Asia has a big role to play in the global transition to net zero as it accounts for almost half of the world’s greenhouse emissions. The rise in green capital expenditure to meet climate challenges will mean significant bond issuances. Asia’s innovative companies within the Electric Vehicle and renewables energy ecosystems also offer investors interesting opportunities in the race to net zero.
Asia scored a few wins during COP27 although the failure to agree on greater emission cuts or to put an end to fossil fuel use disappointed many delegates. At the climate summit, it was agreed that a fund will be set up to cover the climate-related losses and damages that “particularly vulnerable” nations experience. This could be good news for some parts of ASEAN, such as Philippines and Thailand, where severe weather events in 2022 had resulted in a significant loss of agricultural output and disruption of livelihoods. In addition, a coalition led by the US and Japan announced that it will provide USD20bn to help Indonesia shut its coal power plants and bring forward its peak emissions date by seven years to 2030.
The rise in green infrastructure
It is estimated that USD4 to 6tr per annum would be needed globally this decade and beyond to transit to a low-carbon economy. Asia has a big role to play given that it accounts for five out the world’s ten largest greenhouse gas emitters. Asia alone would probably need USD1tr per annum to help high carbon emitting sectors such as the power generation, transportation, property, agriculture, and manufacturing industries in their net zero transition. This has multiple implications for investors.
Asia’s sustainable bond market will play a pivotal role in funding sovereigns and corporates in their transitions. We expect to see more Green, Social and Sustainability bonds being issued by property companies to build and refurbish energy-efficient buildings. Power generating companies are also likely to raise funds to invest in renewable energy. Meanwhile governments and quasi-governments will seek debt financing to build low/zero carbon transportation infrastructure. Multilateral development banks as well as supranational developmental institutions can support issuances in domestic debt markets by providing guarantees and sponsorships. Meanwhile, the rise in transition capital expenditure (green capex) is extremely commodity intensive, which should benefit the Emerging Markets.
Getting to net zero
Asia is leading innovation in the Electric Vehicle (EV) battery and renewable energy ecosystems. China is a world leader in solar manufacturing and dominates the world’s EV supply chain. Indonesia is planning to build the world’s largest green industrial park in North Kalimantan (solely powered by hydropower and solar), which will house high-tech green industries that will produce solar panels, green aluminium, and lithium-ion batteries. There are also companies within Malaysia’s vibrant Automated Test Equipment and Outsourced Assembly and Test industry that are designing innovative systems and equipment to detect abnormalities in production lines. Besides saving manpower and energy, detecting defects early significantly reduces e-waste that ends up in landfills. All these present exciting opportunities for investors.
Climate challenges are also impacting companies that are not operating in zero/low carbon sectors. The energy price hikes in 2022 have led some corporates to review their future energy demands and develop plans to manage these risks. While Asia may have lagged the Developed Markets in terms of Environment, Social and Governance (ESG) policies, investment and reporting, more Asian corporates are making efforts to improve their sustainability roadmaps and policies. The number of ESG policies in Asia has doubled since 20161.
Within Asia, investors are also embracing a more balanced approach when considering ESG factors, with a move away from exclusions to greater engagement. In particular, we see room for greater engagement especially on environmental and governance issues to drive long-term value amongst Japanese corporates. According to MSCI ESG Research, only 10% of Japanese companies are rated as ESG Leaders (ESG ratings of AAA, AA), far behind European companies.
Engagement favoured over exclusion policies
Asia’s big role in carbon trading
The demand for carbon credits has increased as more companies make carbon neutral or net zero commitments. According to a McKinsey study, global carbon offset demand is set to grow 15x by 2030 and 100x by 2050. Global initiatives to drive more transparency, standardisation, and detailed verification of carbon credit projects will help develop more robust carbon markets. At COP27, the Global Carbon Trust agreed to create standardised contracts for carbon credits, embed third-party monitoring and verification of project performance, as well as provide arbitration mechanisms for projects that fail to meet targets.
Asia can play a significant role as a carbon trading hub. There have been efforts to grow Asia’s carbon offset ecosystem with the establishment of the Climate Impact X, a Singapore-based global carbon exchange and marketplace, in 2021. Hong Kong also launched a carbon trading platform in October 2022, while Malaysia has expressed similar ambitions. The regulatory environment is also becoming more favourable for growing the carbon offset market with Singapore allowing 5% of carbon tax to be met by carbon offsets.
