EM impact investing: the importance of the environment
In the second of five themed articles on emerging market impact investing, we look at the importance of the environment and the role companies play in the clean energy transition.
As emerging market (EM) impact investors, care for the environment has long been a concern for us. In fact, the environment is one of five key investment themes we’ve identified as part of our impact investment process.
By investing in sustainably run companies whose products or services help address environmental and societal challenges, our intent is to have a positive impact and advance the UN’s Sustainable Development Goals (SDGs) while generating an attractive financial return.
Why climate change risks are even greater in emerging markets
Research suggests developing countries will be disproportionately affected by the negative effects of climate change. This is partly due to a heavier reliance on climate-sensitive sectors like agriculture, forestry and tourism compared to their developed country counterparts.
At the same time, emerging and developing economies are expected to be the biggest source of emissions growth over the coming decades, according to a report by the International Energy Agency (IEA).
The research estimates that the average cost of emissions avoidance is around half the level in developed economies, making clean energy investment in these regions a potentially cost-effective way to reduce global emissions.
How EM companies are playing a major role in environmental impact
Numerous EM companies are facilitators of positive environmental impact, and are investing and contributing to the clean energy transition.
They span various industries, all of which are forecast to see strong demand growth as part of the energy transition. Manufacturers of electric vehicles (EVs), EV batteries, and renewable energy systems, including solar panels and wind energy equipment, play a direct role.
Semiconductor manufacturers play a more indirect role, but their products are an essential component in green transport such as EVs, and in improving the energy efficiency of industry.
Why investors have an important part to play
As investors in EM, we see plenty of opportunities to invest in companies which can positively impact the environment, and which also see strong and consistent forecast demand growth. But it is not simply about adopting a "buy and hold" approach to companies; there is much more to consider, be it ESG, market competition, geopolitics, or valuations.
For example, understanding production processes and supply chains, their impact on the environment and people is essential to evaluating these investments. In particular, answers to questions such as: are plant power sources renewable, or do they still draw on fossil fuels? Is water required for production and how is this managed sustainably? Are working practices of a high standard regarding health and safety?
These are all important pieces of the puzzle.
Company disclosure and transparency has never been more important, and it is improving. But there is work still to do, and we as investors are uniquely placed to identify where companies fall short, to engage and help to drive change.
The competitive environment is a further factor to monitor across all these industries. Low cost of capital and subsidies for some industries has resulted in high levels of competition.
The scale of the opportunities in clean technology in emerging markets is significant. Unsurprisingly given its magnitude, China is important in many of these areas, but there are opportunities across a range of emerging markets, from South Korea and Taiwan through to Brazil. Being active, engaging with companies and grasping the complexity of the opportunities is essential to generating a positive impact and sustainable shareholder returns.
Case study: WEG
Company references are for illustrative purposes only and are not a recommendation to buy and/or sell, or an opinion as to the value of that company’s shares.
What does the company do?
WEG is one of the largest manufacturers of electrical equipment globally. Headquartered in Brazil, it manufactures electrical components, industrial automation parts, coatings and other industrial goods. The company is focused on contributing to a more efficient and sustainable world, investing in energy efficiency, renewable energies, energy storage and electric mobility.
How are WEG’s products having a positive impact?
Its electrical products and technologies enable a shift to renewable power, improving efficiency and reducing waste.
The company’s electric motors are manufactured for a broad range of uses from commercial through to industrial. WEG is one of the largest producers of these products globally, and invests heavily in research and development to make ongoing efficiency gains. The company has 450 global patents. This is not only beneficial from a competitive standpoint, but also delivers progress towards reducing negative environmental impact.
How does WEG approach sustainability?
WEG is committed to working and engaging with all stakeholders, from customers through to suppliers, employees, local communities and shareholders.
For example, WEG has initiated various social programmes over the past few decades to support the communities in which it operates and employs almost 37,000 people.
How does it contribute to the achievement of SDG 7 Affordable and Clean Energy?
SDG 7 seeks to ensure affordable, sustainable, and modern energy for all.
WEG’s products are helping to grow the share of the global population with primary reliance on clean fuels and technology. In many of the countries in which it operates, the company is also playing a role in increasing the share of renewables in total energy consumption. As such, WEG is helping to reduce greenhouse gas emissions.
Improvements in energy intensity, as a result of its products and technologies, are also having a positive impact. Electric motors are estimated to account for around 70% of industrial electrical consumption. Moreover, electric consumption is the main cost faced by owner operators of electric motors. Improved energy efficiency both reduces costs for operators and the impact on the environment via decreased electricity usage. WEG’s products in the digital solutions area are having a similar impact in reducing energy wastage.
Is WEG contributing to other SDGs?
WEG also contributes towards the achievement of SDG 12, Responsible Consumption and Production.
For example, WEG has an “Exchange Plan” where old electric motors can be exchanged for discounted new motors. The initiative ensures that the low efficiency motor is no longer used. Once collected, the motors are dismantled and separated into parts that are used in the company’s own vertical production or distributed to accredited and tracked recyclers.
WEG has a packaging business, RF Reflorestadora in Brazil, which produces the wooden packaging used across various business areas. The company has 12,500 hectares of its own reforestation areas which both guarantees wood supply and also helps to preserve the natural forest and local biodiversity.
WEG also measures water usage, electric energy consumption, solid waste and greenhouse gas emissions, both from direct production emissions (scope 1) and from indirect emissions from energy it has purchased (scope 2). As an example, 87% of solid waste is recycled or reused and the absolute levels of waste have been declining despite the growth of the company.
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