Why Asia is pivotal to future carbon market growth

Sometime it’s can be difficult for investors to see the potential in a market beyond their own immediate borders.

Investors in Europe, North America and other developed economies appear to be hardening their stance to investing in anything that feels like ‘ESG’. The proportion of company earnings calls mentioning ESG looks like it may have topped out earlier this year at 20-25%.

Carbon credits, by definition, sit under the ‘E’ in ESG. Like their ‘ESG’ brethren, the valuations of companies involved in the carbon credit sector have also been shaken to the core in recent weeks.

In recent articles I’ve highlighted some of the specific headwinds currently affecting the carbon credit sector. In particular, signs of resource nationalism as countries with bountiful natural capital understand the implications of global commitments (here), the impact of higher agricultural commodity prices (here), and concerns over energy security costs trumping those of energy transition (here).

It’s important to recognise the difference between short term and long term factors. And in the context of the current malaise over 'ESG’, its even more important than ever to take a broader, world-view of the problem carbon offset projects and the credits they generate are trying to fix, and the opportunity they may present.

Asia is particularly vulnerable to climate change. Asia is also blessed with significant natural capital. Protecting forests, peatlands and coastal zones at risk of deforestation help to conserve carbon stocks. Asia is experiencing the downside to climate change now.

Policies to support decarbonisation in the region are at a relatively early stage. However, there are no signs yet that investors are wavering, while funds exposure to ‘ESG’ remains low relative to Western levels. Commitment to climate action among Asia’s governments, corporates and consumers remains high, even though they are being buffeted by many of the same economic forces hitting elsewhere.

As carbon investors we need to recognise when shorter term factors make the long-term opportunity more attractive. Lets dive in.