China's climate-focused funds surged, surpassing that of the U.S. last year. It will help China bolster its efforts to meet net-zero targets. Flows to Chinese climate funds almost doubled in 2021. 

According to data from research firm Morningstar Inc., China's fund assets increased by 149 per cent from the previous year to $47 billion in 2021, owing to unprecedented inflows and outperformance by the local renewable energy sector. Climate funds in the United States increased to $31 billion, but in Europe, the largest market, they nearly doubled to $325 billion.

Morningstar ESG analyst Boya Wang said:

"In the West, climate protection awareness is probably the main factor driving the growth. In China, it’s largely driven by policy. After the government officially approved carbon neutrality and net-zero targets in 2021, we saw a mushrooming of all these new climate funds.”

Last year, Chinese investors poured $11.3 billion into climate-focused funds, nearly double the amount invested in 2020. According to Morningstar data, Chinese climate funds were up 15 per cent on average in the 12 months to April 2022, while US funds were down 7.2 per cent.

China, one of the world's worst polluters, has invested a huge amount of private money into its green goals, including achieving carbon neutrality by 2060 and reducing emissions by 2030. It has become one of the largest issuers of green bonds, green loans, and other financial products to support those policy goals in just a few years.

Clean energy equities and ETFs have benefited from the campaign. A pair of solar-focused funds, Huatai-PineBridge CSI Photovoltaic Industry ETF and Tianhong CSI Photovoltaic Industry Index Launched Fund, ranked among China's top climate funds in less than 18 months.

Last year, 53 new climate-focused funds were created, with renewable energy and technology accounting for more than half of the new products.

It is difficult to say how ecologically beneficial these funds are. Only 11 of Morningstar's 106 China climate funds earned sustainability ratings of "average" or higher. The rest were either unrated or worse. Low scores can be attributed to ESG concerns, including a lack of transparency in China compared to Europe or the United States.

“Whether this capital translates into long-term benefit for the low-carbon economic transition, I’m doubtful,” Wang said.

Green technology investments require consistent, long-term funding inflows. Retail investors, who are frequently scared by short-term volatility, drove last year's advances. During the recent global financial sell-off, solar stocks, for example, have pared gains.

Meanwhile, cleantech companies weighed heavily on US climate funds. While China's clean energy benchmarks outperformed the country's CSI 300 Index, their American counterparts were behind the S&P 500. Sunrun Inc., one of the worst-affected US holdings, lost more than half its value in 2021, following a fourfold increase a year before.

According to Wang, In China, investor excitement may be dampened by continued lockdowns connected to Covid-19 restrictions. Asset managers are deferring investment plans to launch new climate funds until regional lockdowns are lifted.

Source: BNN Bloomberg