- Companies are preparing for climate change in multiple ways. Green business models in areas such as solar energy and EVs feature as investment opportunities for us. We also invest in carbon-intensive companies that show real commitments and innovation to decarbonize.
- Our local presence in EMs positions us to capture these opportunities and advocate positive climate action with companies.
A Diverse Landscape
Global policies are currently projected to limit global warming to about 3°C above pre-industrial levels by 2100, which remains far from achieving the Paris Accords goal of well below 2°C, preferably 1.5°C. Several countries have made net zero commitments to meet this goal. Within EMs, the landscape varies considerably, ranging from countries that have announced meaningful carbon targets to those that have yet to declare any significant policies.
EM governments will need to adopt growth-enhancing fiscal and structural reforms that promote low-emission resilient investments, backed by productive and cost-effective climate policies, to achieve climate-compatible development. Against this backdrop, our objective to understand the climate commitments of our investee companies incorporates both local and global perspectives, recognizing that the pace of decarbonization and the associated strategies will differ globally.
Take China as an example: it is the largest carbon emitter in aggregate, yet its emissions per capita are lower than various developed nations. We therefore seek to understand local country, industry, and company requirements when we integrate climate considerations into our investment process—a pragmatic and real-world approach. We also recognize that some industries will need to decarbonize at a much faster pace than others, hence our approach is sector-specific, which also helps to prioritize our engagement efforts.
Countries Build Climate Resilience
Key EMs have announced climate-aware ambitions (including legislation for some) to limit and reduce emissions, as well as more direct plans to tackle major environmental concerns.
- China’s efforts to achieve net zero carbon by 2060 will contribute significantly to the world as the country accounts for 30% of global carbon emissions,1 and its pledge represents two-thirds of aggregate emissions across countries that have committed to net zero. The transformation of China’s energy mix will be critical as the majority of its emissions comes from power generation and industry. Policymakers have targeted these areas with guidelines that enforce the adoption of green energy, carbon-efficient manufacturing and energy storage. It is estimated that China’s wind and solar generation mix will increase from less than 10% in 2020 to over 30% in 2030.2 With the figure already near 39%, 60% has emerged as a potential new target.3
- Although India does not have a net zero goal for now, its plan to reduce the emissions intensity of its gross domestic product by 35% from 2005 levels by 2030 focuses on real impact.4 Its ambition has fueled its push for EVs, as well as its call for state-owned enterprises to mitigate climate change. India also aims to increase the share of non-fossil fuels in its overall electricity generation to 40% by 2030.
- Brazil already has one of the cleanest electricity portfolios in the world. More than 80% of its energy sources are sustainable, with nearly 65% coming from large hydropower projects and more than 15% from wind, solar, and biomass.5 In addition to plans to diversify its renewable energy sources, the Brazilian administration has committed to reach climate neutrality by 2050 instead of 2060; curb illegal deforestation by 2030 and increase funds for related law enforcement; and keep the nationally determined contribution target of reducing 43% of greenhouse gas emissions by 2030 compared to 2005 levels.6
Companies Take Climate Action
The recent IPCC report—the first major review of climate change science since 2013—has strengthened the evidence linking emissions and weather, thus holding certain industries and governments directly responsible for this change. This intensifies the global ambition of achieving long-term net zero carbon emissions and spotlights the implications of how capital markets need to adjust, particularly with the upcoming COP26 meeting later this year.
Companies in EMs are preparing for climate change in multiple ways. Some are seeking to meaningfully decarbonize in high-emitting sectors, while others are providing environmental solutions through their products and services. Industrial change has accelerated, with many companies employing technology to reduce carbon emissions, cutting high-pollution industrial activities, and pivoting their corporate strategy toward green businesses such as renewables and EVs. Of particular importance have been advancements in technology driving improved battery energy density and increased solar panel conversion efficiency. Green hydrogen is also an area that is witnessing heavy investments.
Our Role in the Solution
Green revenue-generating business models feature as investment opportunities where we see related demand uptake and contributions to positive environmental outcomes. The solar supply chain, electrolyte production, EVs, and the hydrogen supply chain are key examples.
We also invest in companies in carbon-intensive sectors such as cement and steel where there are real commitments and innovation to decarbonize. These companies have a critical role to play in reducing global emissions. With carbon imposing an economic cost on these business models, decarbonization becomes a material ESG factor for consideration.
Our investment process incorporates top-down policy and industry studies, bottom-up company research, and comprehensive ESG analysis including climate considerations, all of which help identify investment opportunities and seek to reduce overall portfolio risks. Factoring material environmental issues into our company forecasts can lead to adjustments in growth projections, margin expectations, or discount rates. In addition, as active stewards of our clients’ capital, engagement is a key tool that enables us to understand and facilitate a company’s ESG journey, which is supported by a local footprint and access to management.
Climate change is an issue that will span multiple decades and its importance will only increase, with the dynamics varying by market. We believe opportunities lie with companies providing climate solutions and those that are innovating to decarbonize their operations. As such, a company’s preparedness to manage material climate issues is a critical component of our bottom-up assessment of earnings sustainability. We seek to leverage our local EM presence to capture these opportunities and advocate positive change with companies, aiming to deliver better outcomes.
What Are the Risks?
All investments involve risks, including possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with investing in foreign securities, including risks associated with political and economic developments, trading practices, availability of information, limited markets and currency exchange rate fluctuations and policies; investments in emerging markets involve heightened risks related to the same factors. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks.
There is no assurance any estimate, forecast or projection will be realized.
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1. Source: Goldman Sachs Research, “China de-carbonization: A new eco-system of green tech,” May 31, 2021.
3. Source: Mint, “India to achieve target of reducing 35% emissions intensity before 2030: Javadekar,” November 26, 2020.
4. Press Information Bureau, Government of India, “Future power bids to include bids for advanced technology: said Shri R. K. Singh at ‘India PV Edge 2020’,” October 6, 2020.
5. Source: 0 Estado de São Paulo, “Brazil is a model in clean energy generation,” December 9, 2020; Government of Brazil, “Renewable energy sources represent 83% of the Brazilian electricity matrix,” January 28, 2020.
6. Source: Government of Brazil, “Brazil moves towards further reducing greenhouse gas emissions,” April 22, 2021.