By Galina Besedina, senior emerging equity analyst and portfolio manager and Paulo Salazar, head of emerging equities at Candriam.
Cinderella had so much fun at the ball that she had to run downstairs to escape in her carriage before it turned into a pumpkin with the last stroke of midnight. Charles Perrault’s endearing fairy tale was made into a ballet and several operas, for the enjoyment of children and adults alike, such as Jules Massenet’s Cinderella, premiered in 1899 in Paris. But we doubt that, like Cinderella, humanity wants to be surprised by a delay in the energy transition.
Emerging markets: Global leader in financing clean energy new construction assets new construction
It will be impossible to achieve the world’s all-important net zero targets without emerging markets. Representing more than 62% of the world’s population and 48% of global emissions, emerging markets should be a key target for sustainable impact investors. The scale of the challenge is enormous: emerging markets need to find an additional $94.8 billion to achieve the transition to net zero by 2060.
Mostly, however, international investors seem to be staying on the sidelines, spooked by geopolitical risks and uncertainty. So how can responsible investors support the energy transition in emerging markets without compromising their objectives?
Focus on climate change opportunities
Some emerging market companies will be among the most important enablers of the energy transition, not only in their own markets but also in the rest of the world.
In the decade between 2020 and 2030, for example, global solar photovoltaic (PV) and wind power generation capacity will quadruple. Most solar panel producers are based in Asia. During the same period, electric car sales are expected to grow by about 18 times. Solar PV is now one of the cheapest energy options globally, and China and the rest of Asia will grab the lion’s share of the solar power generation expansion pie by 2028. Just a year ago, by the end of 2021, China already had 300 GWt of installed solar capacity compared to 160 GWt in the European Union (EU). And it goes without saying that there are also electric vehicles.
As far as electric vehicles are concerned, the envisaged shift towards net-zero emission mobility in developed economies cannot be achieved without emerging markets. For example, the EU has recently decided that all new cars and vans registered in Europe should be zero-emission by 2035. As an intermediate step towards zero emissions, the new CO2 standards will also require average emissions from new cars to be reduced by 55% by 2030, and from new vans by 50% by 2030.
Given that the battery represents a very important part of the price of an electric car, Asia is set to become the world’s battery workshop, aided by its collective dominance throughout the supply chain. along the entire supply chain.
According to Benchmark Minerals, China will have 322 gigawatt hours (GWh) of production capacity in Europe by 2031, with South Korea second with 192GWh, followed by South Korea with 192GWh. capacity in Europe by 2031, with South Korea second with 192GWh, followed by France and Sweden. France and Sweden. The United States ranks fifth, thanks to Tesla’s Berlin plant, followed by Germany and Norway. The United Kingdom is in eighth place with only 20GWh.
And other ecological facilitators…
Green enablers are producers of building blocks for a more circular and energy-efficient global economy. These include major suppliers of copper and lithium, metals that are essential for decarbonization. Another example is semiconductor producers, which are mostly manufactured in Asia and play a key role in reducing electricity consumption, and whose demand is growing.
To identify specific investment opportunities we believe that investors should create a comprehensive universe of emerging market companies that play a positive role in providing climate solutions. Therefore, Candriam’s approach is to aggregate these companies around different themes, such as electric vehicles, renewable energy vehicles, renewable energies, software, recycling, and smart grids.
In our experience, there are many “hidden gems” among the emerging companies, whose activities have little to do at first glance with the energy transition, but which actually turn out to be important contributors. For example, the Taiwanese financial services company Chailease is not only a specialist in leasing, hire-purchase, import and export, as well as direct financing, but also one of the largest owners of solar power plants in the country.
WEG SA is a well-known international producer of electric motors based in Brazil, generators, transformers, gearboxes, and geared motors. What is less well-known is the company’s high exposure to renewable energy, e-mobility, and industrial automation.
Siemens is experiencing strong demand in India for industrial decarbonization solutions in the form of waste heat recovery systems, biomass solutions, and retrofits and upgrades with energy-saving solutions such as eco-designed transformers. transformers.
Yadea is the largest player in China’s electric two-wheeler market, with nearly one-third of the domestic market. one-third of the domestic market. The company designs develop, manufactures, and sells electric scooters, electric bikes, and related electric scooters, electric bicycles, and related accessories. What we find particularly interesting is that Yadea has also interesting to us is that Yadea has also developed graphene batteries, which offer an affordable alternative to acid batteries. affordable alternative to acid and lithium-ion batteries.
Key enablers clearly include the most obvious contributors to the energy transition, such as Sungrow Power Supply, a Chinese manufacturer of solar inverters (PV inverters) with a global market share of 21% in 2021. A solar inverter is a device that converts the energy generated by a solar panel into a regular electric current that can feed a local power grid.
Focus on what is important
Global net zero will be achieved when man-made greenhouse gas (GHG) emissions are reduced to the absolute minimum, while the remaining “residual emissions” are removed from the atmosphere by plants or new technologies specifically designed to do so. specifically designed for this purpose.
Historically, advanced economies have emitted more carbon than emerging markets. The advanced economies of Europe and the United States were also the first to reduce emissions. However, a global journey will not succeed until emerging markets are incentivized to take equally effective action and investors play a major role in directing capital flows to energy transition enablers. So that humanity does not have to jump from riches to rags with the last peal of the bell, like Cinderella.