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China has the most ESG opportunities, according to Ninety One Global Environment fund manager

20 July 2022

Despite being the world’s single biggest contributor to carbon emissions, Deidre Cooper is overweight China in her sustainable portfolio.

By Tom Aylott,

Reporter, Trustnet

China is filled with the best opportunities for environmental, social and governance (ESG) investors, according to Deirdre Cooper, manager of the Ninety One Global Environment fund.

Global funds typically have an overweight to the US and although the £1.9bn portfolio’s allocation to the region is still its largest weighting at 41.4%, it is far lower than the IA Global average peer’s 56.1% exposure.

Instead, around a fifth of its assets are held in China, an unlikely overweight for an ESG fund as the nation is the world’s single biggest contributor to global warming, accounting for 30% of all emissions.

China’s transition to net zero will be more substantial than the West’s and more difficult to tackle, hence why a lot of opportunities are appearing in the market.

Cooper said: “It is the biggest producer of carbon emissions so it’s not surprising that a lot of the solution providers are appearing there, while the 27 EU countries altogether account for less than 8% of emissions.

“You really need to think about emerging markets, as well as developed markets, when you want to invest in decarbonisation.”

Although China’s net-zero goal is set a decade later than the standard 2050 target adopted by other signatories of the Paris Agreement, the country has been rapid to transition in some areas.

For example, it accounts for more than half of all electric vehicle (EV) sales globally, according to Cooper.

The second highest is Europe, which buys around 30-40% of EVs produced, whereas “the US is tiny,” only making up 10-15% of all purchases.

A partial reason for this is Tesla’s dominance in the US market – even though Cooper anticipates more diversity in the States as established car manufacturers roll out their own EVs. Conversely, China already has a range of “companies you've never heard of” that are offering solutions to this such as XPeng, Li Auto, NIO and BYD.

She added: “Last month, 37% of new cars sold in China were electric so they're way ahead of Europe, which was in the high teens. The US was in the low single digits, so there are certain areas where people are moving much more quickly to decarbonise.”

The fund does not have holdings in the car manufacturers themselves because “it’s a tough business,” but invests in companies in the supply chain such as Zhejiang Sanhua Intelligent Controls.

“Over the cycle, the auto industry doesn't make fantastic return on capital, so we tried to find the suppliers to the industry that have really strong market positions and can generate really good returns over time,” Cooper said.

That beings said, having assets in the Chinese supply chain has not been straightforward in recent months as China’s zero-Covid policy continues to enforce frequent lockdowns.

Freezing the production line, which was already backlogged, detracted from the fund’s overall performance at the start of this year as Shanghai, one of China’s largest cities, was put back into lockdown.

Though this has been a nuisance in the short-term, Cooper expects the policy to be scrapped at some point over the next five years, so her assets there are still a lucrative long-term holding.

“Zero-Covid was a big headwind to our performance in the first quarter. Our Chinese names really underperformed, but we're long-term investors and we felt confident that in five years’ time, zero-Covid is not going to be a huge factor for companies’ ability to produce equipment,” she added.

China’s ‘common prosperity’ programme, on the other hand, was not a concern. It swept away millions in profit from the technology and education sectors in its mission to level the social playing field in China, but the fund’s goals of reducing carbon emissions are aligned with the government’s and interference is therefore unlikely, according to Cooper.

Although China has been rapid in tackling its sizable carbon emissions in some regards, such as the high demand for EVs, there are areas where Cooper would like to see improvement.

More than half of the 176 gigawatts of coal power being constructed around the world in 2021 was in China and the nation finished building its largest site, the Shanghaimiao plant, in December last year.

Cooper said: “There are certain areas where it is moving much more quickly to decarbonise, but it's not everywhere. We would like to see fewer coal plants being built in China for sure, but the percentage of coal in the electricity grid has decreased every year for the past 10 years.

“You're going to have to be more patient, there's no question about that. China will not decarbonise as quickly as Europe, which has a 2050 net zero goal. China will find it harder to do that.”

Although “Chinese environmental policy is definitely not perfect,” having a high allocation to the region is a good diversifier.

Many ESG funds predominantly hold big names in the US market and overlook opportunities appearing in less developed parts of the world.

Cooper said: “There's definitely a lot of crowding within the ESG world and lots of funds all hold the same name. For us, we have generally have few overlaps.”

It’s for this reason that Ninety One will be launching a new ESG fund to invest solely in emerging markets, which will be managed by Juliana Hansveden.

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