Considering the Climate: Investing in Emerging Markets

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To celebrate Climate Week 2022, learn from Senior Research Analyst Ola El Shawarby how VanEck’s Emerging Markets Equities team is looking at climate-related risks and opportunities as well as specific stocks that may benefit from the energy transition. in their decision-making processes.

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What are the unique climate-related factors that drive investment decisions and engagement with companies?

Given that we focus on secular, long-term growth trends, they tend to align very well with sustainability and sustainable goals. We really take it on a case-by-case basis rather than adopting a checklist approach. We think this really gives us the opportunity to focus more specifically on the physical issues with respect to climate, which usually tend to affect that particular sector or company, rather than trying to apply a holistic approach.

These could be things like carbon emissions, it could be waste management, energy efficiency and sustainability. A variety of factors, but the key here is that we focus on the physical factors that affect specific companies and that’s also largely because we’re a bottom-up focused fund and strategy. We invest in companies, not just topics or ideas.

What are some observable climate-related trends and topics?

With all that is going on and focusing on environmental trends, sustainability and climate change, there are a lot of opportunities and risks that come with that.

What we’re trying to do when we look at the different companies in our portfolio, or the ones we’re considering investing in, is really think about where the opportunities and risks might lie in terms of climatic factors.

Some companies will benefit from specific themes or trends that arise from a focus on climate change. This could include things like electricity and green energy transition, which recently with the war in Ukraine has become not just a climate issue, but also an energy security issue.

This is one bucket. We also have other companies that may, as a result of certain superior environmental practices, take advantage of the competitive advantages that place them at a disadvantage either with the consumer or in comparison with their peers.

We also have some companies that are really trying to move towards better environmental practices and sustainability practices as a way to manage their own risk, and that could be from cost factors or fear of regulatory sanctions.

What we always like to talk about is stocks, so I think giving some examples to show how we think about opportunities or risks as far as ESG, more specifically climate factors, would be helpful.

One such example is the direct beneficiary of the topic of electricity, which is now clearly gaining a lot of traction, a company called LG Chem (OTCPK: LGCLF), a Korean company. Historically, it was one of the largest petrochemical producers in Korea. Recently, and what we think is exciting for the company and which we believe will drive value and growth in the future, is the relatively newer sub-segment of advanced materials and, within that, battery component production.

These guys are actually one of the biggest producers of nickel cathodes, a key component of electric car batteries and really hard to manufacture.

With this in mind, they benefit greatly, in terms of growth, from the increasing demand for electric vehicles as well as the expected increase in EV (electric vehicle) penetration in the future. They produce these components and sell them to battery makers. This will be a major driver of earnings growth in the future. Moreover, they also think very seriously and try to introduce a lot of programs that focus on plastic recycling when it comes to their traditional petrochemical business. This is also something we strongly encourage.

Finally, they are also the majority owner of LGES (LG Energy Solution). They own more than 80% of a company called LGES, which is the largest battery manufacturer outside of China. It’s a direct beneficiary of the topic of electricity and in general we particularly like the story because, in our previous discussion on the direction of travel and optimization, this is a company in transition from a sector that has traditionally been somewhat controversial when it comes to climate factors to one that is directly aligned with sustainability. And electricity is better in the long run.

This is one example. Another company that is also a direct beneficiary of some climate-related topics is a company called Sungrow Power Supply, a company in China. They manufacture solar inverters, which are a major equipment component when it comes to solar power systems. It also produces energy storage systems. They are one of the world’s largest producers of solar inverters, and I believe they have a market share of over 25%. It is also one of the largest exporters from China of energy storage systems.

If you think about renewable energy and how much there is an increase in the demand for renewables, including solar, these people are directly in a good position to benefit from this growth and this rise in demand. Once again, this is an opportunity that is a direct consequence of some of these long-term themes that relate to the factors of climate change.

Important disclosure

As of 08/31/2022, 2.56% of LG Chem Ltd. (Owner of LGES) Held under the VanEck Emerging Markets Strategy.

As of 08/31/2022, 1.34% of Sungrow Power Supply Co., Ltd. is included. Class A in the VanEck Emerging Markets strategy.

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from San Jose News Bulletin https://sjnewsbulletin.com/considering-the-climate-investing-in-emerging-markets/