Taiwan fund managers rush to roll out sustainable ETFs

Domestic fund managers in Taiwan are rushing to roll out new exchange traded funds that carry an environmental, social and governance label, plugging into the continued appetite for the low-cost passive vehicles and rising popularity of sustainable investing.

Sustainable investing and ETFs have been two of the biggest draws for Taiwan investors since last year.

While assets in ESG-themed funds in Taiwan jumped fourfold in 2020 to NT$89.5bn ($3.21bn), the country’s ETF market also ballooned, with assets under management growing 135 per cent in the past two years. One in four Taiwanese investors in their 20s now hold ETFs.

Taiwan fund firms are now taking advantage by combining these two trends. So far this year, five ESG or sustainability-themed ETFs have been launched, most of which are bond ETFs, according to records from the Financial Supervisory Commission.

These include the SinoPac Securities Investment Trust’s Taiwan Target Exposure ESG ETF, and four ESG bond ETFs developed by CTBC Investments and KGI Securities Investment Trust.

The number of ESG ETFs listed in Taiwan this year account for almost half of all ETFs that have entered the market in the first four months of the year. There was just one ESG ETF launched in the whole of 2020.

At least two more ESG ETFs from CTBC Investments and Cathay Securities Investment Trust are in the pipeline, according to FSC records. CTBC Investments received the green light last week to roll out its new ESG Leading Semiconductor ETF.

The size of the ESG mutual fund market in Taiwan is still bigger than the ESG ETF market. By March, active ESG strategies had accumulated NT$70.5bn in assets, more than ESG ETFs’ NT$55.1bn in total assets, according to the latest data from the Securities Investment Trust & Consulting Association.

Buying into the ESG or sustainability theme has become a huge attraction for Taiwan’s retail and institutional investors, and asset managers are now heavily marketing these attributes.

Russell Mu, executive vice-president in KGI Securities Investment Trust’s new business development division, said many institutional investors in Taiwan were being closely scrutinised by peers and regulators in terms of what they were investing in, and they wanted to be seen to be committed to doing good by investing in ESG strategies.

ESG ETFs are becoming a “very important” investment tool for institutional investors, especially life insurers that traditionally have a high exposure to ETF vehicles that carry certain benefits and efficiencies when compared with standard mutual funds, Mu said.

Meanwhile, the ESG label is also a huge plus for Taiwan’s young retail investors, who have been the driving force behind Taiwan’s ETF market boom in recent months.

“The ETF market has a very high saturation among Taiwanese young investors, especially millennials, because ETFs allow them to buy huge companies like TSMC without having to pay that much,” an executive at Yuanta Securities Investment Trust said.

“They are also the group who really resonate with the ESG theme. Many of them will first check whether an ETF has an ESG label before buying it,” the executive said.

One possible reason for the surge in new ESG product launches is that fund houses are trying to rush out strategies before July, when tighter ESG fund rules are set to kick in.

In a few months, Taiwan fund houses will be subject to more stringent disclosure and entry regulations if they want to label their strategies as ESG or sustainable.

Firms will have to spend more time explaining their ESG investment principles and explaining to the regulator why they have selected certain companies to include in their ESG portfolios over others. But existing ESG funds will be exempt from the heightened scrutiny.

However, industry participants say the main reason for the surging number of new ESG ETF launches is that fund firms are facing pressure from both investors, who are demanding more ESG-compliant investments, and from their parent companies, which have pushed their asset management subsidiaries to churn out more ESG products.

Fund managers have also started to adopt a more long-term and sustainable view regarding ESG funds’ fundraising process.

At the same time, more investment-linked policies that appeal to ESG themes have been issued. These policies usually operate with a fund-of-funds model and seek long-term investments or retirement-oriented funds, so the connection with the ESG theme is stronger, Mu said.

Although the total assets under management of ESG-themed funds, both active and passive, jumped fourfold last year, they still accounted for only about 2.5 per cent of the entire Taiwan onshore fund market in 2020.

But now with the new ESG ETF launches and increasing demand for these ETFs from institutional investors, industry participants expect this percentage to multiply.

*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.