Environmental, social, and governance (ESG) funds invested an additional $660 million in Asia equities in January, increasing exposure to the region following subdued activity over the course of 2022.
The Bank of America (BofA) data — which involved an analysis of 322 ESG funds managing $469 billion in assets — found the uptake in ESG investment coincided with the third consecutive reduction in cash holdings.
Chinese equities attracted the lion’s share of ESG investment ($570 million), followed by India ($410 million).
This was offset by a sharp decrease in exposure to the Australian equities market ($370 million).
When assessed by sector, growth was driven by strong investment in information technology companies, which totalled an additional $870 million.
Conversely, outflows were sharpest across the materials and financials sectors, which both saw contractions of approximately $220 million.
Bank of America attributed the shift in demand among ESG funds to recent changes in market sentiment, particularly off the back of the reopening of the Chinese economy.
BofA co-head of APAC ESG research, Girish Nair, added demand for Chinese equities reflects the country’s record of environmental reform and investment.
“When it comes to China, from an ESG perspective, you cannot deny the fact that China is a green superpower,” he told InvestorDaily.
Citing a recent report from BofA, which assessed progress towards decarbonisation, Mr Nair said China was “far ahead” of the United States and Europe across four categories — the number of government-led reforms; the quantum of investment; innovation; and the implementation of green energy projects.
Chinese equities, Mr Nair continued, have also outperformed the rest of the world in value terms, particularly off the back of the recent easing in COVID-19-related restrictions on movement and business activity.
“From an ESG lens, China looks attractive, and from a growth and valuation perspective, there’s no other place to be than in China,” he said.
“That’s why we saw this positive rotation towards China — not just from ESG funds but from all funds across the region.”
However, the influx in ESG investment in China has come amid ongoing concerns over the Chinese Communist Party’s (CCP) influence in the private sector.
The regime continues to implement a “Party Committee” system, which involves installing CCP representatives on the boards of privately-operated China-based firms.
These committees often oversee key board determinations, including executive appointments.
This has cast doubt over the independence of China-based firms and, hence, their association with the regime, known to perpetrate human rights abuses.
The US State Department — under both the Trump and Biden administrations — has openly condemned the regime for these abuses, particularly against minorities.
Former secretary of state Mike Pompeo reported a “dramatic” escalation in what he described as China’s “campaign of repression” against Uyghur Muslims and members of other ethnic and religious minority groups.
The State Department’s “exhaustive documentation” of Beijing’s treatment of minorities in Xinjiang since March 2017 identified what has been described as “morally repugnant, wholesale policies, practices, and abuses”, designed to discriminate against and survey ethnic minorities; restrict travel, emigration, and school attendance; and deny other basic human rights of assembly, speech, and worship.
The State Department, along with the international community, has accused the CCP of committing crimes against humanity, which include: forced abortions and sterilisations; torture of detainees;; the arbitrary imprisonment or deprivation of physical liberty of more than 1 million civilians; forced labour; and the imposition of draconian restrictions on freedom of religion or belief, freedom of expression, and freedom of movement.
When asked to explain ESG investment growth in China, in light of these concerns, Mr Nair acknowledged their severity, but said investors apply risk-based assumptions drawn from “quantifiable” evidence.
These metrics, he added, have a bias towards environmental and climate change risks.
“If global temperatures go above the Paris agreement of 1.5 degrees, then water levels will start rising and we’ll get an increasing number of environmental disasters than we've seen in the last 15–20 years.” he said.
“If you’ve survived that, that environmental crisis, then you can think about other things.”
Mr Nair said his team at BofA are working on gathering information about these social and governance concerns, which can be quantified.