It may be counterintuitive to suggest, but the energy policy environment in Asia may be a lot more stable than most ‘developed' economies.
While Europe is no doubt the world leader in sustainable finance, many western countries have been less stable or decisive on energy policy. Progress is certainly being made - progress we strongly support - but Asia has been clearer on its intentions to move towards alternative sources of energy.
One reason is of course the very real need for stable and locally produced energy; economic and population growth combined with rapid urbanisation means Asia's energy needs are increasing at an exponential rate. Governments across Asia have also started to recognise the environmental benefits of alternative sources of energy. Perhaps the most important reason for this shift is the economic benefits that alternative sources of energy provide. Diversifying their energy production will reduce the strains on their balance of payments, reduce imports of fossil fuels and spur innovation.
As a result, Asia's regulatory environment around renewable energy should be recognised as decisive and provides a stable platform for foreign investors - countries across Asia have made it very clear they need more foreign capital and are creating the policy environment to facilitate this, creating compelling investment opportunities for investors
Opportunities for investors
A recent blog post published[1] by the IMF suggests that ESG investments in emerging markets had a breakout year during 2021 and now make up almost 18% of foreign financing for emerging markets excluding China - quadruple the average in recent years.
This is particularly important in the context of the global issue of climate change. Investors with clear climate goals stand to create greater impact by focusing on emerging market opportunities, since most developed countries (not all) are further along in their green transition.
Consider Europe's electricity consumption, which according to the International Energy Association has only risen by 7% in the past 20 years. In comparison, Asia's electricity consumption has tripled since 2000[2].
[1] IMF Blog - Sustainable Finance in Emerging Markets is Enjoying Rapid Growth, But May Bring Risks
[2] IEA - Data and statistics
Asia's electricity consumption is driven by several factors - 1) population growth, which is expected to reach 5.3 billion by 2050[3]. 2) A rapidly growing economy. Pre Covid, Asia averaged a 7% economic growth rate per annum[4]. While this declined during the pandemic, new forecasts from the Asian Development Bank suggest Asia will be back on track to grow 5.2% this year and 5.3% in 2023, thanks to a robust recovery in domestic demand and continued expansion in exports[5] and finally, 3) increased urbanisation, as more people move to Asian cities.
This combination is leading to increased energy demand which provides a considerable opportunity for investors looking to invest in sustainable and renewable energy.
What about home bias?
Investors will always invest in what they know, which may deter some from looking at emerging markets as an investment opportunity. However, such ‘home bias' is not always a successful strategy, as the last 5 months have proven.
For example, many believe that the safest asset class is sovereign bonds, and the highest credit rating among sovereign states in Europe is that of the German government. Many European investors may therefore be looking to invest in German bonds for safety, since it is closer to home. However, investors who opted for this strategy at the beginning of 2022 have lost almost 15% of their investment due to increases in interest rates.
Figure 1: Price of 10-year German Government bond in 2022
[3] OurWorldInData - More than 8 out of 10 people in the world will live in Asia or Africa by 2100
[4] International Monetary Fund World Economic Outlook April 2022
[5] Asian Development Bank - Developing Asia Economies Set to Grow 5.2% this Year Amid Global Uncertainty
This is not only an issue with sovereign bonds but exists across traditional asset classes more broadly. Equity prices are also down since the beginning of the year.
By comparison, unlisted infrastructure assets are uncorrelated with the broader markets and have therefore performed considerably better. For example, the three largest UK renewable energy investment trusts (InVIT's) have all delivered positive absolute returns since the peak of the S&P500 Index, while the S&P 500 is down 22% since the beginning of the year. Our own investment Trust, the ThomasLloyd Energy Impact Trust plc (TLEI), which aims to deliver measurable social and environmental impact along with consistent financial returns, is still up since the beginning of January.
ThomasLloyd's investments both mitigate the need to purchase foreign fossil fuels, and ensure the provision of local, affordable electricity. Long-term offtake agreements with local and national governments provide certainty both to the communities we invest in, but also enable us to predict and maintain long term financial returns. This resilience is the primary reason behind the growth of the AIC Renewable Energy Infrastructure sector, with TLEI being the only dedicated offering on the London Stock Exchange providing direct access to sustainable energy infrastructure in the fast-growing economies of Asia.
Solving the climate crisis
At ThomasLloyd, we operate a portfolio of sustainable energy infrastructure assets and invest in construction ready, operational assets across renewable power generation, transmission infrastructure, energy storage and sustainable fuel production in the countries where it is needed most. Our target markets include India, the Philippines, Indonesia, Vietnam, Bangladesh, and Sri Lanka.
Half the world's population lives in Asia and the region is responsible for more than half the world's carbon emissions. Therefore, global Net Zero ambitions cannot be reached without investment in the fast-growing economies of Asia.
Investors looking to solve the global problem of climate change in the context of the current market environment, will need to invest in sustainable infrastructure assets, uncorrelated to the rest of the market with a specific focus on Asia.
There is a powerful commercial and investment case for investing in sustainable energy infrastructure, with the added benefit of producing locally generated sustainable long-term energy for local consumption. Investors need to be cognisant of how they can have a direct and positive impact on the environment and people's lives, without having to sacrifice financial returns. To address climate change globally, we must provide much needed foreign investment to countries across Asia to support their energy transition.
This article was written by Nick Parsons, head of Research & ESG at ThomasLloyd Group. Views expressed and data provided are solely those of the author.
