China’s net zero pledge holds opportunity for emerging markets investors
Portfolio Manager Daniel Graña outlines three reasons why he believes China’s pledge to achieve carbon neutrality by 2060 is credible and explains how it could create opportunities for emerging markets investors.
3 minute watch
Key takeaways:
- From a national security perspective, the fact that the gap between domestic production and consumption of hydrocarbons is being filled by less-stable parts of the world has impelled China to move away from hydrocarbons.
- China also wants to move into higher-margin, higher intellectual property products; renewables clearly fit into that industrial production framework. It is also now cheaper to produce electricity using renewables than coal, so China has an economic motivation to decarbonize.
- Many of the supply chains that stand to benefit from China’s pledge to decarbonize reside within emerging markets, creating potential opportunities for investors.
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Daniel Graña: We do believe that China’s net zero pledge by 2060 is a credible pledge for many reasons. Number one, for national security reasons: There’s a yawning gap between domestic production and domestic consumption of hydrocarbons, and that gap is being filled by parts of the world that are perhaps a little less stable. Consequently, for national security reasons, China would like to move away from hydrocarbons.
Number two, for industrial reasons, China certainly wants to move up the value-added curve, move away from making shoes and clothes into more higher-margin, higher intellectual property kind of products. And so pushing solar, wind, and electric vehicle batteries certainly would fit into that industrial policy framework. As a matter of fact, today, more Chinese workers are employed by the renewable industries I just identified than in the coal mining industry.
And lastly, for economic reasons. Today, given the cheaper manufacturing costs for solar and onshore wind, it is cheaper to produce electricity using these renewables than it is from coal, without all the negative environmental implications of coal-based electricity.
And so for those three reasons, I think it does make sense that China wishes to move on from carbon.
Now, what are the investment implications? Well, certainly there are going to be some favored ecosystems. Anything that touches copper, lithium, cobalt, nickel, solar, wind, electric vehicles, batteries for electric vehicles – a lot of these supply chains reside within emerging markets. Some do not, but nevertheless, that creates opportunities for us in emerging markets.
In terms of disfavored ecosystems or parts of the world that we have to worry about, obviously anything that has to do with hydrocarbon exporting, and of course carbon emitting. So steel or cement would have to eventually face a reckoning in terms of the carbon emissions that they currently make. And so, because China is the largest carbon emitter on the planet, their pledge to decarbonize has enormous implications for how we would invest, where we would invest, but it does create opportunities for investors, and that’s what gets us excited about that pledge.
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3 minute watch
- From a national security perspective, the fact that the gap between domestic production and consumption of hydrocarbons is being filled by less-stable parts of the world has impelled China to move away from hydrocarbons.
- China also wants to move into higher-margin, higher intellectual property products; renewables clearly fit into that industrial production framework. It is also now cheaper to produce electricity using renewables than coal, so China has an economic motivation to decarbonize.
- Many of the supply chains that stand to benefit from China’s pledge to decarbonize reside within emerging markets, creating potential opportunities for investors.