Canadian Investment Review

ESG Investing in Asia

Written by Vivek Tanneeru on Tuesday, November 7th, 2017 at 6:52 am

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As recently as September, top Trump administration officials hinted that the U.S. might consider staying in the Paris climate accord, then promptly reversed the suggestion. Regardless, Asian countries aren’t waiting for clear signals from Washington. As Asia has gained in prosperity and influence in the global economy, it is clearly forging its own path on climate issues.

Chinese President Xi Jinping saw America’s withdrawal as an opportunity to assert leadership on the issue, calling the Paris agreement “a hard-won achievement” and urging other signatories to stand their ground.

Last June, Beijing convened a meeting of high-level energy officials from around the globe to discuss clean energy initiatives, in which the U.S. played only a marginal role.

There remains a measure of irony in China’s stance: Asia is still the world’s dominant carbon emitter, and China alone accounted for a 61% increase in CO2 emissions globally between 1990 and 2015[1]. This is due, in part, to the country’s sheer size, but it’s also caused by three decades of rapid industrialization and wealth creation, with little regard for the environmental consequences.

,There are signs, however, that China is not just talking the talk but walking the walk on energy matters, having slashed its reliance on coal-fired electricity by 10% from 2011 to 2015[2].

China has the world’s largest installed base of solar power and, in just the first half of 2017, added the equivalent to about 60% more than half of total U.S. capacity installed solar base at the end of 2016[3] The country is also a world leader in wind, hydro, and bioenergy for electricity and heat.

China edges out the U.S. in its share of electric cars on the road, and leads the world in the number of publicly available vehicle charging outlets. Asia overall also dominates the electric vehicle battery industry, with China accounting for more than half of global production capacity[4].

China’s decisive action and decoupling from the West on climate change are indicators of a broader phenomenon in the region: the recognition that environmental and social responsibility, combined with effective corporate governance, can create new economic opportunities. For those aiming to include ESG factors in their investing decisions, Asia offers exposure to companies in a position to make a long-term difference. Many global ESG issues cannot be addressed effectively unless they are first addressed and solved in Asia. And many companies in the region are seizing the initiative to do just that.

Innovations in energy are just one example of ESG in action. Companies in Asia are also exploring novel approaches to providing access to affordable health care, a critical social issue, driven by their rapidly aging populations. Asia will likely be home to more than 60% of the world’s seniors aged 65 years or older by the 2030s, according to a recent Deloitte study[5]. In China alone, the over-65 demographic is expected to more than double to nearly 25% of the country’s population by 2035, according to U.N. estimates. These trends have created new opportunities for companies to address the growing eldercare sector, as well as for private health care, pharmaceuticals, biotech and nutrition.

A notable development in recent years is the growing popularity of elder daycare centers in Japan as an alternative to both expensive in-home care and full nursing care service. These centers allow seniors to stay active and socialize, while their families are free to go about their everyday work.

Asia is also emerging as a major player in the manufacturing of “biosimilar” medicines, the drugs allowed to replace an original biologic drug when its patent has expired. The experience of Scandinavian countries, where a biosimilar used to treat rheumatoid arthritis and Crohn’s disease captured over 90% market share, illustrates the huge cost savings potential of these drugs for national health care systems[6]. Biosimilars are expected to find a big market in Asia, given their relative affordability. Driving down the cost of health care is a crucial step in Asia’s social progress.

Another example of addressing critical social issues is delivering financial services at affordable rates to underserved segments of society, building financial inclusion, which allows greater participation in local and regional economies.  Giving “micro” enterprises access to credit, for example, can help expand economic participation for low-income segments of the population in Asia.

Some of the fastest growing banks in South Asia, for instance, are focused on pursuing unexplored niches in the micro, small and medium enterprise (MSME) business sectors that generate significant employment opportunities. This part of the market is harder for large, established banks to serve as it is operationally intensive. Because a lot of these businesses operate in the cash economy, lending to them requires an underwriting ability that goes beyond published financials. By serving these underserved niches, these MSME-focused banks are promoting financial inclusion and helping reduce poverty in their countries.

While Asia has some of the world’s most challenging ESG issues, it has also produced companies that are providing effective solutions to tackle the problems. Indeed, the region presents a meaningful opportunity for impact investing by virtue of being the world’s most populous region with a dynamic mix of developed, emerging and frontier countries with diverse growth drivers.

Vivek Tanneeru is portfolio manager, Matthews Asia

[1] P&L Netherlands Environmental Assessment Agency and EU Joint Research Center, “Trends in Global Co2 Emissions” 2016

[2] IEA, March 16, 2016

[3] Bloomberg News, July 18, 2017

[4] Bloomberg New Energy Finance, as of Feb 6, 2017

[5] Voice of Asia, September 18 2017

[6] Biosimilar Development, July 26, 2016

 

 

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