Q: What trends are you seeing in clean energy investment in APAC?
In the ESG world, the trends in clean energy exchange-traded fund flows are a good indicator of where investor interests lie. In our research, we focus on the Asia-Pacific region excluding Japan, and here we see that clean energy ETFs have proven to be resilient in 2023 in terms of flow. In the first three quarters of 2023, APAC ex Japan clean energy ETF flows reached $2.7 billion – a 60 percent year-on-year increase.
Our analysis also shows that clean energy has been the dominant theme in the past year. It accounts for 70 percent of the region’s ESG ETF flows, as we see more money being put into China-domiciled clean energy ETFs. These trends are extremely positive.
Q: What is the implication of investors’ support of climate stewardship?
There are many elements to responsible investing, but clean energy has always been a popular strategy for investors. China in particular has strong green commitments on renewable energy and electric vehicles. This has been appealing to investors, which is reflected by the launch of a growing number of clean energy ETFs in the past three years. This type of ETF now represents more than 70 percent of the Chinese market’s assets under management in ESG ETFs.
South Korea and Taiwan also have many clean energy ETFs; they are the second and third jurisdictions in terms of AUM in the APAC ex Japan region respectively, behind China.
Overall, this reflects positive market sentiment in the region. Investors appear to be using clean energy ETFs as tools or platforms to drive decarbonization and related investments. In the future, with continued investor interest and more clarity around the evolving regulatory policy, we expect clean energy ETFs to maintain a healthy growth rate in APAC.
Q: What are the challenges for climate governance in Asia?
When we look at investors’ interests, we also look at climate governance, and there are quite a few challenges in the region. Investor stewardship in Asia is often carried out behind closed doors between shareholders and corporate management. Climate proposals are not common at AGMs, especially among Chinese companies. This could be due to the more concentrated ownership structure of Asian companies – a lot of them are either family-controlled or state-owned enterprises. Consequently, we see that shareholder proposals usually have a low success rate, especially those related to climate.
As geopolitical tensions persist, investor stewardship has been impacted, especially when it comes to Chinese state-owned enterprises that were sanctioned by the US. Big names such as the Semiconductor Manufacturing International Corporation were sanctioned as relations between the two countries soured. This is a challenge,
given that many of China’s heavy emitters are SOEs, including in the cement, coal and oil industries. These are key players in the world’s net-zero progress, contributing a third of global emissions.
Climate investor stewardship through AGM proposals could also take much longer to develop because most Chinese SOEs are governed by a top-down political system and could be less driven by investors’ interests. That will impact the whole climate governance in Asia.
Q: What are the main markets to look at in the region regarding the energy transition?
If we look at Asia, there are a few key markets. Number one is China, which has many heavy polluters but also a big market cap. This means that investors will always look to what is happening in China first.
However, number two is Japan. It has been particularly key in the past year as it has taken a lot of policy actions when it comes to sustainability and decarbonization. The energy transition is a key priority for Prime
Minister Fumio Kishida, whose agenda includes initiatives to support green transition as Japan aims to shift national industries towards innovation.
Japan’s 2030 green plan includes a target to reduce emissions by 46 percent compared with 2014, and a $1 trillion mobilization to combat climate change. This includes more than $130 billion of green bonds and $65 billion for green start-ups. Furthermore, seven pension funds managing $600 billion in assets will join the Principles for Responsible Investment to foster ESG investment.
Even with these initiatives, however, Japan has a challenging energy transition ahead. The auto industry, for example, remains very much tied to traditional technology. This is a huge industry in Japan, representing 10 percent of the country’s total market cap and employing nearly 10 percent of its workforce. It’s a big industry to decarbonize.
Q: How will Japan’s green plan address these challenges, and will it be successful?
The two key sectors it must address are the transport (including auto) and power industries. Some 60 percent of Japan’s greenhouse gas emissions come from these sectors. The country is aiming for a 100 percent shift to electric vehicles in sales, and nearly 40 percent share of renewables in the power mix (which today is 70 percent reliant on fossil fuels). Japan’s 2024-25 budget seeks $8 billion in green stimulus to support the two sectors, bolstering its green transformation policy.
However, there are still some challenges. Japan has cut greenhouse gas emissions by 20 percent between 2014 and 2022 but is still at the start of its green transition. Renewable energy capacity is up by 80 percent from 2014, but fossil fuels still dominate the power mix. While electric vehicles account for the majority of new car sales, growth could slow due to their high price and limited charging infrastructure.
I would say Japan’s 2030 green plan is ambitious yet necessary, given the auto and power sectors in that country have such high fossil fuel exposure. Because of these moves and the wider economic backdrop within the region, Japan is a key focus for investors this year.
Bloomberg
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