All eyes on China’s clean-up effort

By Ruth Sullivan
Published: August 31 2008 19:42

Early signs that China, one of the world’s worst polluters, is beginning to tackle its environmental impact is seen in some quarters as a big investment opportunity.
Restrictions imposed by the state environmental protection agency, the recent beefing up of the agency to ministry level, and the move by the central bank and banking watchdog to ban banks from lending to heavy polluting industries, are among the signals Asia and emerging market specialist Lloyd George Management has noted.

“China is in the next stage of development and is going to have to spend serious money cleaning up the air, water and soil which has suffered in the last 25 years of hell-for-leather growth,” says Robert Lloyd George, founder and chief executive of the eponymous asset manager, which was set up in Hong Kong in 1991. “I think we will see billions of dollars spent on the greening of China over the next decade and this provides an investment opportunity,” he adds.
He believes it is the next big investment theme in Asia and maintains Lloyd George is the first fund management company to identify it in the region.
With an eye to such opportunities, the asset manager, which has 95 per cent of its $11bn (£6bn, €7.4bn) assets invested in Asia, rolled out the LG Asian Green Fund in June, with seed capital of $36m.
Mr Lloyd George, a great grandson of David Lloyd George, the first world war prime minister, is confident the fund will reach $100m by the end of the year.
The Dublin-based Ucits III fund, which is run from Hong Kong, invests in companies in the Asia-Pacific region, focusing on alternative energy producers that play a role in reducing oil dependency in the region. These include wind turbine manufacturers in India, desalination plants in Korea and solar equipment makers in China.
The asset manager, a signatory to the UN Principles for Responsible Investment, has been keeping an eye on government announcements on renewable energy. It says China’s central government has committed itself to a target of increasing its renewable energy to 10 per cent of total energy consumption by 2010, increasing to 15 per cent by 2020.
Mr Lloyd George believes Asia will become a dominant manufacturing hub for energy efficient products such as hybrid cars from Japan and LED (light emitting diodes) lighting production from Korean companies over the next 5-10 years.
He also expects investment opportunities to emerge as growing environmental awareness among Asian customers starts to drive companies to address issues such as carbon footprint, product traceability and supply chain audits.
The fund has caught the attention of European pension funds, particularly in France and Germany where investors are “more switched on to green issues”, and institutional investors in the UK and US, he says.
He is hoping it will follow the performance of its sister fund, the Asian Natural Resources Fund – an investment theme Lloyd George identified in the region five years ago – which has seen more than 26 per cent annual net returns since launch in 2003.
On the domestic front, Mr Lloyd George is in the early stages of setting up a joint venture fund management business to attract China’s local investors who he describes as “shell-shocked” after the stock market (Shanghai Composite) plunged more than 60 per cent from its record peak last October. Since setting up the original company he has seen a strong flow of US money into China and Asia; now he is expecting some of the flow to move from east to west.
Being well-known in China and having three local founding partners with regional expertise helps in setting up a joint venture, he says. “That makes us different. We’re not a western fund management company, most of my partners and colleagues are Chinese, giving us an Asian angle.”
Despite the advantage, the process of gaining relevant permissions from Chinese authorities has moved at “glacial speed”, he adds.
It is not an easy time to invest in Asian emerging markets where inflation – above 6 per cent – is the new concern and markets are volatile, says Mr Lloyd George. Many question marks remain over China, where most companies are still state owned and corporate governance is weak.
Despite this, the firm’s partners on the ground are keen to invest more in the country. Mr Lloyd George says he sometimes feels the lone cautious voice among them but is optimistic that “markets will pick up by the end of year”.
He is even more upbeat that green investment is a “good long-term theme” for the region.
Copyright The Financial Times Limited 2008