All too often Western commentators have presented the environmental costs of China’s development as the final straw that will break the planet’s already burdened carrying capacity. Over the past year, however, a new theme has been emerging from the business and investment community, one that emphasizes the profound commercial opportunity that this crisis presents. As leading investment bank, CLSA, noted this May in a special report on sustainable energy, “if environmental legislation in Asia were a stock, it would be a raging Buy”. China lies at the heart of this burgeoning market for environmental goods and services, driven by the pressing need to respond to its twin ‘resource crunch’ of getting access to sufficient quantities of clean energy and clean water.
Far-sighted investment analysts such as Stephen Roach at Morgan Stanley are seeing signs of a new ‘commodity lite’ model of development in China, “in effect, retrofitting China’s commodity-guzzling production platform with more commodity-efficient technologies.” China’s 11th Five-Year Plan contains an explicit target of reducing the energy intensity of growth by 4% each year through to 2010 – a target that is eminently achievable by adopting good practice standards from across the globe. For example, a recent assessment from the World Bank and the UN Environment Programme concluded that China – along with Brazil and India – could reduce energy demand by a quarter.
Until recently, reports such as these would probably have gathered dust on bureaucrats’ shelves. But the rapid rise in world energy costs, increasing import dependency for energy and the emergence of new carbon markets has generated real demand for clean energy options. Installed wind power grew by 65% in China last year, and is forecast to expand by an annualised rate of 44% by end-2010 (CLSA, Clean and Green, May 2006). Growth rates such as these are underpinned by falling costs of energy from wind generation and government incentives flowing from the new Renewable Energy law. The momentum is such that industry executives believe that China’s official target to increase wind capacity to 5 giga-watts (GW) by 2010 could be exceeded by as much as 100%. Leading international wind developers, such as Spain’s Acciona and Iberdrola, are now positioning themselves to take a slice of this attractive market.
Burgeoning oil prices are also providing an additional stimulus for an expansion in bio-fuel production. China is already the third largest bio-ethanol producer in the world, and has prioritised clean fuels as a priority for the ‘green’ Olympics in 2008. One sign of the growing investment opportunities in this area was the listing of the China Biodiesel International group on London’s Alternative Investment Market (AIM) in June. Importantly, this company produces its fuel predominantly from waste, thereby avoiding some of the growing environmental concerns about the conservation and water consumption impacts of increased biofuel production.
On top of this, China has also become a centrepiece of the emerging global carbon market thanks to the UN’s Clean Development Mechanism (CDM). Through the CDM, international capital is being deployed to achieve reductions in carbon emissions in emerging markets which then count against the industrialised world’s domestic carbon targets. China is projected to account for more than 40% of expected emission reductions under the mechanism, thanks to its competitive business environment which means that carbon savings can be made at a fraction of the equivalent cost in the developed world. Projects that will cumulatively help to achieve this target include a landfill gas to electricity initiative in the southern city of Nanjing. In August 2006, the world’s largest CDM project worth over US$1 billion was agreed between the World Bank and two Chinese chemical companies. For James Cameron, founder of Climate Change Capital, a London-based carbon bank, “choosing to put money in China to reduce emissions is simply an efficient allocation of capital on a global scale.”
With an unprecedented drought affecting China this summer, the severity of the country’s water crisis cannot be underestimated. With less than a quarter of the world’s average per capita water availability, China currently squanders what it has, using five times as much water to produce each and every dollar of national income. Not surprisingly, water shortages are already reducing industrial output by an estimated US$ 25 billion each year, with a further US$ 19 billion lost in terms of agricultural production. But rising demand and declining supply – exacerbated by local pollution and global climate change – is prompting an unprecedented national investment programme, worth perhaps US$ 61 billion by 2010. Serving this market offers major opportunities for international engineering companies such as General Electric, which is deploying advanced membrane and desalination technologies as part of its ecomagination initiative. International investors are also showing increased interest both in China’s stock-market listed water utilities – such as Shanghai Municipal Raw Water, Guangdong Investment and Tianjin Capital – as well as technology providers, including Hyflux and Sinomem.
The scale of China’s ‘green’ opportunity means that it is enticing ‘mainstream’ as well as specialist SRI investors from across the globe. And in China itself, the Bank of China International Investment Managers (BOCIIM) launched its Sustainable Growth Equity Fund in May to tap into the potential. Much still needs to be done to ensure that China’s growth is compatible with sustainability. But the early signs of the commercial bonanza this represents are already with us.
The author: Nick Robins is head of sustainable and responsible investment (SRI) funds at Henderson Global Investors in London where he has a particular focus on the investment implications of climate change. Previously, Nick worked at the International Institute for Environment and Development (IEED), at the European Commission’s Environment Directorate in the run-up to the 1992 Earth Summit and as an adviser to a range of government bodies in the UK, as well as the OECD, UNEP and UNIDO.
Homepage photo by Doreamon