Emissions Are Declining in China; Invest in the Companies Driving Change

Carbon dioxide emissions in China fell again in the first quarter of 2022, extending the decline to three consecutive quarters, the longest period of emissions reduction in the last decade, reported Carbon Brief.

The data came from an analysis of both commercial data and official figures done by Carbon Brief and concluded that China’s CO2 emissions dropped 1.4% in the first three months of this year, extending the decline from summertime peaks in 2021.

Image source: Carbon Brief

The reduction is attributed to the slowing real estate sector alongside the ramp-up of clean energy projects, and it’s expected that the second quarter of 2022 will continue the trend, largely due to COVID lockdowns.

Construction output has slowed markedly, with cement production dropping 12% in the first quarter of 2022, alongside drops in both the steel and power industries. Steel and cement are the second- and third-largest industries responsible for CO2 emissions in China, and the slowdown in real estate development has had direct impacts on production levels, though the declines look to be bottoming out.

Thermal power plants increased 1% year-over-year in the first quarter, but coal consumption was reduced due to improved efficiency of the power plants as well as fuel switching. In April, the first month of the second quarter, output fell 12% year-over-year, the sharpest decline since December 2015.

Half of the drop was driven by a reduction in electricity demand, but the other half was due to alternative energy use increases, with solar growing 25% year-over-year and wind energy growing 15% year-over-year.

Emissions declines in China have historically been followed by a rebound, and with China committing to more coal mines as it looks to rebuild reserves and encouraging infrastructure growth, which will mean a ramp-up of the cement and steel industries, the trend has potential to continue.

“Whether the current fall in emissions results in another rebound depends mainly on three factors: how large is the infrastructure construction programme this time; will the real estate sector inflate again; and how fast does clean energy investment grow,” wrote Lauri Myllyvirta, lead analyst at the Centre for Research on Energy and Clean Air.

Investing in ESG Drivers Across China’s Sectors

The KraneShares MSCI China ESG Leaders ETF (KESG) invests in the leading ESG companies within China and offers sector diversification. With China committing to stricter mandates regarding emissions and the environment, companies are working to align themselves for sustainable growth.

The fund seeks to track the MSCI China ESG Leaders 10/40 Index, an index that is free float-adjusted and market cap-weighted. It includes companies with high ESG ratings compared to their peers within their industries. The index includes all types of publicly issued shares from Chinese issuers from all market caps and screens out any issuers that have any controversies according to the UN Declaration of Human Rights, the International Labor Organization Declaration on Fundamental Principles and Rights at Work, and the UN Global Compact. The index also screens out any companies that are involved in alcohol, tobacco, civilian firearms, gambling, nuclear power, and conventional and controversial weapons.

The index is comprised of securities from the following sectors: consumer discretionary, industrials, financials, communication services, healthcare, real estate, utilities, consumer staples, information technology, materials, and energy. Securities included make up the top 50% market cap of their sector, and no single security can make up more than 10% of the underlying index, while no sector accounts for more than 40% of the index.

KESG has an expense ratio of 0.58%.

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