Asia’s economic growth is a double-edged sword for investors – the region’s soaring industrialisation could have a devastating impact
by Andy Davis
Even allowing for the promises and warm words exchanged at the COP26 meeting in Glasgow recently, the chances of the world achieving the ambitions of the 2015 Paris Agreement on climate change are close to zero. Without almost unimaginable changes very soon, there is no chance that global warming this century will peak “well below” 2°C above pre-industrial levels. As for the most ambitious target of +1.5°C, forget it.
According to a 9 November update by Climate Action Tracker, an independent scientific analysis by two organisations, Climate Analytics and the NewClimate Institute, that maps governments’ climate policies against the Paris targets: “Nationally determined contributions alone [(NDCs) – individual countries’ pledges so far] will limit warming to 2.4°C. When binding long-term or net-zero targets are included, warming would be limited to about 2.1°C above pre-industrial levels, or in probabilistic terms, likely (66% or greater chance) limit warming below 2.3°C.”
The likely impacts of climate change are now coming over the horizon
Climate Action Tracker concludes: “There remains a substantial gap between what governments have promised to do and the total level of actions they have undertaken to date. Furthermore, both the current policy and pledge trajectories lie well above emissions pathways consistent with the Paris Agreement long-term temperature goal.”
By the end of COP26 on 12 November, 151 countries had submitted new NDCs, which would put the world on track for 2.5°C of warming by the end of the century. But the Glasgow agreement calls on countries to submit revised and strengthened targets by the end of 2022 to align with the Paris Agreement.
The likely impacts of climate change are now coming over the horizon. They are serious enough to require investors to question their longstanding assumptions about the outlook for economies everywhere – and nowhere more so than in Asia.
Global leader, global heater
With the emergence of Japan as an industrial power following the Second World War, investors started to recognise Asia’s potential as an engine of future economic growth. After China began its reintegration into the world economy from the 1980s, appetite for the region’s growth story only strengthened. By the time the investment bank Goldman Sachs coined the term BRIC in 2001 for the major emerging economies of Brazil, Russia, India and China (at the time, South Africa wasn’t included), the idea of Asia’s inexorable rise to economic pre-eminence was the received wisdom.
But advancing climate change means that – if they haven’t done so already – investors might want to consider questioning this story much more rigorously.
According to a July 2019 discussion paper by McKinsey Global Institute, Asia’s future is now, Asia will account for a large percentage of the growth in global output over the next 30 years – its share of world gross domestic product is set to grow from around under a third in 2000 to about 50% by 2040. This means the region will need to grow much more quickly than other parts of the world, implying massive infrastructure expansion and urbanisation and huge increases in energy demand and consumer consumption of all sorts.
But wait. The world must aim to achieve net zero carbon emissions by 2050 if we are to have any chance of avoiding the more extreme effects of climate change. Unless surging demand – everywhere, admittedly, but especially in Asia – for energy, products and services can be met from sustainable, carbon-neutral sources, the effects on the climate are very likely to be devastating, given the damage already done by earlier waves of industrialisation.
Extreme events
That is not all. Investors who buy the Asian growth story must also realise that not only is the region fast-growing: it is also extremely exposed to climate risks of many sorts. According to McKinsey, large cities in South Asia could be “among the first places in the world to experience heat waves that exceed the survivability threshold for healthy human beings in the shade”.
Parts of East Asia, McKinsey warns, face up to a fourfold increase in extreme rainfall events by 2050, while three-quarters of the global impact of riverine flooding could be felt in Asia, damaging around US$1.2 trillion of capital stock per year by 2050. Parts of China could spend four to six years per decade in drought by then, with up to eight years in every ten possible in southwestern Australia.
Research by Climate Central, published in 2019, suggests that unless global warming is contained within narrow limits, large parts of some Asian countries, notably Vietnam, are at risk of being submerged by rising sea levels.
Investors who concentrate on the growth side of the Asia story should beware
Asia, therefore, faces some of the heaviest impacts of climate change, as well as being the fastest growing source of greenhouse gas emissions over the next 30 years. Political leaders across the region are under intense domestic pressure to deliver the spoils of economic growth to their citizens and at the same time under fierce international pressure to limit their greenhouse gas emissions as the effects of climate change become increasingly unmistakable.
Investors who concentrate on the growth side of the Asia story should beware. The region’s prospects over the next few decades will be decided as much by the effects of climate change as they will by its rapid economic expansion and the rising prosperity of its huge new middle class.