China overtook the US as the largest climate investment market outside Europe in 2021, a new report from Morningstar analysts shows.

Boosted by significant inflows and new fund launches, assets in climate funds domiciled in the country hit a record high of $46.7bn, a 149% increase on 2020 figures. US climate fund assets grew by 45% to to $31 billion in 2021, by comparison.

Globally speaking, Morningstar had identified as many as 860 managed funds and exchange-traded funds (ETFs) with climate mandates by the end of 2021, with assets doubling throughout the year to $408 billion as product developments and new regulations bit. 

Despite China's rise, Europe remains the largest (and most diverse) climate funds market, accounting for more than three quarters of global assets ($325 billion).

"Fund investors globally have a growing number of choices to mitigate climate risk in their portfolios and invest in climate opportunities," report author and Morningstar global director of sustainability research Hortense Bioy says. 

"The introducton of the sustainable finance disclosure regulation in March ratcheted up the demand for innovative investment strategies incorporating climate considerations.

"Recent improvements in climate-related data [also] enable asset managers to better understand and interpret the climate profile of companies and countries, and, as a result, design strategies that meet investors' needs and preferences."

Optimism is not the only tone colouring analysts' words, however. Grave concerns still remain over the consistency of available data used to inform investor decisions on climate investing, and that's particularly the case with clients of financial advisers sporting newly-minted climate or ESG-centric portfolios for sale.

Last week, Morningstar spoke to a range of internal spokespeople on ESG investing, ahead of updated Mifid II rules due to come into affect in August this year. This is a legal framework that brought sweeping changes to firms that manufacture, distribute and trade financial intruments in the European Union. Though the points made during the conversation relate to the topic of ESG as a broad church, the relevance to climate strategies is just as apparent.

"There's basically a data gap," Morningstar director of client solutions Anastasia Georgiou said in our studio.

"The regulation comes into play on 2 August. Most of the data that is required may not even be in the market. So, today, the only data that sort of meets the needs of the requirements is the SFDR flags, so these are the Article 8 and 9 funds in the markets, and that's really only what we call Level 1 [...] where asset managers define whether funds are Article 8 or 9.

"The detail – so what is the minimum exposure within those products – is missing, as are the reports that will start to come out in January, and also the taxonomy alignment piece."

A product of the European Union, the taxonomy was agreed in 2019, and represents a classification system defining environmentally sustainable economic activities, based on six objectives, including climate change mitigation, climate change adaptation, sustainable use and protection of water and marine resources, and the transition to a so-called "circular" economy.

To read a copy of the report, click here