Foreign asset owners wait for post-Covid Zero to assess China’s energy transition
Foreign asset owners are showing increasing interest in investing in China’s decarbonisation, after the country announced its 2060 net zero target in late 2020.
However, challenges remain for such interest to translate into actual investments, as the country still hasn’t opened up for quarantine-free travel under its stringent Covid Zero policy.
“I think there are really positive developments and progress in a number of areas in China, from the commitments to carbon neutrality by 2060, to peaking emissions by 2030,” said Eric Nietsch, head of ESG, Asia at Manulife Investment Management.
“China has a very large and fast-growing sustainable debt market — like the labelled green bond market for example — so there are a lot of opportunities there,” he said. “A lot of the world’s clean technology is also coming out of China.”
In particular, the asset management arm of Manulife is looking at investments in clean energy technologies, and power distribution. They include renewable energy (both solar and wind), batteries, and power grids.
Another area the firm is interested in is the application of energy efficiency across different sectors. Green buildings within the real estate sector is one example, Nietsch told AsianInvestor.
OUT OF SYNC
However, he noted that one of the challenges for global investors is the misalignment of timelines between investors’ own net zero targets for 2050, and China’s 2060 goals.
Many Chinese companies will be following the national target for their own ESG integration, including the country’s largest asset owner, the China Investment Corporation (CIC).
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So far, no asset owners in China are members of the United Nations-convened Net-Zero Asset Owner Alliance, whose members are committed to net zero by 2050.
“I think this is one area where [fund managers] can play a role for clients who are interested in constructing portfolios that are aligned with net zero by 2050. Even in China, or in other markets, we can look for companies that are on that trajectory,” Nietsch said, noting that they do identify Chinese companies that are on that path.
“I think that'll be beneficial for China as well in terms of meeting that goal of carbon neutrality even ahead of time,” he added.
However, the actual inflows from foreign asset owners into China’s energy transition have not been “tremendous” compared to the huge potential opportunities, partly because the target was announced in late 2020, during the pandemic, noted Guenter Tschiderer, head of intermediary sales, Hong Kong and South East Asia at BNP Paribas Asset Management.
“Under the still ongoing Covid Zero, it's much more challenging for foreign direct investment going into China and probably also going out of China,” Tschiderer told AsianInvestor.
On the 10-year mismatch, he believes it’s not yet an issue — at least not before China opens up.
“We have not really had meaningful conversations with asset owners to address that 10-year gap, because it just hasn't been on the table for us,” he said.
UNDERSTANDING THE MARKET
“We have been engaging with a lot of clients who just want to understand the sheer size of the opportunities, be it in China, Asia, or elsewhere, and how we can help as a global sustainable manager to tap into those growth opportunities,” he said, noting that net zero targets, whether 2060 or 2050, are relatively new concepts that have emerged during the pandemic.
“We're talking about decades-long opportunities, on the liquid or the illiquid side,” he said.
“I don't think that the focus, for the time being, is on the mismatch. I think the focus is clearly, first and foremost, for asset owners to get a strategy, and align their long-term expectations with these growth opportunities.”
However, he noted that in the past two years, the adoption of ESG in China has been huge, and asset owners’ willingness to engage in discussions with investment managers, including BNP Paribas Asset Management, has been increasing by the month.
Those interests are coming from corporates, government pension funds, and pan-Asian institutions driven by policy changes that want to expedite the speed of policy implementation by committing their own assets.
They primarily come from Europe where BNP Paribas is based, but also from Asia, Tschiderer noted.
POLICY SHIFT
In China, there was an energy policy change late last year, when the country became too aggressive on energy transition — which resulted in serious power shortages in parts of the country last winter.
Now the policy stance is that the 2060 target is a long-term commitment, and the government needs to ensure a steady new energy supply before shutting down all coal mines and other non-renewable sources, noted Yu Song, chief China economist at BlackRock Investment Institute.
It is an important policy shift that has been underappreciated when investors look at China’s decarbonisation commitment, Song told BlackRock’s webinar on the second half outlook last week.
That said, he believes China is still very committed to decarbonisation.
“One reason is that China is a big net importer of energy. So, when energy prices are high, China suffers,” he noted. “Green energy happens to be the area where China has developed an edge. If the whole world moves in that direction, China can develop further in solar and wind for example, and turn [its reliance on energy imports] from a disadvantage into a competitive advantage for energy security.”