Talking Heads – Investment opportunities in Asian environmental markets

This is an audio transcript of the Talking Heads podcast episode: Investment opportunities in Asian environmental markets

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing environmental investing in Asia. I’m Daniel Morris, Chief Market Strategist, and I’m joined today by Oscar Yang, Senior Portfolio Manager at Impax Asset Management. Welcome, Oscar, and thanks for joining me.

Oscar Yang: Hi, Daniel. It’s my pleasure .

DM: Could you please give us an overview of the landscape for environmental investing in Asia, and share with us some of the key trends that make the region interesting for investors? In particular, are you seeing governments and regulators taking action to stimulate the growth of Asian environmental markets?

OY: Over the past 15 years, there has been a dramatic expansion of both the breadth and depth of Asian environmental market investment opportunities. From about 150 companies in 2009, we now have around 900 companies.

The initial opportunities were focused on infrastructure buildout and utility business models. Nowadays, we have a much more diversified opportunity set, including high-end industrials, technology and solutions leaders.

Asia has long been a growth-oriented region. We’ve seen the rise of Japan, South Korea, Taiwan, Hong Kong, China and India, and South Asia will likely become the growth driver as we move forward.

These countries are at different stages of their economic and social development, which offers diversified opportunities to investors. And the opportunities are sizable given the large populations and economies. The region contains more than 60% of the global population and is undergoing urbanisation, with a rapid expansion of the middle class.

There are also severe environmental challenges, intensified by the natural resource constraint. These challenges demand environmental solutions, be it renewable energy, electric vehicles or factory automation. This is paving the way for the birth of successful Asian companies.

We can split these into two categories.

First, public demand for better living standards. By that, I mean the most basic things – in the less developed areas. For example, access to safe drinking water, clean air, safe soil and even basic food safety.

Second, some countries are taking a longer-term, more strategic view, trying to capture sunrise industries in the transition to a greener economic model. They are aiming to move up the industrial value-added curve and potentially leapfrog others to become globally competitive in those emerging sectors. China is probably a good example, with its mandates promoting renewable energy, high-speed rail and electric vehicle industries.

On top of that, all the major countries in the region have committed to carbon emissions goals. This should ensure the consistency, effectiveness and durability of their policy support for the environmental markets we invest in.

DM: What are some of the main themes, sectors and industries in Asia that are interesting from an investment perspective? And why do you find them so?

OY: We break down the environmental markets into six major categories: water, clean and efficient transport, the circular economy, sustainable food, and smart environment. We see attractive investment opportunities across all those markets.

In clean and efficient transport, for example, we can capture companies benefiting from providing products and services to facilitate the transition to electric vehicles (EV). When we map out the whole EV value chain, the leading players – including the major EV original equipment manufacturers (OEMs) and the key components manufacturers such as those that make battery cell power management systems and charging equipment – are Asian companies.

On top of that, Asian companies are not only leading the technology advancement in the EV race, but also creating new business models such as the EV battery swap model versus the traditional charging model. This market dynamic is completely different from the internal combustion engine vehicle value chain where Western companies dominate.

Another example is digital infrastructure. The China/US technology decoupling trend has been creating new demand for leading edge semiconductors which play a key role in a wide range of end-market applications, especially industrial power networks and consumer energy efficiency.

There are semi components, equipment and material companies from more developed Asian regions such as Japan, South Korea and Taiwan that are benefiting from capital expenditure driven by offshoring and reshoring. There are also companies, especially in China, in a strong position to enjoy new growth opportunities in trying to provide import substitutes to fulfil national security and technology independence mandates. That demonstrates the diversification of the investment opportunity set.

DM: How are companies in the region addressing environmental challenges? Are there examples of innovative technologies that are making a significant impact on sustainability and offer investment potential?

OY: Again, I would use the EV sector as an example. The fast-growing EV ecosystem has fostered innovation by Asian companies.

We invest in a China-based automation specialist that has applied its technology to enhance the energy efficiency of EV drive trains. This company now is one of the largest third-party providers of motors and motor control systems to China’s EV makers. It is seen as one of the national champions paving the way for faster EV transition and reducing the reliance on foreign technology in this key strategic industry.

Innovation in the EV segment is not limited to China, nor to the advanced car-making sectors in South Korea and Japan.

A new generation of mobility-focused software companies is emerging in countries such as India, where local talent and expertise have been cultivated by its world-leading technology outsourcing industry. One company we invest in specialises in EV powertrain software and advanced driver assistance system software.

Among the top 15 global original equipment manufacturers, 12 are customers of this Indian company due to its sector know-how and its ability to provide highly cost competitive, leading-edge software solutions.

DM: To finish, can you summarise why investors should consider environmentally focused Asian companies?

OY: We believe companies that provide products and services to address environmental challenges are in strong positions to benefit from long-term structural growth opportunities. This is supported by Asian countries’ growing focus on technology, leadership and climate action and huge demand for basic infrastructure and improved living standards in the region.

DM: Oscar, thank you very much for joining me.OY: Always a pleasure, Daniel, thank you.