Electric vehicles (EVs) have increasingly dominated headlines and you can now frequently spot such vehicles – cars, taxis, buses and even waste collection trucks – on Singapore roads.
Singapore is also accelerating EV infrastructure and aims to phase out internal combustion engine vehicles and have all vehicles run on cleaner energy by 2040.
This is in line with global trends, as many large automakers are expected to introduce dozens of new EV models in the coming years. By 2040, more than two-thirds of new vehicles sold are expected to be electric.
At the same time, governments, companies and citizens globally are rallying together more than ever before to address climate change. At the recent COP26 climate summit, further pledges were made to strive for net-zero carbon emissions, methane emission reduction, halting and reversing deforestation, and the phasing-down of coal.
The transition to clean energy and the broader shift towards sustainability are an unstoppable trend that Citi has termed “Greening the World”, one that presents potentially profitable investment opportunities as well.
With the advancement of technology, the cost of building EVs has dropped significantly and they are expected to surpass traditional combustion engine vehicles in terms of cost competitiveness and performance in the coming years.
A recent Straits Times article highlighted different EVs for various price segments, a testament to the significant progress in EV economics.
In the broader context, green energy is already cheaper than most varieties of fossil fuel energy. A Bloomberg New Energy Finance report in 2020 noted that solar and wind power are the cheapest new sources of electricity in most parts of the world, beating fossil fuels such as coal and natural gas.
To illustrate the pace of progress, the cost of producing solar panels has dropped by an astounding 90 per cent in the last decade.
Clean energy technologies will only get better; thus, what is good for the environment is now also making great economic sense.
Companies involved in the development of new technologies that seek to enhance energy efficiency and reduce emissions represent one category of potential investment opportunities.
These include infrastructure suppliers and installers, battery makers, smart appliance makers and EV makers.
Clean energy is at the forefront, given that most greenhouse gas emissions are generated during energy production and usage (across buildings, transport and industrial sectors).
In addition to clean energy, there are green opportunities for investors in diverse areas such as sustainable food production, energy-efficient construction materials, waste management and clean water.
In every area, efforts are being made to reduce carbon footprints, including better land use, meat alternatives, enhanced construction materials and improved desalination technologies.
While sustainability opportunities exist, the risks are very real for companies as well.
Firms will have to adapt their existing business models by embracing new technologies or face disruption. It is intuitive that companies involved in some of today’s heaviest greenhouse gas emitting sectors will face the greatest risk of disruption.
Companies that do not prepare well for the future will face potential regulatory headwinds, constraints in accessing capital and consumer boycotts.
Disclosure requirements on sustainability have been enhanced to raise the bar on corporate accountability and enable investors to make informed decisions.
For example, the Singapore Exchange and other exchanges require listed companies to include an annual sustainability report on how environmental, social and governance (ESG) factors present opportunities and risks.
In the fund management industry, the Sustainable Finance Disclosure Regulation (SFDR) implemented in March last year by the European Union now requires fund managers to qualify their “sustainable funds” under one of two categories – Article 8 (funds that promote
environmental and/or social characteristics) or Article 9 (funds that have a sustainable investment objective).
The regulation aims to encourage responsible and sustainable investments, and the trend is accelerating.
According to investment research company Morningstar, sustainable funds (Article 8 and Article 9 funds) formed 50 per cent of new funds launched and almost 60 per cent of fund sales in the third quarter last year.
For the average investor, funds offer a diversified way to gain exposure to green investments as a fund typically holds more than 30 to 50 companies, thereby avoiding single-counter concentration risk.
The fund literature provides useful information to the investor that may include the SFDR classification, fund objective, top 10 holdings, past performance and associated volatility.
It is useful to look into the top 10 holdings listed in the fund fact sheet to gain insights into the companies the fund manager is focusing on, which may be world leaders in renewable energy, driving energy efficiencies or other sustainable areas.
The fund manager may also highlight how it is actively engaging with the companies to bring about positive sustainable outcomes.
Build portfolio exposure
Citi believes that “Greening the World” is a long-term unstoppable trend and we recommend long-term portfolio exposure to the transition’s potential beneficiaries.
However, progress does not occur in a straight line and there will be volatility along the way.
For example, after strong gains in 2020, the global alternative energy sector gave up some of its gains in the past 12 months as the world reopened and plugged acute energy shortages with traditional fossil fuel solutions as a short-term measure.
Despite economic shutdowns, greenhouse gas levels reached record highs in 2020, according to the World Meteorological Organisation. Nonetheless, recent developments only strengthen the case for acceleration in green energy transition.
Financial institutions have been an active contributor in this green movement by helping companies raise capital to fund green projects and also helping consumers to finance EV purchases.
Increasingly, consumers are also seeking information on whether an investment product has embedded sustainability characteristics or objectives, and financial advisers play an important role in highlighting key information to help consumers make informed decisions.
A pioneering Harvard Business School study in 2015 found that companies with good performance on material sustainability issues significantly outperformed companies with poor performance on these issues. Since then, many other studies have shown that companies and funds that score higher on ESG metrics tend to have higher risk-adjusted returns, bringing to mind the old adage of “doing well by doing good”.
The quest for cleaner air and cooler temperatures is good for the planet and its people, which has led to trends such as EVs catching on. Investors who are well positioned for this transition could reap healthy gains for their portfolios.
Lui Chee Ming is the head of wealth management at Citibank Singapore
THE STRAITS TIMES (SINGAPORE)/ASIA NEWS NETWORK