22 April 2021

Green technology and innovation is an emerging uplift for investment portfolios

International Earth Day reminds us of the perilous state of our environment. For value-seeking investors it’s also a good reminder of future portfolio directions as Southeast Asian governments invest in remedies.

Asian Governments have pledged ambitious carbon neutrality plans backed by massive stimulus to push for green and sustainable industries. And for good reason as the stakes are high.

Asia has 15 of the world’s 20 most vulnerable cities and crop yields could fall by 7 per cent to 25 per cent over the next 30 to 50 years.1

As part of wider response measures, Southeast Asia’s governments are pledging investment in green technology. These commitments not only seek to address the immediate climate issues but have the potential to create more than USD$1 trillion in annual economic opportunities by 2030, according to Bain.2

For investors, this is a nascent opportunity as an emerging thematic trend. But knowing where governments and industry will focus efforts could build resilience into your portfolio to grow in tandem with the markets.

Here are themes and market developments to look out for.

#1: Building sustainable smart cities: Southeast Asia is expecting a population surge of 90 million in the next decade, which will put more stress on existing infrastructure. Cities are a key contributor to climate change responsible for 75% of carbon emissions, with transport and buildings being the largest emitters. Smart building solutions can unlock cost savings by adopting efficient energy usage.

However, to solve climate change, the future of transport has to be electric, which is insignificant at under 1% of market penetration globally.3 Indonesia has an ambitious target of producing 20% of electric vehicles of their total production in the next five years.4

Electric vehicle getting charged

Globally, electric vehicles are expected to grow by 36% annually, reaching 245 million vehicles in 2030 – more than 30 times above today’s level. Southeast Asia coming from a low base, is expected to see bigger exponential expansion. In the region, electric two and three-wheelers will represent the lion’s share of the total electric vehicle fleet, as this category is most suited to rapid transition to electric drive.5

With such goals, there will be immense improvements in electric vehicle infrastructure. For example, Singapore is aiming to deploy 60,000 charging points and require all newly-registered cars to be cleaner-energy models by 2030 and phase out internal combustion engines by 2040.

#2: Transitioning to greener energy: Resource extraction and energy generation are still very much coal-reliant and inefficient in the region, and must be decarbonised in a sustainable manner. ASEAN has set a target of 23% share of renewable energy in primary energy supply by 2025.

It is not realistic to suddenly replace fossil fuels with renewables. However, the transition to natural gas is one low-hanging fruit. The advancement of green hydrogen technology can possibly be a solution but solar and wind has the potential to grow significantly due to substantial land mass for the region.

In Singapore, the government has committed to quadruple solar energy deployment by 2025, including covering the rooftops of public housing blocks with solar panels. In another decade, the ambition is to deploy five times that of today, with at least two gigawatt-peak, capable of powering over 350,000 households a year.

Singapore can also play a crucial role as a clean tech hub as a test bed of commercialisation for new green technologies – such as green hydrogen and battery storage capabilities – and scale these solutions in other markets.

#3: Securing sustainable food chains: Agricultural practices are subsistence and inefficient in many parts of the region, however, employing technology and localising production are key to feeding a growing and large urban population in a sustainable manner.

Singapore as a small city with limited land for traditional agriculture wants to increase its local food production through vertical farms and sustainable aquaculture that can increase yield. This includes a commitment of $60mn for a new Agri-Food Cluster Transformation programme announced in the Singapore Budget 2021, which will support tech adoption in the Agri-food sector.

Also take for instance the upside in development of alternative plant-based protein, which is estimated to generate $14 billion by 2025, globally. Singapore can be the launchpad for alternative plant-protein research such as cell-cultured protein, and the development of a plant-protein production hub for the region.

Swedish oat milk manufacturer, Oatly, has also chosen Singapore to land its first factory in the Asia Pacific region. Indeed, sustainable agriculture and food technology can be scaled across SEA improving yield, production and security significantly.6

#4: Reconfiguring to more efficient supply chains: SEAs manufacturing hub can become a viable alternative to China – and supply chains can be reconfigured sustainability. As supply chains shift to this region, more robotics and automation will be employed to improve productivity and energy efficiency.

Furthermore, the implementation of the Regional Comprehensive Economic Partnerships (RCEP), will allow a standardisation of cross-border regulations, which will promote trade efficiencies, streamline logistics and eventually reduce carbon emissions.

Investment Strategy

Southeast Asia’s green revolution should not be ignored by investors.

The investment case for Southeast Asia’s green opportunities will evolve from a small set of pure play renewable and clean tech companies to a broader set of opportunities across the whole economy. All companies across all sectors will be affected by climate change and are pressured by their shareholders to become net-zero and have an action plan in place.

There is a need for investors to be aware of these trends and avoid companies that fail to adapt to these changes. At the same time, investors can gain exposure to Southeast Asia’s green opportunities either through global companies - with strong ESG scores that are adapting to these trends - or pure-play companies that are pushing the boundaries of green innovation.

As Southeast Asia’s transition into a green economy gains traction, knowing what lies ahead will position your portfolio to capture a once in a life-time value creation opportunity.

A contribution piece by James Cheo, Chief Investment Officer, Southeast Asia, Global Private Banking and Wealth Management, HSBC which was first published in The Business Times on 22 April 2021.