Investors should not lose sight on sustainability as a long-term investment theme
4-minute read
07/11/2022
Tai Hui
Investors should embrace the fact that there are long-term structural factors that would run through multiple economic and market cycles.
Tai Hui
Chief Market Strategist
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In brief
- In addition to the objective of reducing carbon emissions, recent energy security concerns will fast track the global transition towards sustainable energy production
- In order to bolster energy security and attain net-zero targets, we expect an increasing amount of fiscal spending into sustainable infrastructure and renewable energy production initiatives. This offers long-term structural tailwinds to the energy transition theme
The market volatility of 2022 has been difficult for all investors since few asset classes were able to deliver positive returns. While sustainability and a broader consideration of environmental, social and governance (ESG) issues are still highly relevant to institutional investors, they could be pushed to the backburner for retail investors in Asia. This would be a mistake since a number of events in the past few months have reiterated the importance and relevance of sustainable investment.
Europe has been a pioneer in reducing carbon emissions and incorporating ESG and sustainable investment into financial investment. The greater adoption of renewable energy was primarily to reduce carbon emissions. The Russia-Ukraine conflict has escalated the importance of energy security, adding more urgency to this transition. While renewable energy is not going to solve the potential energy shortage for this coming winter, or even in the next few years, reducing dependence on Russian energy imports should be a priority. If this can be combined with decarbonization, governments are likely to get more buy-in from voters and the business sectors.
Europe’s move towards sustainable power generation forms only part of its transition towards green energy. In addition to this, they also need greater investment into improving energy efficiency. This could be done via refitting insulation in buildings and boosting public transportations. European governments have already earmarked grants and loans (see Exhibit 1) to finance these projects. Investors can also anticipate strong policy support.
In China, the government has been emphasizing its target to be carbon net-zero by 2060. This is clearly an ambitious target considering China is the largest emitter of greenhouse gasses in the world. In early June, the Chinese government announced its renewable energy development plan for the 14th Five-Year plan (2021-2025) period. It looks to modernize renewable energy development in technology and production. It aims to have renewable energy to be responsible for more than 50% of the expected increase in electricity consumption, doubling the power generated by wind and solar power.
Exhibit 1: Eurozone proposed spending on green infrastructure
Percentage of MFF* and NextGenerationEU** spending package
Source: European Commission, J.P. Morgan Asset Management. *MFF stands for the Multiannual Financial Framework, the European Union’s long-term budget plan running from 2021 to 2027. **NextGenerationEU is a fiscal recovery package established to help repair economic and social damage brought by the COVID-19 pandemic.
Guide to the Markets – Asia. Data reflect most recently available as of 30/06/22.
We would expect a significant policy tilt towards building the renewable energy sector. The impact of this transition in China would go beyond the domestic market. China could play a critical role in the global energy transition given the need for renewable energy technology and equipment across the world to reach net-zero targets. Infrastructure continues to be a key policy lever to boost economic growth during downturns. Highways, high speed rail, ports and airports were the focal point of these spending in the past, we can add renewable energy to this list going forward.
The Japanese government is planning to set up a JPY 20trillion fund to promote investment in new power grid technology, energy-saving homes and other technologies that can help the country to reach carbon neutrality by 2050. In addition to renewable sources of power generation and distribution network, electric vehicles and battery technology could also be the focus.
Investment implications
Amid the talks of economic recessions and high inflation, investors should embrace the fact that there are long-term structural factors that would run through multiple economic and market cycles. The business of reducing greenhouse gas emissions is one of these long-term themes. In Europe’s case, the current geopolitical backdrop is likely to accelerate this transition, even though in the very short term, more fossil fuels are used as a stop-gap measure.
As we see in the three examples above, there is a considerable drive from governments to achieve carbon neutrality. This is not only about reducing emissions. Given the importance of this transition, there is a significant incentive for nations to be leaders in the field of renewable energy production, storage and distribution. Both financial resources and industry policies are expected to be dedicated to nurture these technologies' development. This could potentially bring rapid growth, but at the same time build strong resilience against the ebb and flow of economic cycles.
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