By Saurabh Chugh, portfolio manager, Fullerton Fund Management
There have been seismic changes in the investment landscape around the world in recent times and Asia is no different. The COVID environment, coupled with geopolitical risks and supply constrained resources, is likely to reinforce de-globalisation trends over time. Energy prices, in particular, have increased significantly as investment and supply are still recovering. Although these prices may be elevated over the short to medium term in 2022, the Russian war on Ukraine that started in Q1 2022, highlights the need to accelerate the transition away from fossil fuels to clean and renewable energy.
China will be core to the global green transition effort in the long-term
Climate change considerations are creating new investment opportunities across green energy, as well as across the broader economy, as related infrastructure spending increases. Across Asia, China remains a key focal point for such alpha opportunities. Its long-term objective to reach peak carbon usage by 2030 and carbon neutrality by 2060, implies that spending every year will remain significant (achieving peak carbon usage by 2030 may require an extra $6.5tn (£5.1tn) in infrastructure investment).
According to its latest five-year plan for the energy sector, the country is planning to build out more renewable power to facilitate the green transition and boost production of green hydrogen to curb emissions. Compared to the 13th Five-Year Plan (FYP), the installation of renewable energy systems during the 14th FYP will double translating to more than 100GW additions per year.
Furthermore, electric vehicle (EV) sales in China continue to outpace the industry by a large magnitude. According to a McKinsey study, projected share of EVs in the light vehicle market should reach 37% by 2030, with many industry participants expecting this threshold to be crossed much earlier. Apart from the much-publicised growth in EV and renewable sectors, there are many opportunities to consider. These include the upgrading of buildings, recycling and regeneration of plastics, as well as cleaner technologies for polluting industries such as steel, cement and aluminium.
In addition to being one of the biggest investors in green transition, China is a global leader in manufacturing of many clean technologies such as solar, electric vehicles, batteries and hydrogen, whose adoption is poised to increase at a meteoric rate.
This may create a prolonged ‘double’ boon for investors in China, with opportunities across infrastructure investment, followed by greater spending on renewables. Chinese companies are well positioned to benefit, not just from strong demand for renewables at home, but also from abroad. For example, China is Europe’s largest trade partner, and spearheaded by new wind and solar projects, Europe has pledged to get an extra 5% of its energy needs from renewables by 2030 (i.e. increasing its target to 45% from 40% for EU energy from renewable sources. Source: 18 May 2022 Reuters).
A good example of a leading company at the forefront of green transition is Longi Green Energy, a major manufacturer of photovoltaic (PV) solar modules and a developer of solar power projects, and the world largest manufacturer of monocrystalline silicon wafers. Longi took early initiatives to contribute to the UN SDGs as a responsible leader in the PV industry. In 2020, Longi joined RE100, EV100, EP100 and the Science Based Target initiative (SBTi), the only Chinese company to join all four international initiatives. It has also joined the Solar Industry Forced Labour Prevention Pledge and supports the industry-led supply chain traceability protocol.
There are significant alpha opportunities in businesses that are demonstrating an improvement in ESG, which makes it more rewarding and interesting for investors. It would be incomplete, however, not to mention the various challenges still associated with ESG and green transition in Asia - from the lack of sufficient incentives for companies to adopt sustainability related best practices, and the unavailability of data sets, to unreliable information from rating agencies, as well as limited influence possibly to affect change, due to the primary ownership structures of many Asian companies (which are possibly state-owned, or dominated by large controlling-shareholder groups).
In tandem with these challenges, however, is the increased scrutiny from regulators on Asian companies. For example, regulatory bodies across China, Hong Kong, Singapore and India have been discussing introducing standards similar to the EU’s SFDR.
Nonetheless, in our view these challenges are outweighed by the tailwinds offered by ESG investing and the green transition theme in Asia. As the fastest growing region, investors can capitalise on opportunities early in business’s growth journey, which means that the investments can be more impactful, as the direction of travel for ESG credential improvements rises. Given Asia is still at the early stages of its ESG journey, the incremental impact as well as benefits from its ESG efforts may be greater, relative to other markets.
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