Climate Considered: Emerging Markets Investing

Which unique climate–related factors are driving investment decisions and engagement with companies?

Given that we're focused on secular growth trends that are long term, they tend to align very nicely with sustainability and sustainable goals. We really take it on a case by case basis as opposed to adopting a checklist approach. We think that really gives us the opportunity to focus more specifically on material issues as far as climate goes, that tend to typically impact this particular sector or a particular company, rather than trying to apply a blanket approach.

That could be things like carbon emissions, it could be waste management, energy efficiency and sustainability. A variety of factors, but the key here is that we focus on material factors that impact the particular companies and that's also to a large extent because we are a very bottom up focused fund and strategy. We invest in companies, not just themes or ideas.

What are some of the climate–related trends and themes that can be observed?

With everything that is going on and the focus on environmental trends, sustainability and climate change, there are a lot of opportunities and risks that come along with that.

What we try to do when we look at the different companies in our portfolio, or the ones that we consider investing in, is to really think about where the opportunities and risks might lie as far as climate factors go.

Some of the companies will be beneficiaries of specific themes or trends that are arising on the back of the focus on climate change. That could include things like electrification and green energy transition, which more recently with the war in Ukraine became not just a climate issue, but also an energy security issue.

That's one bucket. We also have other companies that might be, as a result of certain superior environmental practices, benefiting from competitive advantages that put them at a favorable position with either the consumer or compared to their peers.

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

What we love to talk about is always stocks, so I think that giving some examples to showcase how we think about opportunity or risk as far as ESG, and more specifically climate factors go, would be helpful.

One example that is a direct beneficiary of the theme of electrification, which is obviously now gaining a lot of traction, is a company called LG Chem, a Korean company. Historically, it has been one of the largest producers of petrochemicals in Korea. More recently, and what we think is exciting about the company and we believe will drive value and growth going forward, is their relatively newer sub–segment which is advanced materials, and within that, battery component production.

Those guys are actually one of the largest producers of nickel cathodes, which is a key component for batteries for electric vehicles and are actually quite hard to manufacture.

With that in mind, they benefit quite significantly, in terms of growth, from the rising demand for electric vehicles and also the anticipated increase in EV (electric vehicle) penetration going forward. They produce these components and sell them to battery makers. That is going to be a key driver for earnings growth going forward. On top of that, they are also thinking very seriously and trying to introduce a lot of programs that focus on plastic recycling when it comes to their traditional petrochemicals business. This also something that we highly encourage.

Finally, they are also majority owner of LGES (LG Energy Solution). They own more than 80% of a company called LGES, which is the largest battery manufacturing company outside of China. It is a direct beneficiary of the electrification theme and overall we particularly like the story because, to our earlier discussion about the direction of travel and improvement, this is a company that is in transition from a sector that traditionally has been somewhat controversial when it comes to climate factors into one that is actually directly aligned with better longer–term sustainability and electrification.

This is one example. Another one that also is a direct beneficiary of some of the climate–related themes is a company called Sungrow Power Supply, it is a company in China. They manufacture solar inverters, which are one of the key equipment components when it comes to energy solar energy systems. They also produce energy storage systems. They are one of the largest global producers of solar inverters, I think they have globally something more than 25% market share. They are also one of the largest exporters out of China of energy storage systems.

If you think about renewable energy and how much there is a rise in demand for renewable energy sources, including solar, those guys are directly well positioned to benefit from that growth and that rise in demand. Again, here it is an opportunity that is a direct result of some of these longer–term themes that relate to climate change factors.

IMPORTANT DISCLOSURE

As of 8/31/2022, 2.56% of LG Chem Ltd. (owner of LGES) is held in the VanEck Emerging Markets Strategy.

As of 8/31/2022, 1.34% of Sungrow Power Supply Co., Ltd. Class A is held in the VanEck Emerging Markets Strategy.

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