How Asia’s investors can play a pivotal role in addressing climate change
Viewing the real time impact of global warming doesn’t seem like the most obvious tourist attraction. Yet in July, Chinese sightseers flocked to a giant thermometer located in the Flaming Mountains in Xinjiang province, which showed record surface temperatures of 80 °C. Record high temperatures have been registered in many other parts of Asia this year, including India (49.2°C), Japan (38°C), and Thailand (45°C). Other dramatic weather events are claiming lives across a region that is now at the centre of the climate crisis, according to the World Economic Forum (WEF).
The WEF argues that the battle for net zero will be won or lost here, since Asia is both the “most vital engine” of global economic expansion and the part of the world “most vulnerable to the impacts of unchecked emissions growth.”
Faced with mounting public pressure, Asian authorities are increasingly active. China, for example, is aiming to hit peak emissions before 2030 and reach net zero by 2060, while India aims to be carbon neutral by 2070. Other Asian countries, including Singapore, Malaysia, and Vietnam, are focusing on reaching that goal by 2050.
Businesses across the region, including Pictet Asset Management, are striving to play a part by making their own commitments to sustainability.
Consumers, investors and indeed every element of society can contribute to the effort to mitigate the impact of climate change, a megatrend that Pictet Asset Management believes can function as a catalyst for long-term growth and give rise to new business opportunities.
A framework constructed in collaboration with experts at the Copenhagen Institute for Future Studies helps to define and monitor these megatrends. Part of the process involves gauging the extent to which a particular megatrend is a long-term source of growth for each of its thematic equity strategies.
Unlocking opportunities for sustainable investing
These megatrends provide opportunities for investors. They can help address climate change by supporting companies that seek to alleviate the problem and gain exposure to emerging technologies — from renewables to AI and more, thus becoming part of the green economy, which will become increasingly influential in the decades to come. This should create the potential to receive a positive return on investment. Yi Du, senior investment manager for thematic equities at Pictet Asset Management, said, “Within this decade, we have observed massive energy transition. Technological advancements are making renewable power more appealing than traditional fossil fuels.”
Pictet Asset Management aims to capture opportunities across the whole transition by focusing on clean energy. Investing in listed renewable energy companies is an obvious route. But they are in increasingly short supply. So, investors seeking green energy opportunities need to extend their reach within the energy transition ecosystem.
Advances in technology underpin energy transition
Enabling technologies such as battery storage and power-management semiconductors are needed for the transition to a low-carbon economy. Electric networks, smart grids, and car-charging infrastructure are also necessary. Energy efficiency is necessary to reduce the carbon footprint of resource-heavy industries such as transport, construction, and manufacturing.
The operating outlook for environmental solution providers is also improving, and reflects an increase in support from governments and consumers. This includes subsidies and tax credits for environmental protection and solutions. At the same time, the penalties for companies whose activities are harmful to the environment are becoming increasingly onerous, and they will come under growing scrutiny.
According to Du, environmental solutions companies will benefit from the deployment of cutting-edge technologies that can boost efficiency, as well as a favourable operating environment that should underpin relatively high and sustainable growth.
Not only are these companies helping solve some of the most pressing environmental problems, but Pictet Asset Management also screens stocks to ensure the businesses meets their ESG goals. Du explained: “We combine ESG data from local and global providers and make on-site visits to ensure we fully understand the nature of a business and are convinced of its ESG credentials.”
Building a framework for environmental and climate change investments
Pictet Asset Management's environmental strategies use the Planetary Boundaries framework, a model that influences how the firm analyses and invests in climate change solutions. Developed by a team of leading scientists at the Stockholm Resilience Centre, the model identifies the nine most critical environmental dimensions — including carbon emissions (climate change), fresh water, land use and biodiversity — that are essential to maintain the stable biosphere required for human development and prosperity. It then demarcates the “safe operating space” within which human activities should take place and allows for a scientific measurement of the environmental impact of these activities.
Understanding the strategy
Tackling climate change in Asia is key to addressing the threat posed by rising temperatures and increasingly unpredictable climate patterns globally. Investors can help finance the technological transitions required to alleviate the problem, while at the same time capturing healthy returns. They need to tread warily, however. There is no set definition of what constitutes an environmental solutions business, according to Du. Consequently, Pictet Asset Management examines the purity of a company — a proprietary indicator of how specialised a company’s activities are to a specific theme — as well as the investment universe that stocks are being chosen from.
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