UK asset owners sense strategic edge in emerging market transitions

There’s an energy transition underway in emerging markets. Vietnam’s rollout of solar energy has been one of the Southeast Asia’s quickest. Some 70% of Chile’s electricity generation now comes from renewable energy. Türkiye doubled its solar capacity in just under three years. India is amidst a solar-led, record-high renewables deployment. Its neighbour China adds more renewables than most countries each year.

Most are still early in their journey and there’s some way to go. Translating their transitions into institutional investor appetites has been a work in progress.

A new report from UK’s Emerging Markets and Developing Economies (EMDE) Investor Taskforce shows the state of play and where things are headed.

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Strategic edge

The report surveyed investors with nearly £1.7tn under collective management and includes interviews with 18 of the country’s largest pension schemes and insurers.

The findings show the changing landscape of investor interest and confidence in emerging market transitions.

Hitherto, being in favour of expediting emerging market transitions was often a moral call if not a reputational one. Now, things are changing.

“Sustainability ambitions [in EMs] are no longer seen purely as a moral or reputational imperative, but as a strategic lever for long-term portfolio resilience and value creation”, the report reads.

That realignment has a lot to with systemic climate risk. Faltering energy transitions in India, Brazil or Vietnam, for instance, expose portfolios to long-term systemic risk no matter the exposure. When the taskforce engaged asset owners on this logic, most reported a strong conviction.

Investors however, rightly pointed out a caveat. “Asset owners expressed the view that it is not their role to ‘save the world’ and that any reallocation of capital must remain fully compatible with fiduciary duty and demonstrable risk-adjusted returns”, the report finds.

“The message from UK asset owners is clear: EMDEs matter strategically, but capital will only flow at scale if fiduciary requirements can be met in practice”, says Hedrik du Toit, founder and chief executive of emerging markets asset manager Ninety One.

Barriers

Du Toit, the industry chair of the taskforce, says emerging market investing adds portfolio resilience but investors need to see barriers being addressed.

“Investors need policy clarity, robust data, credible and scalable investment structures, and support to build capacity to correctly assess risks and opportunities in these markets”, he explains.

For asset owners to reinforce their appetite with allocations, their conviction in risk-adjusted returns needs strengthening.

Asset allocation

If it were to occur, allocations are likely to follow the trodden path but consider contrarian strategies nonetheless.

Historically, public markets have been the first port of call. The report reinforces this trend. On average, investors maintain between 5-10% exposure to emerging market public equity and debt. Allocations to private assets in emerging markets are typically much lower – below 1%.

Public markets in several emerging markets are increasingly reflective of their energy transition.

China’s wind, solar and battery behemoths are listed. As are Mexican and Chilean utilities that operate renewable generation assets. Indian conglomerates betting big on the transition have listed their subsidiaries. Thailand’s state-owned solar operator has been trading on the country’s stock exchange for a decade.

Simultaneously, it seems likely that long-term climate solutions alpha is hidden in private markets. Climate technology disruptors in hard-to-abate sectors, for instance, reside there.

The EMDE Investor taskforce is expected to publish a report soon on how asset owners invest in emerging market energy transitions. Whether and how they plan on balancing public market familiarity with private market alpha, that report will tell.

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