Five of the world’s 10 largest carbon-emitting countries – China, India, Indonesia, Japan and South Korea – are located within this region. That’s why changes in energy use and carbon emissions in APAC will significantly affect global climate outcomes.
Last year, we published a paper that outlined the energy transition characteristics of the region, and examined how climate change would affect companies’ valuations.
We’ve built on this earlier work to look at the credibility of APAC corporate plans to transition to a low-carbon economy, and to identify those firms at the vanguard of this evolution.
This is critical for investors who wish to get a forward-looking view on carbon emissions and make a real-world impact by investing in credible transition leaders.
The 6 pillars of our credibility framework
We have developed our own framework to assess companies’ transition plans. A key principle to our approach is that stated carbon targets cannot simply be taken at face value and expected to be fully implemented. Outcomes depend on a range of factors, including the actions companies can take, the policy environment they operate in and the technologies they rely on for decarbonisation.
Our framework captures these dimensions via six ‘credibility pillars’:
- Emissions target design
- Emissions performance
- Technology readiness level
- Policy supportiveness
- Green market penetration
- Climate governance
Companies are assessed against these criteria and assigned a credibility score. This score provides a quantitative assessment that reflects our confidence in corporate targets being effectively implemented. It also allows for consistent comparison across firms and can be complemented with more qualitative, active corporate analysis, particularly where data gaps exist.
What are the findings of our analysis?
In our latest credibility study, we looked at 1,200 stocks with either a large market capitalisation, or those that are significantly exposed to the energy transition.
More than 300 of those companies (around 28%) are based in the APAC region – a large proportion of which are in Japan, India, China and Australia.
Most of these companies operate in emissions-intensive sectors such as materials, industrials and utilities. Our analysis was undertaken at the regional, sectoral and company levels comparing APAC firms to their non-APAC peers.
Here’s what we found:
- APAC companies score below average overall, but lead in technology readiness
Many companies in APAC operate in a policy environment that provides weaker incentives to decarbonise. This may be due to weak support for carbon-pricing schemes or the lack of binding regulations.
As a result, a lower proportion of APAC companies has managed to reduce their emissions intensity, compared to their counterparts in Europe. Having said that, several APAC countries have a stronger policy environment than the US, according to our proprietary Climate Policy Index.
On the upside, APAC companies do better when it comes to ‘technology readiness’. The region is host to a larger share of consumer discretionary and information technology companies where technologies to decarbonise industries are already available (e.g., electric vehicles, semiconductors). It also has a lower proportion of energy firms, where most technologies are only at a prototype, or demonstration, stage.
Chart 1: On average, APAC companies have a lower credibility score than non-APAC firms
Source: abrdn, April 2023
- There is significant variation across countries and sectors
Companies in some of the most developed APAC countries – Japan and South Korea – have a better credibility score than the global average. Conversely, companies in emerging Asian economies – such as India and Thailand – generally score below average.
While the utilities sector boasts the strongest average credibility score at the global level, it’s below average in APAC. By contrast, many of the most credible information technology companies are based in the region, due to the maturity and deployment of energy-transition technologies in this sector.
A key insight is a dispersion across companies within the same sector, allowing investors to identify transition leaders and laggards. Some firms may have ambitious and credible targets and business plans in place, while many others take actions that go against their commitments.
Chart 2: Top and bottom APAC companies are tilted towards specific sectors and countries
Source: abrdn, April 2023
- APAC transition leaders
We identified a number of credible ‘transition leaders’ – firms that set ambitious emissions-reduction targets, actively transform their businesses and lead by example within their sector:
- Taiwan Semiconductor Manufacturing Co. – a high-flier for ‘technology readiness’ that benefits from strong target design supported by actual emissions reduction. It also operates in a sector where low-carbon technologies are already mature.
- Tencent – gets the maximum score on ‘emissions target design’ as it has absolute targets that cover the entire spectrum of corporate emissions (Scopes 1, 2 and 3). It is on track to meet all its targets.
- LG Chem – at the vanguard of ‘climate governance’. It integrates climate change into its strategic assessment. A board member has explicit responsibility over climate policy implementation.
We also observed companies that may not have a high score overall, but stand out on particular factors – indicating a gradual shift towards low-carbon business models:
- SK Hynix – distinguishes itself on ‘emission performance’ by managing to reduce emissions intensity by some 28% between 2019 and 2021.
- Sungrow Power Supply – provides equipment for solar and wind projects. Its share of green revenues is close to 100%. A big hitter for ‘green market penetration’.
These companies are held in some of our Asian equity and credit sustainable investing strategies.
How can investors use the tool?
There are three ways in which this analysis can enhance investment decisions:
- Selection of credible ‘transition leaders’. Companies that score well are better positioned to mitigate climate risks and develop the solutions needed to decarbonise the economy. Investment teams can use the framework to assess how companies rank within a sector or region. Despite a larger credibility gap than the global average, transition leaders can be found in every region and sector across APAC.
- Engagement with ‘climate laggards’. Insights can inform discussions with companies and aid collaboration with corporates that are at an early stage of their decarbonisation journey. The tool can help identify weaknesses in transition plans; support discussions on how to address these issues; track progress; and examine how changes to the business model could alter exposure to climate risks and opportunities.
- Understanding impact on asset valuations. We can get a more accurate picture of the potential effect on asset values, and the extent to which companies would benefit from strengthening and achieving emissions targets. Some APAC sectors will still be exposed to substantial climate risks even if targets are achieved. Other sectors, such as utilities, could secure large gains if they implement strong and credible plans.
There are, of course, limitations and data disclosure gaps which affect the scores. For this reason, the results of the credibility framework are only a starting point for deeper, more active corporate analysis to identify transition leaders across APAC.
This climate credibility analysis complements our climate scenario analysis, giving investors a better idea of how different scenarios may affect asset valuations.
In principle, we expect companies to experience a considerable uplift in valuation if their climate targets are fully implemented – assuming the world embarks upon a clear energy transition pathway with increasing carbon prices.
However, we found that APAC companies risk losing a higher proportion of this potential uplift, compared to non-APAC peers, due to lower climate credibility scores. Many may miss significant climate opportunities by not backing their transition plans with concrete action.
But it’s not all down to companies’ willingness to act – they may also be limited in how quickly they can decarbonise depending on the policy incentives and commercial maturity of the technologies they rely on.
Companies, investors and, indeed, policymakers should consider this a call to action – firms that back their words with deeds (and benefit from the right policy support) could gain in multiple ways; while investors that complement active stock research with credibility analysis will gain better insights into valuations.