While every region will feel the effects of climate change, Asia’s developing countries, which account for 50% of global greenhouse gas emissions (GHG), face outsized challenges. These nations will need to adapt to increasing physical climate perils and mitigate the tremendous costs of decarbonisation and energy transition.
Many Asian governments have pledged to implement risk-mitigation policies. Reaching these targets will require countries to significantly reduce emissions while maintaining economic growth. Historically, these two objectives contradict one another, heightening the overall challenge for emerging Asian countries.
Wellington’s Asia-based investment professionals, in collaboration with our global sector and climate-research teams, believe that Asia’s decarbonisation process should not only decrease transition risks, but also create meaningful medium- to long-term investment opportunities.
The cross-pollination of research perspectives gives us conviction that the low-carbon transition may enable Asian countries to leapfrog traditional energy development by building renewables-based systems that are efficient, resilient and significantly less expensive than those based on fossil fuels. Eventually, this leapfrogging could accelerate emerging Asia’s ability to decouple both emissions and energy use from economic growth, with potentially transformative outcomes.
Reducing energy intensity
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While the goal of the energy transition is to reduce carbon emissions, in most countries, the decarbonisation journey starts with reducing energy intensity (energy use as a share of GDP) — primarily through energy efficiency gains. Today, the efficiency improvements made in some developed, industrialised economies have led to reductions in energy intensity as well as absolute energy use. The US and Sweden, among others, have begun to decouple energy use from growth as a result.
In fast-growing emerging Asia, energy use remains high, as do production and carbon intensity. Given the pace of industrialisation, urbanisation and population growth, emerging Asia’s GDP will likely remain energy-intensive for quite some time.
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As Vietnam, Malaysia and Thailand increasingly become “factories to the world” amid the shift in supply chains away from China, their energy use is growing faster than GDP. Because reducing absolute energy use at this stage of a country’s development is impractical, we expect to see increasing investment across emerging Asian countries to reduce their energy intensity by improving efficiency.
Reducing carbon intensity
Our research suggests that emerging markets’ transition could move faster than it has in developed markets. China’s development miracle of the past 20 years was accompanied by a steep rise in energy demand, so it makes sense that as India catches up and other emerging Asia countries accelerate development, this growth will drive similar energy-consumption booms.
Following years of efficiency gains and use of renewables, however, China has begun to decouple emissions from growth — despite continued increases in energy consumption.
China’s shifting emissions trajectory makes us optimistic that if India and other Asian countries can start to decouple their energy production (which is still at relatively low levels) from GDP, they may also be able to separate emissions from growth before their energy use peaks. This will not be easy. Or cheap. But it could happen faster than expected, given the potential for developing countries to leapfrog over energy systems reliant on fossil fuels straight to renewables, at tremendous savings in the medium to long term.
The potentially transformative effect of leapfrogging
Many developing countries leapt directly to mobile telecommunications and distributed financial services networks, skipping the build-out of landline telephone networks or brick-and-mortar banks. They were able to do this because of the electronics cost curve; as the computing power needed to run mobile devices became faster and more efficient, associated costs fell.
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The analogy holds true for renewable energy, relative to fossil fuels. The current cost to generate energy from hydrocarbons is about the same as it was 150 years ago, after adjusting for inflation. There have been massive technological advancements in drilling, mining, and power generation, but because fossil fuels are a finite resource, the more they are extracted, the scarcer they become.
As a result, prices remain elevated. Renewable technologies have a dramatically different cost trajectory. Their power sources are infinite and modular, aside from being able to benefit from economies of scale. As associated technologies improve and market penetration accelerates, it is likely that cost declines will continue.
Over time, the economic benefits of the leapfrog path to decarbonisation (particularly for countries that do not use very much energy today) could be transformational. Economists refer to energy infrastructure as general-purpose technology, with vast applications. Transitioning the energy system, along with complementary advances in communications, data processing and artificial intelligence, could lead to a medium-term economic transformation that is hard to imagine today. Future industrialisation could be powered by energy systems characterised by low-carbon sources whose costs decrease with scale.
Pace of energy transition almost certain to accelerate
The energy transition is just beginning in Asia’s emerging markets, and the trajectory remains uneven. Current investment opportunities are concentrated in sectors directly related to decarbonisation, including renewables, utilities and the grid, electric vehicles and adjacent activities such as mining and refining of critical raw materials.
As the transition gains momentum, investable opportunities should extend to additional sectors, including construction, transportation, industrial production, agriculture and others. Identifying potential climate leaders — companies addressing the risks and opportunities presented by climate change — may require unique investment perspectives from a range of sector and industry specialists.
Over time, we expect decarbonisation to be a total-economy effort. As rapidly industrialising countries realise the tangible economic benefits of decarbonisation (on top of fulfilling national net-zero pledges), the pace of the energy transition is almost certain to accelerate.
While investments in adaptation and resilience are needed to stem physical climate impacts, the structural solution to mitigating physical climate risks is for countries to emit far less heat-trapping greenhouse gases over time and accelerate at scale carbon removal and storage solutions. And for countries across the developing world, including emerging Asia, the key is to lower the economic intensity of carbon without hampering economic growth and development.
Santiago Millán is macro strategist and Edwina Matthew is investment director, sustainable investment, APAC, with Wellington Management
