China’s sustainability funds have tripled since launch of ‘dual carbon goals’, but concerns over disclosure requirements, investor education remain: Morningstar

Sustainable funds have experienced rapid development in the past few years, with significant growth in the number of products available and consistent annual net inflows, Morningstar analysts say in new report
Lack of public disclosures of ESG information a challenge for Chinese investors investing in sustainable funds

Business of climate change

Martin Choi

Published: 6:35pm, 12 Mar 2024

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The number of sustainability funds has tripled in mainland China since the world’s largest emitter of greenhouse gases pledged to reach peak emissions by 2030 and carbon neutrality by 2060, with local asset managers seizing opportunities arising from the green transition, US financial services firm Morningstar said.

Local asset managers have been actively expanding their sustainable product offerings since 2020, when President Xi Jinping announced China’s “dual carbon goals”, and such funds have also recorded consistent annual inflows, according to Morningstar’s China Market Observer report released on Tuesday.

The number of sustainable funds in China had tripled to 246 as of June 30 last year from 78 as of December 2020, according to the report. About 29 sustainable funds were launched in the first half of 2023.

“Investors’ awareness of sustainable investing is increasing amid the Chinese government’s promotion of a green transformation,” Morningstar analysts led by senior manager research analyst Jingxia Dai said in the report.

“Sustainable funds in China have experienced rapid development in the past few years, with significant growth in the number of products available and consistent annual net inflows.”

These funds received a net inflow of 31.7 billion yuan (US$4.4 billion) in the first half of 2023, which represented 6 per cent asset growth from the end of 2022, despite the challenging Chinese stock market, showcasing the growing popularity of such investments, Morningstar said.

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“Local asset managers are striving to participate in sustainable investing to seize the opportunities arising from the green transition,” Dai said. “Domestic asset managers continue to refine their investment approach towards sustainable investing as well as investment resources into this area. We expect that more asset managers in China will participate in sustainable investing in the coming years.”

However, while asset managers are making positive strides towards sustainable investing, more needs to be done in terms of disclosure requirements and investor education, Dai added.

The State-owned Assets Supervision and Administration Commission of the State Council established a social responsibility unit in March 2022, with the aim of directing state enterprises to cut greenhouse gas emissions as part of China’s carbon-neutral goals.

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In April 2022, the China Securities Regulatory Commission called for the country’s mutual fund industry to embrace sustainable investing and promote the development of a green economy.

“It is imperative for the China mutual fund industry to intensify its efforts in investor education to enhance the awareness and understanding of sustainable investing among retail investors,” Morningstar said.

In February, the mainland’s three main stock markets, the Shanghai Stock Exchange, the Shenzhen Stock Exchange and Beijing Stock Exchange, released their first guidelines for listed companies to disclose their sustainability-related information, a landmark in the country’s progress towards achieving a sustainable economy and embracing the global environmental, social and governance (ESG) boom.

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“The lack of public disclosure of ESG information related to sustainable funds remains a challenge for Chinese investors [when] making informed decisions when investing in sustainable funds,” the Morningstar report said.

“The market has a need to establish unified standards for disclosure on sustainable investments, in order to increase the transparency of ESG-related information for China’s mutual funds.”

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