Meanwhile, Asia’s high quality natural ecosystems mean that more than 50% of nature-based carbon offset supply (using plants, trees, soil or the ocean to remove carbon from the atmosphere) resides in Asia, potentially making Asia a key supplier of nature-based carbon offsets. The average price of carbon offsets rose by more than 50% from 2020 to 2021 with high quality nature-based credits commanding more than a 200% premium at USD8/tCO2e2. Therefore, Asian companies that are able to supply high quality offsets can benefit from offset price increases although specialised resources and knowledge will be needed to develop nature-based solutions (includes conservation, afforestation, reforestation, forest management, grasslands). Only high-quality carbon offsets can help with offsetting residual emissions that cannot be reduced and enable companies to better meet their net zero commitments. This may help to improve ESG ratings in the long term, although it is still early days.
Joanne Khew, ESG Specialist, Eastspring Singapore
Rong Ren Goh, Portfolio Manager, Fixed Income, Eastspring Singapore
Bryan Yeong, Portfolio Manager, Equities, Eastspring Singapore
Steven Gray, Portfolio Manager, Equities, Eastspring Singapore
Sundeep Bihani, Portfolio Manager, Equities, Eastspring Singapore
Samuel Hoang, Portfolio Manager, Equities, Eastspring Singapore
Mapping another new normal
Dec 22 | 6 min read
As we head into 2023, another new normal confronts us. Just as several pandemic-induced ...
Tracking China’s re-opening
Dec 22 | 5 min read
China’s zero-COVID policy and the turmoil in its property sector had weighed ...
Embracing a different Asia
Dec 22 | 6 min read
Asia’s long-term investment attributes remain intact despite a reset in the growth ...
Pursuing resilience amid volatility
Dec 22 | 5 min read
Portfolio resilience is going to be very important over the next 12-18 months ...
1 PRI, data compiled by Goldman Sachs Global Investment Research. Cumulative capital market ESG regulations and amendments, January 2000 to August 2021.
2 Carboncredits.com live carbon price: https://carboncredits.com/carbon-prices-today/
Singapore by Eastspring Investments (Singapore) Limited (UEN: 199407631H)
Australia (for wholesale clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore, is exempt from the requirement to hold an Australian financial services licence and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Australian laws
Hong Kong by Eastspring Investments (Hong Kong) Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong.
Indonesia by PT Eastspring Investments Indonesia, an investment manager that is licensed, registered and supervised by the Indonesia Financial Services Authority (OJK).
Malaysia by Eastspring Investments Berhad (531241-U).
Thailand by Eastspring Asset Management (Thailand) Co., Ltd.
United States of America (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is registered with the U.S Securities and Exchange Commission as a registered investment adviser.
European Economic Area (for professional clients only) and Switzerland (for qualified investors only) by Eastspring Investments (Luxembourg) S.A., 26, Boulevard Royal, 2449 Luxembourg, Grand-Duchy of Luxembourg, registered with the Registre de Commerce et des Sociétés (Luxembourg), Register No B 173737.
United Kingdom (for professional clients only) by Eastspring Investments (Luxembourg) S.A. - UK Branch, 10 Lower Thames Street, London EC3R 6AF.
Chile (for institutional clients only) by Eastspring Investments (Singapore) Limited (UEN: 199407631H), which is incorporated in Singapore and is licensed and regulated by the Monetary Authority of Singapore under Singapore laws which differ from Chilean laws.
The afore-mentioned entities are hereinafter collectively referred to as Eastspring Investments.
The views and opinions contained herein are those of the author, and may not necessarily represent views expressed or reflected in other Eastspring Investments’ communications. This document is solely for information purposes and does not have any regard to the specific investment objective, financial situation and/or particular needs of any specific persons who may receive this document. This document is not intended as an offer, a solicitation of offer or a recommendation, to deal in shares of securities or any financial instruments. It may not be published, circulated, reproduced or distributed without the prior written consent of Eastspring Investments. Reliance upon information in this document is at the sole discretion of the reader. Please carefully study the related information and/or consult your own professional adviser before investing.
Investment involves risks. Past performance of and the predictions, projections, or forecasts on the economy, securities markets or the economic trends of the markets are not necessarily indicative of the future or likely performance of Eastspring Investments or any of the funds managed by Eastspring Investments.
Information herein is believed to be reliable at time of publication. Data from third party sources may have been used in the preparation of this material and Eastspring Investments has not independently verified, validated or audited such data. Where lawfully permitted, Eastspring Investments does not warrant its completeness or accuracy and is not responsible for error of facts or opinion nor shall be liable for damages arising out of any person’s reliance upon this information. Any opinion or estimate contained in this document may subject to change without notice.
Eastspring Investments companies (excluding joint venture companies) are ultimately wholly owned/indirect subsidiaries of Prudential plc of the United Kingdom. Eastspring Investments companies (including joint venture companies) and Prudential plc are not affiliated in any manner with Prudential Financial, Inc., a company whose principal place of business is in the United States of America or with the Prudential Assurance Company Limited, a subsidiary of M&G plc (a company incorporated in the United Kingdom).