ESG Investment Themes in Asia

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The complex and unpredictable effects of the Covid-19 pandemic have served as a harsh wakeup call for decision-makers. Now, more than ever, the issue of societal wellbeing and sustainable development will take centre stage in social, political and business affairs.

Thanks to rapid technological advancements, we are witnessing an acceleration of a policy shift towards green economy. And as the world gradually recovers from the pandemic, we believe these changes are here to stay. This brings forth new, interesting investing themes:

1) The shift to electric vehicles (EVs);

2) Clean technology driven by China’s 2060 carbon neutrality target; and

3) Better financial inclusion through the digitalisation of financial services in Southeast Asia.

The EV revolution

In 2020, EV sales improved to 3.24 million units, up from the 2.26 million for the year prior. The main driver behind the boom is the surge in demand from Chinese consumers, where the country has been the world’s largest market since 2015.

As at end-December, there were almost five million EVs on the roads, according to the Chinese Ministry of Public Security. Of the 3.24 million EVs sold globally in 2020, 1.33 million were sold in China — marking a 62% increase since 2017. The country is currently the largest manufacturer in the world, producing 1.21 million units for the year.

China’s dominance in the EV space is largely due to the “carrot and stick” policy implementation. On the “carrot” side, the Chinese government has been trying to incentivise consumers to switch their vehicles to comparatively more expensive EVs through subsidies. As at end-2017, Chinese central and local authorities had already invested over RMB393 billion in the sector. Even as the government eventually reduces subsidies, the exemption of new energy vehicle (NEV) from the 10% purchase tax will still sustain sufficient demand.

On the “stick” side, the Chinese government has introduced an “NEV credit” regime to push for more supply, where Chinese car manufacturers will need to achieve a certain number of credits through meeting production quotas for EVs to avoid production suspensions for existing high fuel-consuming models.

With supportive measures to boost demand, global EV volume is forecast to enjoy a 52% CAGR during 2021-2025. China will likely hold the majority share — 49% of the global EV market. Europe will likely account for 27% and the US will hold 14% by 2030.

Such a rapid growth in EV also presents investment opportunities. One of the key beneficiaries of the EV boom is the battery technology sector, where there will be significant increases in EV battery capacity. Technological advancements will play a huge role in reducing battery costs and increasing energy density gains, which will ultimately increase demand.

With the battery industry and upstream supply chain improving faster than expected, there has been consolidation among battery makers. The scale gains by the top five makers — all located in Asia — exceed the rest of the industry.

China’s green push

While technological advancement is the key driver to EVs becoming more accessible to the general public, this rapid expansion in demand would not take place without supportive government policies.

As we have witnessed from the Covid-19 pandemic, many of the societal pillars in place, such as the healthcare system, economy and community framework, were severely challenged. To rebuild these frameworks and be better prepared for future crisis, governments have recognised the need to step up their ESG adaptation measures. China, once again, will be a key player in all this.

In September 2020, Chinese President Xi Jinping announced that the country aims to achieve net zero carbon emission by 2060. China’s carbon neutral plan is significant as it accounted for 30% of global CO2 emissions in 2019. To reach this ambitious new net-zero target — given that the previous reduction rates would only see a 10% decrease in emissions by 2050 — China will increase its reliance on emissions-free energy sources and rely on effective policy.

The evolution of China’s energy mix is one of the most important determinants of its de-carbonisation path. Renewables, as a percentage of energy generation, will increase from 15% to 25% by 2030, and China plans to triple its wind and solar power capacity to reach 1,200 gigawatts (GW).

Amongst renewables, solar is expected to grow the fastest due to decreases in generation cost over the past decade, where it is equal to or less than traditional energy sources. Although China announced that it would cancel solar tariff subsidies for new projects starting from 2021, the government is making it easier to build new solar glass projects. As a result, we foresee China’s solar installation to rise 31% year-on-year to reach 50GW in 2021.

However, the shift to renewable power is only part of the equation. A multi-dimensional ecosystem encompassing battery storage, clean hydrogen and carbon capture is required.

Along with solar, hydrogen has also emerged as a viable energy source, with a number of provinces announcing their five-year plans on increasing reliance on hydrogen power. In Beijing, the industry is expected to double in size to RMB100 billion from 2023 to 2025. Local governments are planning to develop world-class innovative hydrogen technology platforms and infrastructure, such as refuelling stations, to promote the use of hydrogen in fuel-cell EVs and for emission-intensive industries.

A new way of banking

The last super-trend that we see is better financial inclusion through financial transformation in Asean. With a population of 660 million, many of which are unbanked and underbanked, digital banking is set to accelerate in the region.

By 2025, digital financial services are expected to generate revenues of about US$38 billion and account for 11% of the total financial services industry in the region. New financial products can help close the equality gap and Asean is witnessing a wave of new digital bank launches, aided by the perfect blend of connectivity and innovation from super apps such as Grab, Gojek and Tokopedia.

As consumers shift towards the online economy, demand for financial services such as digital payments and remittances also will increase. There is significant opportunity for non-housing loans in the Philippines, Indonesia and Vietnam, where a large proportion of the population are millennials.

Neobanks have collaborated with super apps to provide integrated payment systems and loan/cash management solutions to merchants and shoppers. In the near future, Asean digital banks will experience high revenue growth, with SMEs becoming the largest loan driver as the informal economy has a large propensity to borrow but lacks access to affordable credit.

Driven by recent trends, governments in the region are supportive of new digital banking players to promote innovation. Singapore has issued four digital bank licences, while Malaysia and the Philippines have each issued five. Traditional banks are following suit (and also riding the digitalisation wave) as we are witnessing key players investing heavily in digitalisation.

Over time, we expect a convergence in business models between digital banks and the evolving incumbent banks. Regardless, consumers benefit through access to a broader suite of products and investors can take advantage of the situation.

At RHB, our Relationship Managers and Investor Specialists stand ready to advise you on the investment strategy riding the potential opportunities in ESG to achieve your financial goals.

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