Sustainable investments, including through ESG funds, are gaining traction with investors around the world, says Morningstar, describing them as a key trend for 2025.
ESG funds are investment funds that consider environmental, social and governance factors when selecting companies for investment.
"Because the global warming crisis has intensified and has a widespread impact on everyone, businesses need to quickly adapt and find funding sources to cope with growing risks, while grabbing opportunities in green sectors," said the US-based financial services firm.
ESG bonds or sustainable debt instruments have become an increasingly popular option to mobilise funds in developing ESG projects, said Morningstar.
The firm highlighted sustainable investment trends for 2025 and the foreseeable future: environmental sustainability; social responsibility; corporate governance; investments geared towards adapting to a low-carbon economy; sustainability-focused debt instruments; the evolving landscape of ESG funds; biodiversity finance and the ethical considerations of artificial intelligence.
Testing ESG regulations
This year marks a pivotal moment for the EU as it reviews financial disclosure regulations for sustainability reporting and enters an era where the business sector must report sustainability information.
Both private and political sectors are calling on regulators to prioritise the significance and value of ESG principles.
In contrast, in the US Donald Trump's administration is expected to roll back ESG-related initiatives. These potential actions, including exiting the Paris Agreement, reducing or eliminating clean energy subsidies, and the Securities and Exchange Commission repealing rules on greenhouse gas emissions and climate risk disclosures, pose challenges to the transition towards a low-carbon economy and sustainable investment strategies.
Many other countries are advancing climate and sustainability disclosure efforts, with frameworks such as those developed by the International Sustainability Standards Board gaining prominence.
ESG fund landscape
A key driver of change is the ESG fund naming guidelines issued by the European Securities and Markets Authority to protect investors from the risk of greenwashing by setting minimum standards for funds in the EU to use ESG-related names.
As a result, roughly 30-50% of ESG funds in the EU are estimated to change their names by mid-2025, with the remaining funds expected to adjust their investment approaches to retain their ESG fund names.
Global fund closures are also expected to accelerate. The US ESG fund market is valued at US$353 billion, with the number of funds down from 647 at the start of 2024 to 595 at the end of September as asset values continue to rise, supported by a rally in US stock markets.
ESG funds in other countries, which now account for around 5% of global ESG funds, are also on the rise, but at a slower pace.
From goals to tangibles
Morningstar predicts the investment landscape will remain focused on decarbonisation, shifting from merely supporting businesses to setting clear goals and driving tangible actions.
Investors are expected to seek opportunities emerging from the energy transition, with the International Energy Agency estimating annual investments of more than $6 trillion through 2030 to support this shift.
The EU is working to enhance investor confidence in the EU green bond market by introducing new reporting and auditing standards. Under the EU Green Bond Standard, at least 85% of the proceeds from these bonds must be allocated to sustainable activities aligned with green objectives.
In addition, the industry's structure is fostering growth, driven by technological advancements, decreasing costs and rising energy demand.
Sustainable bonds
Morningstar anticipates issuance of sustainability-related social and environmental bonds will surpass $1 trillion this year, driven by lower interest rates and growing investor demand for these instruments.
Since 2021, high interest rates have dampened returns for green businesses, including wind, solar, batteries and electric vehicles. However, the outlook for 2025 appears more optimistic, according to the firm.
The US Federal Reserve is likely to lower interest rates, potentially boosting the performance of green industries, though this could be tempered by the potential repeal of tax incentives for green businesses under the Trump administration.
Morningstar also predicts an increase in green bond issuance dedicated to environmentally friendly initiatives and advancing the transition to a green society. This includes investments in companies producing lithium, a critical component for green technologies, and materials that help reduce greenhouse gas emissions in buildings.
Thai ESG funds in 2024
According to Morningstar Research (Thailand), the Thai government has prioritised ESG initiatives in line with global trends, offering tax incentives to promote investments that support a low-carbon society.
The Thai ESG Fund was introduced in late 2023 and gained popularity among some investors.
As of 2024, there were 53 Thai ESG funds with a combined net asset value of 32 billion baht, reflecting nearly 400% growth from 6.5 billion the previous year.
The funds attracted 26 billion baht in net inflows throughout last year.
A significant surge occurred in the third quarter last year after investment conditions were revised. The holding period for investment units was reduced from eight years to five, and the tax deduction ceiling raised from 100,000 baht to 300,000 baht.
"These changes led to substantial inflows, particularly in the last three months of the year, with total investment of almost 23 billion baht," said Morningstar Thailand.
Analysts attribute this growth to supportive government policies, including incentives for green investments and a broader shift towards ethical investing among both institutional and retail investors.
