climate funds reached US$40 billion globally in 2023, accounting for more than half of the total in the overall fund universe, which netted US$75 billion.
Still, the US$40 billion inflows into climate funds last year represented the lowest level in four years, mostly because of the substantial redemptions from climate solutions and clean energy tech sectors, which were plagued by high interest rates and sticky inflation, according to Morningstar.
“One area worth monitoring is climate transition and Paris-aligned funds,” said Hortense Bioy, global director of sustainability research at Morningstar, referring to the Paris climate accord in which world leaders have committed to containing global warming at well below 2 degrees Celsius above pre-industrial levels.
“These strategies have expanded significantly in the past couple of years and can be expected to evolve as investors intensify their scrutiny of companies’ transition plans and demand better management of climate risks,” he added.
