China is one of the world’s largest polluters. It’s also among the countries most committed to reducing carbon output and embracing renewable energy.
To be sure, that’s a dichotomy, but it’s one that could spell opportunity with exchange traded funds such as the KraneShares MSCI China Clean Technology ETF (KGRN). The fund, which tracks the MSCI China IMI Environment 10/40 Index, is pertinent not only because the world’s second-largest economy is a green energy and electrical vehicle leader, but because Chinese companies in carbon-intensive industries are waking up to the need to change course.
In what could prove to be a long-term catalyst for KGRN, Beijing is mandating a variety of decarbonization commitments. That’s relevant because China-based companies typically must follow government orders.
Why KGRN Merits Attention
KGRN, which turned six years old last month, has some tailwinds investors might want to pay attention to.
“China aims to reach peak carbon emissions by 2030 and achieve carbon neutrality by 2060. Consistent government policy support, with a clear road map, easy access to funding from state-owned commercial banks, and significant investment will support Chinese companies’ revenue growth and global expansion, especially those in the renewable energy and NEV sectors,” according to Moody’s Investors Service.
Also notable regarding the KGRN investment thesis is the percentage of carbon-intensive companies in China. Simply put, it’s higher than it is in other regions, indicating there’s a potentially attractive runway for the services and technologies purveyed by KGRN member firms.
“About 22.5% of rated nonfinancial companies in China are significantly exposed to carbon transition risks, higher than in the Americas, Europe, Middle East and Africa. Those in the power, oil and gas, chemicals and steel sectors are most exposed. Challenges include increases in leverage and operating costs, diminishing demand for their products and curtailment of access to markets,” added Moody’s.
Another factor that could point to longer-ranging growth for KGRN holdings is that, as of today, corporate-level decarbonization efforts in China are lagging. That room for improvement could be a catalyst for assets such as KGRN.
“Chinese companies are lagging global peers in setting decarbonization targets that can be associated with a specific temperature pathway,” concluded Moody’s. “A delay in setting targets and associated transition plans is credit negative for companies as they may have to take more aggressive action in future to meet more stringent rules for emission reductions, which could raise costs and leverage.”
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