Commentary: Net Zero and AI Will Shape the Future of Sustainable Investing

04 Nov 2024

China’s massive market, abundant data and high degree of digitalization mean that the country can lead the way in integrating AI into the real economy, potentially at a much faster pace than global peers. Photo: VCG

With the continued relevance and criticality of ESG across the whole economy, two of the most consequential trends shaping the global economy in the coming years are the transition to net zero and artificial intelligence (AI).

Innovation in technology, but also financial innovation, is needed to unlock the capital to power that transition, and the role that China can play in this progress cannot be ignored.

China has been early and fast on innovation — and innovation is what we need in this transition economy, which has propelled China as a leader on both of these themes.

A powerhouse of green technology

China plays a critical role in tackling climate change, and is unrivaled in many aspects of green technology.

Having captured 80% of the supply chain for solar panels and recently become the world’s largest manufacturer of electric vehicles, much of the rest of world is looking on with envy and is either trying to emulate or look to diversify across global supply of renewables.

According to a recent report from Carbon Brief, China remains on track for a decline in annual emissions this year, which is another great achievement. Looking ahead, if the planned capacities in solar and wind are all installed on time, China could easily reach 1,200 gigawatts of installed wind and solar capacity by the end of this year. That’s six years ahead of the country’s 2030 pledge.

Speak with capital: Transition to net zero by financing it

Real-world decarbonization means all countries and regions in the world reaching net zero. It will be impossible to stop climate change without China — and the focus on climate change and other environmental issues in the Chinese government’s agenda for economic transformation underpins that. Investors need to therefore speak with their capital, make their views on China’s role in net zero clear, and provide support for progress with the investment decisions in their portfolios.

China’s large-scale transition will undoubtedly create opportunities for all types of investors. For global investors, the Chinese capital markets offer diversification benefits. If we combine this with opportunities to meet investors’ sustainability goals, there’s huge potential to drive investment in sustainable solutions.

Pairing decarbonization leaders and climate solutions providers in a portfolio is a powerful combination from an investor and a climate perspective and emerging markets show wide dispersion across the opportunity set of today’s markets. At UBS, we’ve sought to innovate in this space by extending our proprietary climate framework for our Global Emerging Market Equity Transition Strategy — it’s an emerging market version of our climate transition strategy.

Emerging market countries are likely to be disproportionately affected by climate change and thus potentially have most to gain from investment into their market. So, this strategy marries UBS’s proprietary and highly innovative decarbonization framework with our climate engagement program, targeting climate-related companies aiming to decarbonize, as well as the solution providers. Both are critically important for transition investing.

AI as part of the sustainable solution, with risks to be mitigated

AI, as a transformative force, is the second theme shaping our client agendas, and we find the intertwining of AI and sustainability particularly exciting and challenging.

China’s massive market, abundant data, and high degree of digitalization means that the country can lead the way in integrating AI into the real economy, potentially at a much faster pace than global peers. We saw this already when China digitalized day-to-day payments and went cashless, and also the way that China electrified passenger vehicles enabling much better data collection and potential autopiloting.

While all these prior efforts have built a great foundation for AI to find applications in China, it is important that we tread carefully in this new era and are aware of the potential impact of this disruptive technology in terms of downside.

We’ve started to see lawsuits globally and in China around plagiarism, privacy and personal rights, such as unauthorized use of voice in text-to-speech, and debates around false content in social media. Companies providing AI-embedded services and large language model developers have a role to play in ensuring the responsible development and adoption of AI.

For investors looking at the investment case for companies, it is important to assess how well these companies are managing the adoption of AI and the potential impacts. For example, not only would self-policing minimize possible regulatory intervention, but it can also increase the user stickiness to the AI tools and models and thus gain the trust of employees and customers.

At UBS Asset Management, we believe that responsible AI principles create an advantage for companies adopting AI products and services. In the past year, we have been engaging with the management teams of Chinese tech companies developing foundational models open to the public to understand how they are practicing responsible AI principles. We applaud these Chinese companies for being among the first to publish their principles, well ahead of international peers.

While companies explore how to implement these measures, we think it’s crucial to demonstrate their efficacy. In particular, we see possible improvements for companies globally to test tools and demonstrate effectiveness against fairness principles to prevent biases.

Navigate the transition with sustained actions

China has seen incredible growth in green finance over the past few years, reflecting rapid progress in clean energy and low-carbon transport. In our decarbonization journey, we can’t underestimate the importance of natural capital.

While AI may be part of the solution to these challenges, it also introduces new challenges along the way, which we need to navigate.

As we are all aware, there is a lot more to be done. We’ll continue to partner with clients to bring innovative investment and financing solutions to meet their sustainable returns objectives.

Lucy Thomas is the head of sustainable investing at UBS Asset Management.

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Image: Pukan – stock.adobe.com