The surge also reflects growing investor confidence in sustainable financial products, as well as heightened awareness of ESG criteria, according to Morningstar.
Moreover, the rise in corporate transparency and reporting on ESG metrics has further bolstered trust and participation in these funds, setting the stage for continued expansion in the coming years, noted the firm.
Bond funds outperform
Criteria for Thai ESG funds are limited to domestic assets, but allow investments in both equities and debt instruments that meet ESG rules.
Current offerings include fixed income, mixed and equity funds, each catering to varying investor preferences.
Fixed income funds dominate the market, with a net asset value of 16.5 billion baht as of Jan 2, representing 51% of the market and achieving the highest growth and net inflows.
In comparison, equity funds have a net asset value of 11 billion baht, representing 35% of the market and posting a lower growth rate, while mixed funds accounted for the remainder.
Fixed income funds also attracted the largest share of net inflows, totalling 16 billion baht, or 61% of total market inflow of 26 billion baht.
Equity and mixed funds followed with inflows of 6.9 billion baht and 3.2 billion, respectively.
To meet growing demand for fixed income investments amid ongoing stock market volatility, asset management companies launched 23 new Thai ESG funds in 2024, including 10 fixed income funds, eight equity funds and five mixed funds.
The largest Thai ESG bond fund is the KKP Government Bond Thailand ESG Fund (KKP GB THAI ESG Fund), managed by Kiatnakin Phatra Asset Management, with an asset value of roughly 4.7 billion baht.
Meanwhile, K-ESGSI-ThaiESG, managed by Kasikorn Asset Management, drew the most inflows, attracting nearly 4.5 billion baht of investment.
In 2024, bond funds emerged as the top performers in the Thai ESG fund market. In sharp contrast to the overall market's average return of -3.4%, bond funds achieved an average return of 6.4%, while equity funds recorded the poorest performance with an average return of -4.2%.
Since their inception, bond funds have maintained the highest average annual return of roughly 6%, compared with -5.7% for equity funds.
The overall Thai ESG fund market delivered an average annual return of -2.5% since its inception.
Despite the negative average return, the potential for long-term growth, tax benefits and relaxed investment conditions make Thai ESG funds an attractive option for investors seeking tax-deductible investments, noted Morningstar.
ESG bond market review
The value of ESG bonds issued in Thailand totalled 179 billion baht last year, consistent with 2023 levels.
In November 2024, the Finance Ministry issued Asia's first sustainability-linked bond worth 30 billion baht.
Thailand became the first country in Asia, and the third globally after Chile and Uruguay, to issue this innovative financial instrument aimed at improving climate and environmental goals.
Thailand has 35 ESG bond issuers with an outstanding asset value of 815 billion baht, representing 4.7% of the Thai bond market.
Since ESG bonds were first introduced in 2019, their issuance value has grown eightfold, from 23 billion baht to 180 billion in 2023.
Sustainability bonds account for the largest issuance, reflecting both public and private sector efforts to fund social and environmental initiatives.
Globally ESG bond issuance reached $870 billion (32 trillion baht) over the same period, with green bonds leading the pack, highlighting the global push to fund environmental projects addressing climate change.
Investment benefits
Investors gain a couple of benefits from ESG bonds, including financial returns, said Morningstar. ESG bonds typically offer an interest rate of 3-5% per year, higher than deposit interest rates of 1-2%.
These bonds also provide social and environmental impacts for investors, providing both financial and emotional satisfaction, according to the firm.
UOB Asset Management (UOBAM) said ESG funds offer a beacon of opportunity in today's unpredictable global economy.
"They provide sustainable financial returns while aligning with global demand for responsible investment practices, focusing on companies committed to positive environmental practices, social responsibility and strong governance, thus mitigating risks and uncovering growth opportunities," said the company.
ESG investments reflect a shift towards sustainability and ethical considerations, appealing to investors who want to make a positive impact while securing their financial future, said UOBAM.
Prioritising ESG factors supports companies better equipped to handle economic challenges, regulatory changes and societal expectations. This approach offers resilience, growth and long-term value for both investors and society, said the asset manager.
Regarding investment advice for ESG bonds, Morningstar recommends investors review a bond's fact sheet and understand the bond type, return conditions and potential risks.
Investors should evaluate the credit ratings of bonds to assess default risk, with higher ratings indicating lower risk.
Diversification is also recommended to mitigate risks associated with concentration in one asset type, along with monitoring performance reports of the bond regularly to ensure funds are utilised appropriately and ESG goals are met, noted Morningstar.
Investing in ESG bonds is a medium- to long-term commitment, requiring regular evaluations to align with both financial goals and sustainability objectives, said the firm.