Is “decarbonization” the next investment trend?

Global warming is a common challenge facing the world. In order to cope with the “heat wave”, China has pledged to peak in carbon emission by 2030 and strive to achieve carbon neutrality by 2060.

Sustainable investment has attracted much attention from the market, so what investment opportunities will this bring? Ronald Wu, Head of ESG & Sustainability Research, APAC, UBS and Ken Liu, Asia Utilities Analyst, UBS served as guest speakers at the “New Vision of ESG Investment in China” seminar hosted by the Institute of International Finance (IIF).

“Green” finance facilitates sustainable investment

It is daunting to achieve “carbon neutrality” while pursuing economic development. It requires the transformation of production processes and the upgrading of industrial technology. Achieving this requires huge investments in improving the energy infrastructure as well as the support of financial policies.

At present, the scale of China’s green credit exceeds RMB 11 trillion, ranking first in the world, while the scale of green bonds exceeds RMB 1.2 trillion, ranking second in the world. Ronald Wu, Head of ESG & Sustainability Research, APAC, UBS believes that policies are an important driving force for the development of sustainable finance in China.

Ronald said: “In 2012, the China Banking and Insurance Regulatory Commission issued guidelines on green credit, and the scale of green credit has continued to grow steadily in recent years. In 2015, the People’s Bank of China also issued regulations on the administration of green bonds. Looking ahead, we believe that these policies will continue to support sustainable finance. In the next five-year plan, we expect related sustainable financing will double compared to current levels.”

In addition, information disclosure is another driving force for the development of green finance. Better disclosure improves data access and quality, which is critical to promote ESG integration.

UBS conducted a survey of 160 asset management managers in the Asia-Pacific region and found that 90% of them expect to integrate ESG factors into analysis and decision-making. However, less than 10% of them integrate factors such as climate change, resource scarcity, or demographic structure into their investment decisions in practice.

“Lack of data and poor data quality are the main causes for this,” Ronald said. “Asset managers need to analyze investment returns and risk exposure, which requires more data, especially standardized data.”

Which industries will benefit from ESG Investment?

Given China’s stated goal of carbon neutrality, what changes will it bring to various industries and which industries will benefit from them? This is a topic of particular concern to investors.

Ken Liu, Asia Utilities Analyst, UBS believes that this issue can be viewed from the perspective of carbon emissions: industries with more daunting tasks of “decarbonization” will benefit more from the policies.

1. Power industry

About 40% of China’s carbon emissions come from the electricity sector. In order to reduce carbon emissions, it is necessary to switch power generation from coal-fired to more renewable energy sources. Therefore, related sectors will benefit greatly.

Regarding investment opportunities in renewable energy, Ken remarked that wind energy and solar energy present better prospects than hydropower and nuclear energy for two key reasons.

First, the current prices of wind energy and solar energy in China are relatively low, and the cost will continue to fall in the future.

Second, China enjoys multiple supply chains in the production process of wind energy and solar energy, including the manufacturing of solar panels and the production of wind turbines. About 50% of the world’s wind power is generated in China. Meanwhile, China accounts for 70% to 90% of supply chains for solar energy. China will continue to be a major player in wind and solar energy.

2. Industrial field

About 40% of China’s carbon emissions are generated from industrial sectors, including steel, cement, chemicals, and petroleum, which are all “carbon-intensive” industries. Ken said that the benefits of these industries will be reflected in two aspects:

The first is to change the production process. For example, changing the method of steelmaking and transforming to new technologies will greatly reduce carbon emissions in the production process.

The second is through seeking new alternative materials. For example, seeking alternative materials for cement and steel or using more biodegradable plastics in the chemical industry might drastically reduce carbon emissions.

3. Electric vehicles

What may surprise investors is that transportation accounts for only 10% of China’s total carbon emissions. Although its carbon emissions are not as severe as the power and industrial sectors, electric vehicles are still an area to watch. Electric vehicle and battery manufacturers will benefit the most from ESG.

Ken said: “The current penetration rate of electric vehicles in China is about 5%. But we believe that by 2040, 100% of road traffic could be conducted by electric vehicles. Therefore, the potential of the electric vehicle industry is huge.“

Technological innovation and other factors that could cause disruption

Across renewable energy sectors, advances in technology are occurring regularly.

In the field of solar energy, polysilicon is a key material in solar panels. However, there are discussions about developing new materials. Ken gave an example, “If perovskite alloy is combined with polysilicon, the cost of solar panels will be greatly reduced by 90%, and its power generation efficiency will increase from the current level of 24% to 50%.”

In addition, the development of innovative technologies is also underway in the field of clean energy such as wind energy, hydrogen energy, and lithium batteries. These will continue to be the focus of the capital market.

Ken said: “Investors are actively looking for disruptive technologies and they are willing to invest in these technologies. However, if investments are made too early, decent returns from the companies may not be realized. Therefore, timing is a critical and difficult issue for investors. “

However, looking forward to the future, technological innovation will continue to drive development, and “decarbonization” investment is still the general trend. Ken stated, “Just like in the early days of e-commerce, people were not initially keen. However, investors were still willing to invest and the long-term trend was fueled as a result. This trend will also apply in terms of investment in ‘decarbonization’.“