ESG/Responsible Investing | Shannon Lancaster
09 Mar 22
Emerging markets – Challenges and opportunities
This article, written by fund analyst Shannon Lancaster, was written as a feature for Investment Week.
Over the past century, the earth’s population has grown at an alarming rate. It is predicted that by 2045 there will be nine billion of us on this planet, that is nearly two billion more people demanding food, water, energy and materials.
As a result of this rapid population growth, the number of middle class in developing countries will rise, pushing up incomes and the demand for resources like cars and electronics. This brings with it an acceleration of urbanisation, as hundreds of millions of people move from rural areas to cities, placing increasing demands on energy production and waste handling. The planet is already depleting its natural resources - how will it cope under the strain of so many additional people?
A significant amount of projected population growth will come from developing countries, and as their wealth increases so will the demand for energy resources. The energy sector is due to undergo a huge transformation in the next 30 years, at an unprecedented rate. This change will require massive investment across the value chain by 2050 if we are to achieve our climate targets. Such mammoth investment will create significant opportunities for companies across the world to generate strong real earnings growth, translating into more value for shareholders and sizable opportunities for investors.
While much of the focus of the energy transition is on the developed world, it is important to remember the 940 million people globally who do not have access to electricity. The world has made striking progress regarding access to electricity over the past decade as the number of people without access has fallen significantly. While this is great progress, the reality is that one in 10 people still have no access to electricity. Many in emerging markets are looking for efficient, affordable and accessible energy in order to improve their lives. For them, access to energy creates transformational opportunities.
In addition, changing demographics and rapid urbanisation create higher demand for materials, food, water and energy and will result in larger pollution levels in these regions. Innovation is required to build and modernise sustainable infrastructure and circular cities. The water and waste management systems in these cities will need to improve to cope under the strain of more people.
Emissions from developing countries are growing rapidly and are contributing to environmental problems, such as climate change and poor air quality. On top of this, the emerging market regions are particularly vulnerable to climate change and lack the financial power to prevent or adequately respond to the impacts of a changing climate. The good news is that clean energy today is cheaper than it has ever been. In some countries, clean energy sources are comparable to natural gas and coal in terms of unit costs and rely less on government subsidies each year.
In addition to this, electric mobility is expanding at a rapid pace. In 2020, sales of electric vehicles grew 43% to more than three million. China remains the world’s largest electric vehicle market for both supply and demand – partly driven by a need to combat chronic air pollution – with more than double the number sold in the US. Despite the headlines and media attention that Tesla attracts, Chinese carmakers are responsible for nearly half of all electric vehicle production. Considering the policies and regulations being introduced globally targeting lower emissions, it is likely electric vehicles continue to be widely adopted.
It is clear that investment is needed to support socio-economic changes in emerging markets as well as help those regions deal with the impact of climate change. The good news is there are plenty of exciting businesses in emerging markets seeking to solve these issues.
For our Channel Island investors, we have exposure to environmental solutions and emerging market themes in our new fund-of-funds, Ravenscroft Global Solutions*. It is a global equity fund with exposure to businesses solving the world’s greatest challenges, which includes this emerging markets equality theme. It also invests in themes such as basic needs, environmental solutions, resource scarcity and energy transition. The investment areas are diversified as the fund also has exposure to decarbonisation, nutrition, and oncology.
While we know the path to solving these issues will not be a straight line, we invest in funds which we consider to be best placed to pick the potential winners of the transition to a world focused on doing more with less. As we deplete our stock of finite resources and environmental issues intensify, it is essential to consider one of our greatest resources, our ability to innovate. Banking on human ability to innovate and create is a promising investment approach of the future for the materials, food, water and energy sectors and beyond.
*The Ravenscroft Global Solutions Fund is only currently available off-shore.