Sustainable investing has continued to accelerate in global markets, with China overtaking the United States as the second-largest climate funds market in the world last year, reflecting favourable domestic conditions for environmental, social and governance (ESG) investing, Morningstar said.

Assets in the Chinese climate funds market grew by 149 per cent from 2020 to US$46.7 billion last year. The US, bumped into third place after Europe and China in market size, saw assets totalling US$31 billion, achieving 45 per cent growth since 2020. Climate funds markets in the rest of the world also doubled to US$6.3 billion at the end of last year.

"The rapid expansion of China's climate funds market can be mostly attributed to the heightened focus on climate change and other environmental issues in the ruling party's agenda for economic transformation," said Hortense Bioy, global director of sustainability research at Morningstar.

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Clean energy and technology funds formed a lion's share of the Chinese climate funds market last year, taking up more than 60 per cent of annual inflows. Climate solutions funds followed at 35 per cent, while low carbon and climate conscious strategies remained less popular.

An aerial view of the Datong Panda Power Plant in Shanxi province, where solar panels are placed to form the pattern of a giant panda on 25 July 2017. Photo: EPA alt=An aerial view of the Datong Panda Power Plant in Shanxi province, where solar panels are placed to form the pattern of a giant panda on 25 July 2017. Photo: EPA>

Climate funds are a part of environmental investing that focuses on climate-related issues. Funds under this category can be divided by their purpose, with some investing in companies with quantifiable climate strategies while others invest in companies or products that directly offer solutions to particular climate issues.

Falling into the latter category, clean energy and technology funds invest in companies that contribute to clean energy transitions while climate solutions funds focus on companies working on the global transition to a low-carbon economy, such as water management companies and electric vehicle manufacturers.

The Hong Kong market has also been witnessing a rise of interest in ESG investment, but investors remain primarily concerned with returns when considering ESG strategies.

All institutional investors and 88 per cent of retail investors in Hong Kong have been using or have been interested in ESG investing strategies, rising from 80 per cent and 79 per cent, respectively, in 2020, according to a survey by the CFA Institute.

The main motivation for Hong Kong investors considering ESG strategies was an expectation of higher risk-adjusted returns, followed by the desire to express personal values or investing in companies that contribute to positive environmental or social impact.

Nick Pollard, managing director, Asia-Pacific, at the CFA Institute, however, cautioned against investors' concerns about the credibility of data from ESG strategies, as only 28 per cent of Hong Kong retail investors polled trusted ESG messaging and net-zero pledges.

"Everybody talks about ESG, but institutions have a greater concentration on environmental, social or governance investing, rather than everything being exactly the same," he said. "There are many challenges in terms of public statements from institutions about how they are approaching the ESG world.

"The reality is that it is a greenwashing question or response as much as anything, which is why it is important that there are indices and standards for investors to judge performance against," Pollard added.

Greenwashing refers to sustainability benefit claims without clear, agreed definitions on sustainable investment, which could sometimes lead to a false impression of the overall benefits.

The CFA Institute released its own disclosure standards for ESG investment last year, along with a certificate in ESG investing for professionals to familiarise themselves with ESG principles and portfolio management.

Currently, there is no unified standard or index to measure the impact of ESG investments. Various financial agencies have released their own frameworks for ESG impact reporting.

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