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ESG Investing
Asia green transition offers opportunities in 2024
ESG-leading companies more prepared for systemic change, often outperform
Tom King 20 Nov 2023

UBS’ chief investment office (CIO) has launched its outlook for 2024, a year the Swiss bank says will see the green transition mega-trend playing out across the region. The bank has highlighted a trio of major arcs it thinks will influence Asia’s sustainable and green economy in the Year of the Dragon.

While the risks from the changing climate are being felt across the globe, Asia – the world’s largest and most diverse continent with climate zones from tropical to polar – is home to some of the countries and populations most vulnerable to climate change.

Asia, though, also accounts for half of the world’s new investments in clean energy and renewable energy capacity, as well as half of global annual GDP growth.

Collectively, these factors, UBS says, highlight the challenges and opportunities in the region’s green transition. Climate action will drive fundamental business change, not only in themes such as clean energy and transportation, but also across every industry and sector in Asia’s economy.

Within both environmental, social and governance (ESG) thematic and ESG leaders’ strategies, the Swiss lender thinks larger industry leaders, which are better prepared for the capital expenditure, research and development, and major strategic shifts needed along the way, will continue to outperform in the year ahead and beyond.

Overcapacity in China

While China has faced a myriad of challenges in 2023, the country is the global leader in the electric vehicle (EV) and solar industries, driven by the aggressive targets in its 2060 carbon neutrality pledge. These domestic industries, UBS says in its outlook, will likely enter their most dynamic growth phase this decade while the rest of the world lags behind.

The Asian economic giant is already well ahead of its EV penetration goal of reaching 20% of all sales by 2025, having achieved an estimated 34% in 2023. By end-2024, UBS thinks this is likely to reach 40%, or double its initial target.

Correspondingly, the Chinese economy has likely already reached its 2025 goal to double wind and solar output from its 2020 level of 534 gigawatts (GW), following an aggressive onshore and offshore capacity expansion over the past two years.

However, this expansion, comes with oversupply along the entire domestic solar supply chain, from polysilicon to wafers, cells and modules. This will exacerbate the solar module glut, UBS estimates, from an estimated 64% excess capacity in 2023 to almost 100% in 2024.

As in other sectors, China will have to find overseas buyers for this excess capacity, which the Swiss bank says keeps them cautious on China’s solar sector.

Still, despite heightened geopolitical tensions and rising protectionist rhetoric in Europe, China’s solar exports still grew 34% year on year to 114GW in 1H 2023, or the equivalent of the total installed capacity in the US, with more than half of these exports destined for Europe.

Expanding markets

Affordable solar panels from China, though, will also present an opportunity for emerging markets in Asia to both address the growing power demand and decarbonization aspirations.

India, which has a 2070 net-zero target but remains heavily reliant on coal, ranks third globally in the pace of its solar energy deployment. Green infrastructure investment spending, Indian rating agency Crisil predicts, will jump five times to US$44 billion by 2030, with imports fulfilling equipment demand.

Southeast Asia is also pivoting towards renewable energy, and the Asean bloc aims to increase its share of renewable energy from the current 14% of total installed power capacity to 23% by 2025 and 35% by 2035.

Among the growth stories in the region, Vietnam has led the region’s expansion into renewable energy, with Thailand and the Philippines increasingly following suit. UBS expects the renewable energy capacity in the Association of Southeast Asian Nations (Asean) region to more than double by 2027, implying annual investments of US$20 billion from 2022 to 2027.

Listed renewable energy equities have also de-rated, alongside their global peers, amid supply-chain disruptions and project delays. But while the sector’s valuation multiples remain lofty relative to history, UBS says the recent retracement could provide entry opportunities for long-term investors.

Sustainable development

In Asia, decarbonization, UBS says, looks different from more developed regions as economic growth, as well as basic consumption demand from food to electricity, is still rising, meaning sustainable development is also a necessary solution to meet the growing basic needs.

External pressures are also challenging complex supply chains and business as usual in the region with the EU, for example, having passed a new law making brands and importers liable to any environmental or labour rights violations within the supply chain – and local regulatory responses will only further fuel industry action.

The result, UBS says, is a rapidly changing business landscape that has seen Asian companies’ sustainability disclosure rates almost double in the past decade, and they are now among the highest in the world.

UBS CIO Sustainable Investing (SI) scores show that issuers in this region have demonstrated the fastest improvement rates in sustainable performance globally over the past two years.

Therefore, ESG leaders – companies that demonstrate better sustainability management than their peers – will be more prepared for this systemic change. As such, investing in Asia’s ESG leaders will pay. For example, the banks says, the MSCI Asia ex-Japan ESG Leaders index has outperformed its non-SI parent in five out of the past eight years at an annual average rate of 0.5 percentage points.

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