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ESG fund flows fell 68% y-o-y in 2023, but returns were higher: Maybank

Jovi Ho
Jovi Ho • 3 min read
ESG fund flows fell 68% y-o-y in 2023, but returns were higher: Maybank
High inflation, rising interest rates and uncertainty about the pace of the global economy weigh on investor sentiment, say Maybank's analysts. Photo: Bloomberg
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Global sustainability fund inflows declined 68% over 2023 to US$60.2 billion ($80.28 billion) and even notched a US$3 billion net outflow in 4Q2023. This is the second year fund flow has declined after peaking in 2021 at US$620 billion.

However, Morningstar data shows that returns were higher last year, particularly among European names.

Maybank Research analysts Jigar Shah and Neerav Dalal examine this apparent dissonance in a quarterly report published on Feb 28. “[A] slowdown in launch of sustainability-linked products, greenwashing accusations and regulatory tightening led to the slowdown [in fund flows].”

Aided by stock and bond price appreciation, sustainable assets under management (AUM) increased to US$3 trillion as of December 2023. 

Europe, at 84% of total sustainable assets, continued to witness inflows whereas the US reported outflows. The US started to report a decline in 4Q2022. Meanwhile, Japan has reported outflows for the past six quarters.

See also: Qatar raises US$2.5 bil through first-ever green bond

As of 1H2023, sustainable AUM formed 7.9% of total AUM. 

See also: MAS, People’s Bank of China further collaboration in green and transition finance

High inflation, rising interest rates and uncertainty about the pace of the global economy weigh on investor sentiment, write Shah and Dalal. 

But the winds may soon change, according to the analysts. “We believe ESG AUMs and sustainable debt raising will increase from here on, driven by improved disclosures and regulatory push.”

Asean uptick

Asean, in particular, is witnessing an uptick in sustainable fund activity, say Shah and Dalal. 

Asia ex-Japan formed 2% of the global sustainable AUM. “We believe Asean would be even smaller, at less than 5% of the Asia ex-Japan AUM,” say the analysts. “However, there is activity starting to happen in Asean on the regulatory standpoint, which is driving the launch of sustainability and ESG funds in the region.”

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According to Morningstar’s quarterly fund flow reports, Malaysia reported inflows in 1Q2023 and outflows in 4Q2023, Singapore reported outflows in both 1Q2023 and 2Q2023 but inflows in 3Q2023 while Thailand reported inflows in 4Q2023. 

On fund launches, Thailand reported 22 new funds in 4Q2023. This led to a sharp increase in assets to US$236 million as at end-December 2023 from US$75 million as at end-August 2023. 

The Asean regulatory landscape continued to evolve in 2023, say Shah and Dalal. “Securities commissions and central banks are working on improving the disclosure norms, taxonomies for green financing and guidelines for launch of sustainable, ESG and green funds. The best example is Thailand, where the regulatory changes made in 1Q2023 saw a large jump in sustainable fund launches in 4Q2023.”

Better returns 

Despite fund outflows, Shah and Dalal say ESG-linked indices mostly outperformed wider indices last year. 

Their analysis of 174 global and regional ESG-linked indices managed by Morningstar suggests that 55% outperformed their comparable frontline indices in 2023. 

This outperformance is stronger in global and European indices at 64% and 51%, whereas those in the Americas was at 50%. Those tracking the Asia-Pacific lagged at 40% because ESG adoption is still at the initial stage, say the analysts. 

The overall average outperformance of the ESG-linked index was +0.6% in 2023, compared to underperformance of -1% in 2022.

Infographics: Maybank Research

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