Funds Bet Asia ESG Stocks Will Bounce Back on Policy Tailwinds

(Bloomberg) -- Investors are becoming more bullish on shares linked to sustainability in Asia, betting on a comeback next year due to attractive valuations and trends such as China’s reopening and policy support.

Nikko Asset Management, M&G Investments and BNP Paribas Asset Management are among those investing in environmental, social and governance themes, predicting that the build-out of renewable energy supply chains in economic powerhouses such as China and India, and the transition of “dirty” businesses regionally will feed through to stock performance.

Funds that label themselves as conducting responsible investments have had a tough year, with market participants staying on the sidelines in a rocky trading environment. They bought traditional energy shares as commodity prices soared, while greenwashing concerns damped demand for ESG. 

But a host of policy moves this year — from India updating its clean fuel use commitments to Japan shifting away from coal — mean that the theme could return in 2023, particularly as non-renewable resource prices cool and global stocks get a boost from the Federal Reserve slowing its pace of rate hikes.

Traditional energy stocks got a temporary lift in 2022, “but the climate change agenda is yet the most prominent among investors globally,” particularly the shift to renewables and electric mobility, said Jigar Shah, chief executive officer of Maybank Kim Eng Securities India.

The optimism is starting to show in numbers. The MSCI Asia Pacific ESG Leaders Index beat the broader parent index in November after seven straight months of lagging it, climbing 16%. Meanwhile, actively managed ESG vehicles have been building their Asia exposure, pumping in $922 million in October — the most in six months, according to an analysis of 327 funds by BofA Securities.

Clean-energy stocks have been among the few standouts in the US market this year. The $2.7 billion Invesco Solar exchange-traded fund has gained 2%, compared with a 17.5% drop in the S&P 500 and 30% slump of the Nasdaq Composite Index.

Supportive Policy

China’s beaten-down electric-vehicle makers such as Nio Inc. soared last month as Covid restrictions eased, while Korean solar and electric-vehicle companies with sites in the US are seen benefiting from the implementation of the country’s Inflation Reduction Act next year. 

Firms that are part of Indonesia’s nickel supply chain are being favored by Nikko Asset and JPMorgan Asset Management as the country develops its reserves for the battery material and plans to subsidize electric cars.

Increasingly, automakers from around the world are investing “to secure upstream supply of raw materials in Indonesia and hopefully to develop the downstream industry there,” said Peter Monson, a portfolio manager at Nikko Asset Management Asia, adding that his fund has been investing in nickel-related stocks in the country.

M&G fund manager Vikas Pershad, meanwhile, favors Indian cement makers that are attempting to make their businesses less energy intensive.

Investors in such stocks still face significant risks. An economic slowdown in the West could hammer equity markets globally next year. And policy moves won’t always be supportive: China’s solar energy industry, for example, may become subject to potential import restrictions in the US over human rights abuses in Xinjiang province, a manufacturing hub.

Even so, forward price-to-earnings multiples are proving to be attractive for some at these levels. After a decline of 22% in the MSCI Asia ESG gauge this year, the multiple that traders are paying for the measure is at about 13 times, the lowest versus the benchmark since mid-2018.

“Policies supporting the transition to a net zero economy in Asia continue to take shape across the continent,” said Gabrielle Kinder, an investment specialist at BNP Paribas Asset Management. That’s happening even as the focus shifts from environmental obligations to energy security, she said.

--With assistance from and .

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