Case for clean energy in EM
As developing countries continue their path to decarbonisation there is a growing need for companies in these regions to provide renewable solutions.1
With developing nations responsible for three quarters of global carbon dioxide emissions, the need for renewable energy and clean technology solutions in these regions is becoming increasingly urgent, says BNY Mellon Sustainable Global Emerging Markets portfolio manager Ian Smith.
Smith notes that about 60% of the world’s CO2 emissions are from countries listed on emerging market indices and 15% from frontier markets.2 “This is staggering and shows exactly where we need large-scale solutions around energy transition,” he adds.
Smith says with higher expected GDP growth in many developing countries, the “Holy Grail” is the deployment of energy transition technologies across these regions that can reduce carbon emissions and help them reach CO2 reduction targets.
“Clearly, it is in the developing world where the biggest addressable market opportunity is for renewable energy and other clean technology solutions,” he adds. “It is also in the developing world where positive change is most urgently needed if we are to meet Paris Accord global-warming targets.”
The Newton team, which manages the strategy, looks for what it terms “solution providers” to address this growing need and overall, the portfolio has an 81% exposure to such businesses, with Smith expecting this allocation to remain high.
“The scale of the underserved needs in emerging markets suggests an extraordinary opportunity for solution providers more than in developed markets,” Smith adds. “This might evolve over time, but you should continue to see a large allocation to solution providers.”
Smith pinpoints India as an underserved market in terms of the lack of technology and services available to reduce its hefty carbon emissions.
“CO2 emissions per unit of GDP are roughly four times higher in India than in the US3 and this is especially problematic given we expect GDP growth in India to be best-in-class among large economies in the decades ahead,” says Smith.
As at 31 January 2022, India is the strategy’s largest country overweight, with a 28% exposure, compared with the performance benchmark’s 12.5%4.
Smith adds India’s carbon reduction effort looks promising with the country aiming to cut emissions to zero by 20705. A growing number of India’s companies are articulating ambitious goals to help with that transition, he adds.
The strategy’s largest sector overweight is industrials, at 16% of the portfolio, compared with the benchmark’s 5.1%. Smith says this is because the industrials sector tends to contain a lot of energy transition companies.
The team is also finding solutions businesses in healthcare, Smith says, which is the strategy’s second largest sector overweight at 14.2% of the portfolio. To illustrate the case, Smith points to child mortality rates being roughly eight times higher in low- and middle-income countries than in high-income countries6. He says it is similar story with maternal mortality or child stunting.
He adds: “There are opportunities for companies from different industries to play their part in addressing these anomalies, ranging from pharmaceutical companies and contract research organisations to hospitals and insurance companies.
“The growth runways can be huge for those companies that operate in countries where out-of-pocket health spending is very high, and where health spending per capita is low.”
The consumer staples sector also offers opportunities in emerging and frontier markets, Smith says, with the portfolio having a 12.7% allocation compared with the benchmark’s 5.9%. He adds businesses in this sector can have a positive impact on communities through their supply chains and can help by enhancing nutrition within people’s diets.
Addressing the wealth shortfall in developing economies is also providing the team with opportunities, says Smith, and financials is the second-largest weighting in the portfolio at 17.1%.
It is estimated that roughly one billion people globally are “unbanked”7 and 40% of micro, small and medium enterprises (MSMEs) in developing countries don’t have access to proper credit facilities which equates to a US$5.2trn shortfall of credit every year8.
“These MSMEs are key sources of formal employment in their respective economies. The World Bank estimates that they create seven out of 10 jobs in emerging markets.
“There are vast opportunities for those companies that can responsibly bridge these gaps in credit and basic financial services,” says Smith.
1 The value of investments can fall. Investors may not get back the amount invested.
2 Worldometers.info, 2021, Emission database for Global Atmospheric Research (EDGAR), CO2 Emissions, November 2019
3 Worldometers.info, 2021, Emission database for Global Atmospheric Research (EDGAR), CO2 Emissions, November 2019
4 MSCI Emerging Markets NDR index, as at 31 December 2021
5 BBC News, ‘COP26: India PM Narendra Modi pledges net zero by 2070’, 2 November 2021
6 World Bank, UN Inter-agency Group for Child Mortality Estimation, 2020
7 World Bank, ‘Financial Inclusion on the Rise, But Gaps Remain, Global Findex Database Shows’, 19 April 2018
8 World Bank, 2020
88975 Exp: 9 September 2022