Climate Considered: Emerging Markets Investing

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In celebration of Climate Week 2022, hear from Senior Research Analyst Ola El-Shawarby how VanEck’s emerging markets equity team considers climate-related risks and opportunities, as well as specific stocks that could benefit from the energy transition in their decision-making processes.


What unique climate-related factors are driving corporate investment decisions and engagement?

Given that we focus on long-term growth trends that are long-term, they tend to align very well with sustainability and sustainable goals. We truly take a case-by-case approach as opposed to a checklist approach. We believe this really gives us the opportunity to focus more specifically on material climate-related issues that typically affect that particular sector or company, rather than trying to apply a one-size-fits-all approach.

This can be things like CO2 emissions, waste management, energy efficiency and sustainability. A variety of factors, but the key here is that we focus on material factors that impact each company, and that’s also largely because we’re a very bottom-up focused fund and strategy. We invest in companies, not just in topics or ideas.

Which climate-related trends and topics can be observed?

With everything that is going on and the focus on environmental trends, sustainability and climate change, there are many opportunities and risks that come with it.

When we look at the different companies in our portfolio or that we’re looking to invest in, we try to really think about where the opportunities and risks might lie in terms of climate factors.

Some of the companies will be beneficiaries of specific issues or trends arising from the focus on climate change. This could include things like electrification and the transition to green energy, which more recently with the war in Ukraine became not only a climate issue but also an energy security issue.

This is a bucket. We also have other companies that could benefit from competitive advantages due to certain superior environmental practices that put them in an advantageous position either with consumers or relative to their peers.

We also have some companies that are really trying to move towards better environmental and sustainability practices to manage their own risk and that could be cost factors or fear of regulatory penalties.

What we like to talk about is always stocks, so I think it would be helpful to provide some examples to show how we think about opportunities or risks related to ESG and climate factors in particular.

One example that’s directly benefiting from the electrification issue, which is obviously gaining a lot of traction now, is a company called LG Chem (OTCPK:LGCLF), a Korean company. Historically, it was one of the largest producers of petrochemicals in Korea. More recently, what we think is exciting about the company, and what we think will drive value and growth going forward, is its relatively newer sub-segment, which is advanced materials, and within it, the production of battery components.

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These guys are actually one of the largest manufacturers of nickel cathodes, which are a key component in electric vehicle batteries and are actually quite difficult to manufacture.

Against this background, in terms of growth, they benefit quite significantly from the increasing demand for electric vehicles and also from the expected increase in EV (electric vehicle) penetration in the future. They produce these components and sell them to battery manufacturers. That will be a key driver of future earnings growth. In addition, they are also thinking very seriously and trying to implement many programs focused on plastics recycling when it comes to their traditional petrochemical business. That’s also something we encourage a lot.

After all, they are also the majority owners of LGES (LG Energy Solution). They own more than 80% of a company called LGES, which is the largest battery manufacturer outside of China. It’s a direct beneficiary of the electrification theme, and overall we particularly like the story given that it’s about a company that’s in transition from a sector that’s traditionally been somewhat contentious, following our earlier discussion of the direction of development and improvement was when it comes to climate factors into one that is actually directly geared towards better longer-term sustainability and electrification.

This is an example. Another company that is also benefiting directly from some of the climate-related issues is a company called Sungrow Power Supply, a company in China. They manufacture solar inverters, which are one of the most important equipment components of solar energy systems. They also produce energy storage systems. They are one of the largest global manufacturers of solar inverters, I think they have a little over 25% market share worldwide. They are also one of the largest exporters of energy storage systems from China.

When you think about renewable energy and how rapidly the demand for renewable energy sources, including solar power, is increasing, these folks are directly well-positioned to benefit from that growth and rising demand. Again, this is an opportunity that flows directly from some of these longer-term issues related to climate change factors.

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Important Disclosure

As of August 31, 2022, 2.56% of LG Chem Ltd. (owner of LGES) held in the VanEck Emerging Markets Strategy.

As of August 31, 2022, 1.34% of Sungrow Power Supply Co., Ltd. Class A held in the VanEck Emerging Markets Strategy.

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