The silent race to finance Asia’s transition

The battle for the global energy transition will be won or lost in Asia. The region is home to 59% of the world’s population and over a third of its emissions. By 2025, Asian economies will account for half of the world’s electricity consumption. It matters who and what fuels Asia’s engines of growth. At present, over 70% of that demand is sourced from fossil fuels. At the same time, the region is home to some of the world’s fastest growing renewables developers, most notably in China.

For the story of future power generation to look favourable, financiers would need to write a new chapter. What is the current state of capital allocations in Asia?

New research from the Asia Investor Group on Climate Change (AIGCC) helps answer that question. There is a silent race underway to gain exposure to the region’s energy transition – an investment opportunity as exciting as it is urgent.

The AIGCC research draws on data from more than 200 asset owners and managers active in Asia who collectively manage over $76 tn.

Actively screening

Active ownership remains the strategy of choice for Asia’s investors – 78% of those surveyed said it was a key component of their strategy. In addition, 72% of surveyed investors reported using negative screening in their portfolio construction.

Screening functions on an exclusionary principle. Investors build portfolios while avoiding assets with an environmental (or related) footprint they deem too large to be tolerable. GIC, the Singaporean sovereign wealth fund, applies a portfolio screening process based on “material sustainability risks”. Aware Super, an Australian asset owner, does not invest in companies that derive over 10% of their revenue from thermal coal.

In theory, this could imply a willingness to draw down positions in companies where emissions reduction is either progressing too slow or not progressing at all.

“Institutional investors know that climate risks and opportunities are financial risks and opportunities. Asset owners, as stewards of capital, hold the power to accelerate the energy transition,” said AIGCC chief executive Rebecca Mikula-Wright.

The report also finds that investors are actively reducing their exposure to Asia’s fossil fuel industry. The strategies they pursue include: “escalation strategies and timelines for excluding coal, oil, and gas companies from future investment and debt provision where corporates cannot show transition plan alignment with climate scenarios”.

Climate solutions

As a driver of wealth and value creation, it is hard to ignore the attractiveness of Asia’s climate solutions opportunity. Asia’s investors seem to agree.

The survey asked respondents what the focus of their climate solutions allocation was: 63% said they wanted to increase exposure to renewable energy. Another 40% found the energy storage opportunity of interest. Hydrogen, transport, infrastructure and natural capital were other common answers.

East Asian economies such as China, Korea and Japan top the charts in terms of the regional focus. 40% of respondents said the region would be their focal point for investing in solutions. In comparison, 35% said they are eyeing the opportunity in Europe. Investor optimism for Canada and the US was at similar levels.

Asset manager mandates

The research also highlights the role of asset manager mandates in determining the reality of net zero investing. The degree to which incentives of a manager align with net zero targets of an asset owner depends on how the mandates are worded.

“A key barrier to climate action is that asset managers need more client mandates aligned with net zero,” says the report. The list of factors that could be included in a mandate is long and some are more popular than others.

40% of respondents said they require climate factors to be incorporated into investment decisions. Over a third of respondents focus on climate reporting and voting policies. Biodiversity is also emerging as a topic relevant to mandate design. 9% of respondents said they include it as a climate factor in mandates.

Nowhere is the battle for an energy transition as fierce as it is in Asia. While asset owners are positioning their portfolios to target the lucrative investment opportunity an Asian energy transition provides, the road ahead is riddled with transition juxtapositions: a powerful fossil fuel sector remains prevalent while a booming renewable energy ecosystem is making ground.