China holds a quarter of transition investment opportunities: report

Over half of the $100 trillion investment needed to ‘green’ the world’s capital stock is required in emerging markets (EMs), with China needing more investment than any other country, according to a new report.

More investment will be needed in the Brics (Brazil, Russia, India, China and South Africa) nations than in the G7, with the energy, utilities and airline sectors in the greatest need of capital, according to the report released on Tuesday (October 25) by BNY Mellon Investment Management and Fathom Consulting.

“The greatest investment in particular, unsurprisingly, we see is being required in China – 24%. And we see great opportunities there,” said London-based Kristina Church, head of responsible strategy at BNY Mellon Investment Management.

“Those opportunities aren't always directly in the sectors that need them the most, some of those opportunities will be in the sectors that supply to those such as the energy sector and the utility sector. And there are also opportunities, of course, for new players who will create new business models to transition,” she told AsianInvestor.

Within mining, there will be a significant increase in demand for metal and minerals for the transition and capital goods sector, she added. “There will be a need to improve the energy efficiency of buildings, and the shift of transportation to the electrification of vehicles.”

In China specifically, Church said there are opportunities in the demand for the supply of materials and part for the development of renewable energy projects. Risks of stranded assets have prompted Asian nations to shift their energy systems away from traditional fossil fuel and coal.

“Some of those regions may not yet have fully developed the infrastructure that supports the level of car ownership, for instance, that we have seen in developed markets. [Investors] might find that the shift to electric mobility and more sustainable modes of mobility, such as smaller vehicles, micro mobility, two-wheeled electric vehicles etc., is in some ways an easier shift, because you're leapfrogging technology,” she noted.

“These regions are most exposed to climate damage. We're seeing many regions in Southeast Asia and in Asia more generally, that’ll need investment into infrastructure to support climate damage, as well as mitigation,” she added.

The report highlighted that the $100 trillion needed for the world to reach net zero by 2050 does not include only new investments; it instead advocates for a redeployment of capital into transition assets that will help reduce greenhouse gas emissions.

“The longer the transition is delayed, the larger the amount of spending needed will be,” the report wrote.

Still, even as investors increasingly look to incorporate environmental, social and governance (ESG) principles into their investment approach, risk and return remain top of mind, which could explain some investors’ hesitation in allocating more towards emerging markets.

Church acknowledged that those considerations do exist, along with other challenges such as a lack of data disclosures, which could improve with governmental support and policies.

“We have seen huge growth in the debt market and bonds that are linked to sustainable goals or with green bonds, etc. We can see more focus to ensure that some of the shifts can happen with use of proceeds, bonds that can also support a shift in financing, but it really does involve a systemic change in the way markets work, and collaboration across the public and the private sector to really ensure that we can galvanise the capital,” she said.

“We've had $130 trillion of assets pledged towards net zero with alliances that isn't the same as seeing the actual real world impact as yet of capital being driven to the right locations. So we're hopeful that this report, by highlighting where it is most needed, can really help ensure that we get those policy support levers that would drive it in the right direction.”