19 November 2021
The discussions held at the United Nations Climate Change conference climate conference in Glasgow can feel disconnected from the global equities they may eventually impact. However, the decisions, commitments and agreements made at this year's COP26 will underpin industrial policies worldwide for decades to come.
While governments go through the process of turning these framework agreements into national policies and detailed binding commitments, the short-term impact will likely be limited, especially if prior COP events are anything to go by. Neither COP21 held in Paris in 2015 or COP15 held in Copenhagen in 2009 – which were widely regarded as having had a significant and limited impact on the global commitment to tackling climate change, respectively - led to any clear, discernible share price performance difference for clean energy stocks.
In the medium and long term, however, the outcomes of Glasgow will dictate the pace of the global transition to a low carbon economy, whether obligations on corporates to curb emissions emerge more quickly than before it took place, and in what form new opportunities for firms to capitalise on clean technologies arise.
In Asia, a region already experiencing the impacts of climate change and where the greatest need for commitment and action remains, the transition to clean energy has been underway for some time, but it has thus far been insufficient to curb rising emissions from a region where coal still plays a central role in the energy supply, and that is undergoing rapid development and industrialisation.
China, India, Japan, Indonesia and South Korea are key emissions drivers globally. Though, following India's announcement of a 2070 net zero commitment (with an interim target of 50 per cent of power to come from renewables by 2030) at COP26, all five nations have now made firm commitments to a net zero future. Corporates across Asia are also establishing decarbonisation targets – in response, in part, to pressure from both the public and investors. If both companies and nation states are to achieve these demanding targets, there is a need to urgently replace a reliance on coal with renewables.
So, the rapid scaling up of leading clean technologies such as solar, onshore and offshore wind, batteries and EVs, along with the development and deployment of new technologies such as clean hydrogen and ammonia, will be needed to allow them to transition to a decarbonised future.
This presents an enormous opportunity for corporates around Asia.
Government incentives are coming onstream:
Asian companies, given their role in global supply chains and having a huge home regional market, have the unique advantage of being connected to increasing global demand for renewables technology, while able to capitalise on its growth at home. The region is poised to become the key destination for renewable-energy development and investment this decade.3
Add to this the expected global rise in demand for electric vehicles (EVs) and the region's role in the global renewables supply chains, and Asian companies that embrace the challenges and opportunities to pivot their commercial strategy stand to benefit. Not only that, but they could catalyse broader reforms and renew the dynamism in established companies – such as by attracting fresh talent drawn by the decarbonisation mission.
Though we won't know the exact impact of COP26 for some time to come, we can make some predictions with reasonable confidence:
COP26 was described as being about ‘coal, cars, cash and trees’, and though each of these points is crucial, the ‘coal’ and ‘cars’ elements have the most direct impact on Asian corporates.
Weaning the region off coal-fired power – which Vietnam, the Philippines and Indonesia committed to doing in principle at COP264 – while also ensuring that developing economies can access the energy they need to grow will be challenging. Fortunately, both wind and solar are able to deliver electricity cheaper than coal-fired power in most markets now, aiding the decision to switch. For example, the fall in Indian solar auction tariffs from ~$US75/MWh in 2016 to $US33/MWh today (compared to coal at ~$US50/MWh) was a key driver behind the country’s net zero target announcement at COP26, one which includes a more ambitious 2030 targets for renewables.
Policies to promote EVs have similarly become easier to promote as the steep decline in costs for li-ion batteries make them cost-competitive. As Asian corporates along the auto supply chain scramble to capture a greater share in the EV market, national industrial policies are also overtly pushing for a bigger piece of this opportunity.
The current inflationary energy environment has driven up cost assumptions for solar and batteries. Nevertheless, the long-term cost declines that have made solar and/or wind the cheapest available forms of power are not disappearing. This is crucial because, while phasing out coal power was a key aim of the conference, the alternative needs to come from somewhere.
The cost declines for solar and EV batteries have been wildly and famously underestimated for years, and they will continue to fall. Contrast that with fossil fuel prices, which have been flat for over a century.
Greater demand for electric vehicles as a result of increased affordability combined with growing consumer consideration of them in the US (and a Presidential ambition for half of new vehicles sold in the US to be electric by 2030) presents a specific opportunity for the Korean EV supply chain, which is geared to US demand.5
In its latest Global Financial Stability Report6, the IMF argued that, despite the rapid growth in climate-focused funds over the past two years, they are still far too small a share of global capital to drive the energy transition needed for a 1.5-degree world. Investment in renewable energy needs to triple by 2030 – to over $US4 trillion a year – if the net zero ambitions outlined for 2050 are to be realised, according to the International Energy Agency (IEA)7, with 70 per cent of that needing to come from the private sector, according to the UN.8
At COP26, it was announced that through the Glasgow Financial Alliance for Net Zero (GFANZ), over $US130 trillion of private capital has now been committed to transforming the global economy for net zero over the next three decades. Of that, between $US26-37 trillion cumulatively between 2020 and 2050 will be needed for Asia’s decarbonisation investment needs.9
Environmental, Social, and Governance (ESG) momentum in the corporate world will continue to accelerate in response to a growing global urgency around climate action, with the environmental ‘E’ pillar increasingly used by investors to align capital flows with corporate commitments to a low-carbon future. Alongside this greater investor scrutiny and further tightening criteria of corporate investment decisions, additional government and regulatory focus on climate risk disclosure and action is expected to see corporate ambitions in the space continue to grow.
As the dust settles on COP26, governments around the world will begin turning the announcements and declarations agreed to in Glasgow into more concrete policies on everything from renewables infrastructure to EVs and the energy mix. That needs to take place well ahead of the next big global check in in 2023, where the focus will be on assessing the progress made towards achieving actual emissions reduction goals rather than just agreeing policies designed to get the world closer to them.
Despite being responsible for over half of all global emissions, Asia has the chance to lead the global energy transition thanks to the position it occupies at the heart of global supply chains. As both domestic and global demand for new clean technology grows – everything from EVs to renewables and green hydrogen – so too can the region’s corporates by positioning themselves now to meet that demand in the future.
In some areas and locations, it is already leading the way; China, for example, now dominates global production of batteries10, solar panels and electric vehicles11. Subject to the scale of ambition contained within the industrial policies that eventually emerge from national governments, COP26 could present companies in the region with a once-in-generation opportunity to lead both its and the world’s net zero transition.
Charles Yonts is the Head of Asian ESG (Environmental, Social and Governance) Research at Macquarie Group.