April 22 was Earth Day. It originated in 1970 to raise awareness of the need to protect the environment. As the impact from climate change has become more obvious – from extreme temperature swings to more frequent and powerful typhoons – the calls for action have grown louder.
In particular, reducing greenhouse gas emissions to slow the impact of global warming has become a top priority. Two events in the past year have added momentum to this effort.
First, President Xi Jinping announced last September that China would aim to achieve peak carbon emissions by 2030 and net zero emissions by 2060. Since China is the biggest source of greenhouse gas emissions, responsible for about 30 per cent of the global total, this commitment is necessary for the world to successfully tackle climate change.
Second, Joe Biden returned the United States to the Paris Agreement on his first day as president, putting the country back on the path to being part of the climate change solution. Despite all the differences between the US and China in recent years, they have agreed to work together on reducing greenhouse gas emissions.
In addition, Japan and South Korea have pledged to achieve carbon neutrality by the middle of this century, which means those who have pledged to cut emissions make up most of Asia’s 2019 GDP and nearly half of its population. This is a powerful market shift that will shape the investment landscape in the region.
01:57
US, China put aside differences for pledge to work together on climate change
US, China put aside differences for pledge to work together on climate change
Environment, social and governance (ESG) investing has attracted a lot of attention in Asia, including in Hong Kong, in recent years. Net inflows into sustainable funds in Asia rose to nearly US$8 billion in 2020, about 10 times that of 2019. The environment component of ESG investing has coincided with concerted efforts by governments to reduce carbon emissions.
This is important because, instead of just hoping companies will do the right thing in protecting the environment and find ways to reduce greenhouse gas emissions, governments are increasingly imposing regulations as well as policy incentives to accelerate this process.
The production of energy from coal is one of the largest contributors to carbon emissions. Making up 27 per cent of the global energy mix, its use will have to be slashed in the coming decades. This will need to be offset by a five-fold increase in energy consumption sourced from renewables and other non-fossil fuels, from 15 per cent to 78 per cent.
For renewable energy, solar power and wind power are frequently cited as the most promising options. The cost of generating power using sunlight and wind has come down dramatically in recent years, making them economically viable options.
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2020 set to rank as one of Earth’s three hottest years on record, says United Nations
2020 set to rank as one of Earth’s three hottest years on record, says United Nations
Power companies will need to start moving away from fossil fuels and invest in these renewable sources. Central banks and financial institutions will also play key roles.
Green bonds – debt that is issued to support projects or businesses that help improve the environment – could potentially allow companies that contribute to reducing emissions to borrow at cheaper rates. This concept is already common in Europe. Hong Kong and other parts of Asia are also discussing how to grow this market.
Greenhouse gases are not only released by power plants. Industrial manufacturing, transport and agriculture are all culprits too. Producing cement and steel releases a significant amount of carbon dioxide, given the chemical reactions involved.
While more environmentally friendly production methods are available for some industries, they all involve additional investment and possible higher production costs. Companies that can make a smooth transition are likely to be future winners in their industries.
With greener electricity, electric vehicles will play a role in reducing pollution on the streets and carbon emissions. Many cities have already announced they will phase out cars that run on petrol or diesel in the coming decades. Carmakers are rushing out new electric vehicle lines, and consumers should have more options in the future.
Biden’s multitrillion-dollar infrastructure plan includes building a nationwide network of charging stations to encourage car users to switch to electric vehicles. China is already the largest EV market, but the US and Europe are expected to catch up.
Cutting greenhouse gases will create winners and losers in terms of demand for commodities. Demand for coal will fall, but more copper is needed for wiring as countries increase electrification. Industries will go through transformations where the cleaner players are able to borrow more cheaply and get more policy support.
This is not just about doing the right thing for the environment and helping cool down the Earth. This is a multi-decade investment trend that investors should embrace.
Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management
