As emerging market (EM) impact investors, care for the environment has long been a concern for us. In fact, the environment is one of five key investment themes we’ve identified as part of our impact investment process.
By investing in sustainably run companies whose products or services help address environmental and societal challenges, our intent is to have a positive impact and advance the UN’s Sustainable Development Goals (SDGs) while generating an attractive financial return.
Why climate change risks are even greater in emerging markets
Research suggests developing countries will be disproportionately affected by the negative effects of climate change. This is partly due to a heavier reliance on climate-sensitive sectors like agriculture, forestry and tourism compared to their developed country counterparts.
At the same time, emerging and developing economies are expected to be the biggest source of emissions growth over the coming decades, according to a report by the International Energy Agency (IEA).
The research estimates that the average cost of emissions avoidance is around half the level in developed economies, making clean energy investment in these regions a potentially cost-effective way to reduce global emissions.
How EM companies are playing a major role in environmental impact
Numerous EM companies are facilitators of positive environmental impact, and are investing and contributing to the clean energy transition.
They span various industries, all of which are forecast to see strong demand growth as part of the energy transition. Manufacturers of electric vehicles (EVs), EV batteries, and renewable energy systems, including solar panels and wind energy equipment, play a direct role.
Semiconductor manufacturers play a more indirect role, but their products are an essential component in green transport such as EVs, and in improving the energy efficiency of industry.
Why investors have an important part to play
As investors in EM, we see plenty of opportunities to invest in companies which can positively impact the environment, and which also see strong and consistent forecast demand growth. But it is not simply about adopting a “buy and hold” approach to companies; there is much more to consider, be it ESG, market competition, geopolitics, or valuations.
For example, understanding production processes and supply chains, their impact on the environment and people is essential to evaluating these investments. In particular, answers to questions such as: are plant power sources renewable, or do they still draw on fossil fuels? Is water required for production and how is this managed sustainably? Are working practices of a high standard regarding health and safety?
These are all important pieces of the puzzle.
Company disclosure and transparency has never been more important, and it is improving. But there is work still to do, and we as investors are uniquely placed to identify where companies fall short, to engage and help to drive change.
The competitive environment is a further factor to monitor across all these industries. Low cost of capital and subsidies for some industries has resulted in high levels of competition.
The scale of the opportunities in clean technology in emerging markets is significant. Unsurprisingly given its magnitude, mainland China is important in many of these areas, but there are opportunities across a range of emerging markets, from South Korea and Taiwan through to Brazil. Being active, engaging with companies and grasping the complexity of the opportunities is essential to generating a positive impact and sustainable shareholder returns.