When President Xi committed China last September to net zero emissions by 2060, he set the world’s second-largest economy on a path towards a significantly faster decarbonisation than had been expected.
China is by far the world’s biggest emitter of carbon, accounting for 28% of the global total. Consequently, carbon neutrality will require a radical overhaul of China’s energy grid, transport system, built environment and much else besides. (With the average ruminant producing 250-500 litres of methane daily, one of the worst greenhouse gases, the ox will need to think carefully about its role in a net-zero future). That suggests enormous potential growth for the companies enabling decarbonisation, and we think creates a powerful structural-growth trend for investors to tap into.
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Environmental-sector development is high on the agenda in the upcoming five-year plan, not least because it supports China’s national-security aspirations and ‘dual circulation’ strategy, which places more emphasis on internal production and consumption to balance export-fuelled growth. Clean technologies could help China become self-sufficient in energy, given that about 70% of the oil refined in China is imported.
We will have to wait until March for details of the plan, but targets that will drive growth for environmental-sector companies have already been announced. In mid-December, Xi declared that China will have a total of 1,200 GW of wind and solar generating capacity installed by 2030, almost triple the 2019 total.
China’s environmental industries are already substantial. The country builds twice the renewable-energy generating capacity of any other country, but this does not even cover the rate at which power demand is increasing. Should China follow through on its net-zero commitments – and one should be careful about such long-range targets – we think the opportunities for select businesses are huge.
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Don’t forget, too, that Chinese companies are major global suppliers of core technologies for renewable-energy generation (e.g., solar components), clean transport (e.g., electric-car battery components) and energy-efficient buildings and infrastructure (e.g., LEDs). According to the Climate Action Tracker, 127 countries – responsible for around 63% of emissions – are now considering or have adopted net-zero targets (that includes the US, which is yet to formally commit, as well as net-zero ‘newbies’ China, Japan and South Korea). This is creating a vast and fast-growing international market for China-made solutions that help the world avoid carbon. In reverse, select international businesses should also benefit from a faster Chinese decarbonisation.
While we see significant opportunities for investors in green sectors, in China and outside it, we urge caution. Decarbonisation is a highly disruptive process and the journey from here to net-zero, should we get there, will not be without stumbles and wrong turns. We therefore favour an active and highly selective investment approach.
This article was written by Wenchang Ma, co-portfolio manager for the All China Equity Strategy and Deirdre Cooper, co-portfolio manager for the Global Environment Strategy at Ninety One
