As the world’s second-largest economy and the largest energy consumer, China tops the tables of carbon emitters, accounting for one third of global CO2 emissions. That makes the pace of its efforts to reduce emissions a crucial factor in the worldwide push to limit global warming to 1.5°C, writes Janet Li, ESG Research Analyst for China Securities.
Climate has moved up the national agenda in recent years. Ahead of COP26 in 2021, China said it would strive for peak carbon emissions by 2030 and carbon neutrality by 2060 (the so-called 30/60 target). In 2024, China invested $676 billion in clean energy, or 38% of the global total.1 It has achieved notable progress in deploying low-carbon technology, with more solar capacity and electric vehicles (EVs) added last year than by the rest of the world combined.2
According to BMI’s country level Low-Carbon Energy Transition Framework,3 China leads climate progress in Asia Pacific. Its business environment is supportive of the low-carbon energy transition and its renewables sectors are robust.
Wider benefits
A path to a carbon-neutral China by 2060 can transform not only its energy mix, but also its industrial structure and society’s overall standard of living. According to a recent China National Energy Administration (NEA) white paper,4 household solar photovoltaic power installations in rural areas has reached 120 GW, benefiting over 5.5 million residents, adding 11 billion RMB in extra income and two million jobs a year.
Accumulative investment in fixed energy sector assets of around 39 trillion RMB over the past 10 years has significantly boosted growth in upstream, downstream, and related industries. Major construction projects in energy sector have been put into operation, and a complete equipment manufacturing industry chain has been established.
Technological innovation in new energy, hydropower, nuclear power, power transmission and transformation, and new energy storage has accelerated, enabling the clean energy industry to grow into a new pillar of China’s industrial system.
China at the heart of global energy transition
It can be said that China has become the engine of the global energy transition.
In areas such as solar PV and battery, production is centred in China. The rapid scale-up of manufacturing capacity makes it possible to reduce costs more quickly, helping to popularise clean technologies in China and around the world.
From a financial market perspective, Chinese equities now account for around 20% of investable names in global public markets in themes such as clean-energy infrastructure, future mobility, and efficient energy.5
China’s growing dominance in areas from critical mineral resources to advanced manufacturing has raised policymaker concerns in the US and Europe. With a reshaping of global supply chains underway, geopolitical concerns are making it more challenging for investors to pick companies that stand to benefit in the short to long term.
The BNP Paribas Asset Management approach
According to research from JPMorgan (“Lost in Transitions(s):FAQ on Transition Investing,” published 26/02/2024)), appetite is emerging for ‘transition investing’ rather than investing in climate funds focused exclusively on ‘solution providers’ across Asia. The main reasons are the efforts:
- To reduce sector biases which have led to relative underperformance over the past three years
- To facilitate and accelerate climate mitigation efforts.
We believe it is time to reassess the performance of leading companies in ‘hard-to-abate’ industries as they proactively transition from ‘asset phase-outs’ to climate solutions.
Regulators have emphasised the need for a ‘green and inclusive’ development.
The National Development and Reform Commission led the joint publication of the Guidance Catalogue for Green and Low-Carbon Transition Industries which for the first time incorporates low-carbon transition elements into national classification standards.
A State Council action plan for energy saving and decarbonisation guides the transition of key industries. Targeted industries include steel, petrochemicals, non-ferrous metals, building materials/construction/operating, and transportation. It also aims to guide the allocation of funding to support emission-intensive sectors such as power, heavy industry, and agriculture, which traditionally fall outside the scope of green finance.
In Asia, considering the local climate adaptation demand in sustainable investing, we’ve developed the BNP Paribas Asset Management Transition Model to track the progress of companies in the power and mining sectors.
In China, a conceptual carbon-neutral framework guides our ESG-integrated research around energy transition. The aim is to capture potential opportunities from a top-down perspective in a systematic way.
Considering China’s record for policy consistency, we believe the transition story will continue and last for many decades.
[1] BNEF Energy Transition Investment Trends 2024
[2] global-energy-perspective-2024.pdf (mckinsey.com)
[3] BMI’s Low-Carbon Energy Transition Framework is a benchmarking tool measuring the progress of 18 markets in the APAC region towards a clean energy future; FS_BMI_Energy_Transition_Index_Methodology.pdf (fitchsolutions.com)
[4] Full text: China’s Energy Transition | english.scio.gov.cn
[5] MSCI, Data as of Jan. 31, 2024. Based on the MSCI ACWI IMI thematic indexes; 91b0d87a-4e7a-731f-4efd-4cbaf1dd48ce (msci.com)
