More than 50 of the 88 ESG China funds tracked by Morningstar suffered net outflows in the second quarter © Getty Images

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Sustainable funds in China suffered high net outflows in the second quarter despite continued optimism that the sector would be boosted by China’s commitment to achieve carbon neutrality by 2060.

Following President Xi Jinping’s announcement of China’s net neutral goals, net flows into ESG funds jumped dramatically in the fourth quarter of 2020, to hit a record high of Rmb34.5bn ($5.3bn), up from just Rmb4.3bn in the previous quarter, according to Morningstar data.

However, ESG fund growth in China has since slipped dramatically.

Net inflows into sustainable funds in China fell to just Rmb3.1bn in the first quarter of 2021. However, that dip in sentiment deepened into a sell-off in the second quarter when sustainable investment funds in China suffered net outflows of Rmb2.4bn.

This article was previously published by Ignites Asia, a title owned by the FT Group.

The majority of the 88 funds in China categorised by Morningstar as having an ESG focus have bled in recent months, with 53 suffering net outflows in the second quarter.

The Fullgoal China Sectors New Energy Vehicles Fund, suffered the largest net outflows among sustainable funds in China, bleeding Rmb2.2bn during the three-month period.

It was followed by the SWS MU Green Energy Car Theme Flexible Fund, run by Shenwan Lingxin Fund Management, which lost Rmb1.5bn in the quarter, and the Zhong Ou Responsible Investment Allocation Fund, which saw Rmb1.4bn in net outflows.

Vincent Xu, sales director at Seneca ESG, a sustainable investing data and analytics consultancy, said that the strong performance of many sustainable investment funds in China led many investors to redeem their investments.

“In a less-mature market driven by short-termism and irrationality, it is actually very normal to witness that investors tend to think linearly and focus on extrapolating short-term results, and correspondingly enter and exit very frequently,” Xu said.

Wind data show that the Fullgoal China Secs New Energy Vehicles returned 115.1 per cent on average over the past year and 37.2 per cent in the past six months.

In fact, green energy ETFs in China also outperformed other thematic and broad-based ETF strategies in the first half of 2021.

This year, among the top 10 ETF products, E Fund Management’s E Fund CSI New Energy ETF has gained 45.5 per cent, leading the market, followed by China Asset Management’s ChinaAMC CSI New Energy ETF, which delivered 44.6 per cent in returns.

Verna Chen, Shenzhen-based analyst in Morningstar’s manager research team, said that in China, sustainable fund flows were mainly influenced by market conditions and strong fund performance instead of decisions over ESG investing characteristics or benefits.

“After a rapid rise in 2020, the Chinese stock market became volatile in 2021 and, as a result, investor sentiment turned cautious and fund inflows decreased,” Chen said.

However, many industry observers remain bullish on prospects for China ESG investing.

“Rising awareness of climate change and increasing focus on renewable energy mean that both distributors and investors are looking to increase investment into ESG funds,” said Ng Sze Yoon, Singapore-based senior director for Asia-Pacific insights at Broadridge.

“As such, we firmly see ESG as a key pillar of growth in China and any short-term fluctuations to be a speed bump that will not distract from the longer-term growth,” Ng added.

Although Morningstar’s Chen has not yet seen a strong preference among China’s retail investors for sustainable investment products, she said she expected the Chinese government’s policies related to climate change and environmental protection to spur asset managers to continue to develop and launch products in this area.

*Ignites Asia is a news service published by FT Specialist for professionals working in the asset management industry. It covers everything from new product launches to regulations and industry trends. Trials and subscriptions are available at ignitesasia.com.

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