At abrdn, we’re big investors in sustainable growth in Asia – because we believe that Asia will be key in deciding the future of our planet.
By next year, the region is forecast to account for more than half of global economic growth.1 It’s already home to 60% of young people in the world;2 and by 2030, two out of every three middle-class citizens worldwide will be Asian.3 It truly is the world’s growth engine.
Yet at the same time Asia is off track to meet all 17 sustainable development goals (SDGs) set by the United Nations in 2015. It will take the region until 2065 to achieve 2030 targets, by UN estimates.4
Intergovernmental body UNCTAD has calculated that emerging markets (including in Asia) face an annual funding gap of $2.5 trillion to meet their SDG needs. That places an imperative on Asian governments to take action and drive change.
To bridge this gap, they have to turn to the private sector, which has implications for investors. Asia is home to world-class companies. Through them, not only can investors deliver positive impact where it’s needed most, but we believe they can achieve a positive financial return at the same time.
Underpinning our confidence, we see four tailwinds in Asia that we believe will drive investment returns in the coming decades: demand; disruption; digital; and direction. We call them the 4Ds.
We see four tailwinds in Asia that we believe will drive investment returns: demand; disruption; digital; and direction. We call them the 4Ds.
Demand
The Intergovernmental Panel on Climate Change (IPCC) estimates the world must invest $130 trillion in decarbonisation by 2050.5 This represents an opportunity for firms providing energy transition solutions, and for investors who back businesses that can deliver high impact and financial returns.
Last year, Asia Pacific consumed 80% of the world’s coal and generated 51% of its carbon emissions.6 Interlinked with climate change, biodiversity loss is another threat. The region relies on resources and services from its natural environment in and beyond key sectors such as agriculture and mining.
Most Asian governments have set 2050 net-zero goals, and Asia is the largest end-market for electric vehicles, solar and wind generation globally. Chinese firms dominate, with a 91% market share for solar, 78% for batteries and 27% for wind globally.7
By 2060, it’s forecast that hydro, wind, solar, nuclear and other renewable energies will account for 70% of China’s energy provision.8 The energy transition is an emerging markets story.
At the same time, access to health care is very low in parts of Asia, so governments are committed to raise spending to meet demand. The chart below shows rising health-care spending in Indonesia.
Disruption
Disruptive technologies drive change and present major opportunities for investors. The leading companies use innovation to address the needs of new generations of consumers, make businesses more efficient and help to protect the planet. We view them as companies of the future.
Asia is home to world-class technology leaders and innovators. In the decade to 2020, Asia accounted for 52% of global growth in technology revenues and 51% of research and development spending worldwide. Asian firms also filed around 87% of global technology patents.9
But investors need not restrict themselves to the tech sector to find the world’s best innovators. One characteristic to look for in companies is strong investment in research and development. That’s what powers innovation, drives product development and propels revenues. What matters is a company’s ability to harness technology to improve and protect their competitive advantages.
Game-changing technologies enable products and services to be delivered cost-effectively and at scale. In healthcare, for example, use of teledoctors for consultations is rising across Asia (see chart).
Digital
The Covid-19 pandemic has accelerated trends in the way people spend and save worldwide in areas such as contactless payments, e-commerce and financial technology more broadly. Of an estimated 1.7 billion unbanked adults worldwide, almost half live in Asia.10 It points to Asia’s growth potential.
The region has become a primary hub for innovation in e-commerce, 5G, gaming and social media. More people are working from home, driving digitisation and use of cloud computing. We believe many of the changes sparked by the pandemic are here to stay.
At the same time, technological innovation is reducing costs sharply as the world readies for a lower-carbon future. Two thirds of global investment in the energy transition last year was in emerging markets, with China’s investment of $266 billion more than twice that of the US (see chart).11
The growing penetration of electric vehicles is creating huge investment opportunities. Globally, passenger cars account for just 9% of electric vehicle sales, while for vans and trucks it’s 1%.12 Researchers are forecasting an 1,800% increase in production volume of electric vehicles by 2030.13
Direction
For sustainable investment, the direction of government policies and capital flows is clear. Leaders from the G7 developed economies, for example, have pledged $600 billion for investment in sustainable infrastructure in emerging markets.14
US President Joe Biden’s new Inflation Reduction Act aims to channel $400 billion to reduce greenhouse gas emissions in the US and is chock full of tax credits for clean energy investment and generation.
The bill’s introduction drove a rally in the share prices of firms in line to benefit, supporting our view that the energy transition will drive returns for companies providing solutions to climate change. It underlines the value of having a forward-looking view on the energy transition and who will benefit.
At the same time, capital directed at sustainable investment is rising. Allocations to impact investing saw a 20-fold rise from 2015-20, to $715 billion;15 while allocations to equity funds centred on environmental, social and governance (ESG) investing grew 8-fold from 2015-21, to $1.6 trillion.16
ESG investing is just getting started in Asia. The region accounts for 40% of global equity market capitalisation17 but just 4% of assets in ESG funds globally. Again, Asia’s growth potential is clear.
We’re confident that sustainable investment will accelerate, and we’ve long been advocates of ESG investing in the knowledge it drives returns. Here we explain how ESG can enhance performance.
Summary
Asia’s long-term growth potential is compelling as it transitions away from dependency on exports to domestic consumption driven by urbanisation and a rapidly rising middle class.
Investors have an unprecedented opportunity to capitalise on this growth and on thematic trends, such as sustainable consumption, expanding access to health care and financial services and the transition to renewable energy.
Asian governments are committed to decarbonisation, and we expect constructive policies to encourage private capital to deliver solutions. Investors can also expect more policies to inhibit firms that are not part of the solution, whether through carbon taxes or other policy disincentives.
Although the road to net zero remains long and convoluted – and unlikely to be reached by 2050 – global climate action is only likely to ratchet up. This offers great long-term opportunities to invest in companies with sustainable competitive advantages providing critical solutions.
At the same time, Asia is an innovation hub, its firms at the forefront of technological change. Moreover, when it comes to ESG and impact investing, government policies and capital flows are only heading in one direction.
For investors, the signposts are clear – and they’re all pointing towards sustainable growth in Asia.
1 World Economic Outlook, IMF, October 2018.
2 https://blogs.adb.org/blog/asia-young-people-are-key-achieving-national-development-goals
3 The rise of Asia's middle class | World Economic Forum (weforum.org)
5 IIGCC Climate Transition Report
6 BP Energy Statistics Review, Barclays report 6 September 2022
7 Bernstein, November 2020
8 China National Bureau of Statistics (NBS), BofA Global Research estimate
9 McKinsey Global Institute, December 2020
10 World Bank 2021.
11 BNEF data
12 BloombergNEF’s seventh annual Long-Term Electric Vehicle Outlook
13 BofA Global Research
15 Source: (1) Global Impact Investing Network, September 2020
16 BoA Global Research
17 World Bank, Barclays report 6 September 2022