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Carbon Neutrality

Chinese private equity and venture capitals increase bets on carbon neutrality to ride wave of China's green transition

Aron Chen

posted on August 30, 2022 6:01 pmEditor : Wang Boyuan

As China's five-year plan (2021-2025) prioritizes green development and calls for change across its energy, manufacturing, and automotive sectors, Chinese private equity and venue capital are increasing their bets on carbon neutrality.

Zhang Lei, the chairman and CEO of Hillhouse Capital Management, stated at the China Development Forum that "China moves toward a low-carbon economy is a sure thing, this inevitable trend is drawing a huge number of social capitals to invest in carbon neutrality related business opportunities."

Institutional investors are vying for positions in industries related to carbon neutrality.

Among the industries where Chinese private equity and venture capitals were active, the electric vehicle industry, which includes batteries, EV charging infrastructure, and battery swapping, took the lead.

The electrification initiatives are crucial to China's plan to achieve carbon neutrality by 2060, and as a result, it has mandated that by 2035, all new cars sold in China must either be fully electric vehicles (EVs) or hybrids. A number of other Chinese battery manufacturers, including CATL, have experienced a meteoric rise in recent years as a result of China's transition to a greener economy. 

Chinese public companies that trade on the China Stock Exchange and social capitals, which consist of private equity and venture capitals, invested a total of 266.2 billion yuan (US$39.1 billion) on 92 different projects of lithium batteries to boost capacity of EV batteries in 2021, according to data jointly released by the National Bureau of Statistics of China, China Customs, and Ministry of Finance. 

The majority of the investments were made by two massive battery companies: Contemporary Amperex Technology invested 15 billion yuan to establish a new manufacturing base in Guizhou province and EVE Energy invested close to 31 billion yuan to establish a production facility in Hubei province. 

In order to speed up lithium mining, Chinese EV battery companies have launched a global acquisition drive for lithium projects. Recent acquisitions include CATL's purchase of Millennial Lithium, a Canadian company with an eye toward Argentina.

Today, China not only produces about 60% of the world's EV batteries, but it is also making strides in the creation of EV charging infrastructure and EV vehicle production.

By the end of 2021, China will have more than 3 million EVs, 38,000 charging stations, and 1.3 million individual chargers thanks to policy subsidies and the development of automobile companies.

The environmental, social, and governance (ESG) and sustainability sectors are also well-represented, with strong state-backed funds like the 10 billion (US$1.47 billion) ESG fund established in May, which is led by China Energy Investment and includes TCL Electronics Holdings and China Resources subsidiaries.

According to a Morningstar report, China surpassed the US in 2021 as the largest climate investment market outside of Europe. With more than 60% of annual inflows, clean energy and technology funds accounted for the lion's share of the Chinese climate fund market in 2017.

The first half of this year saw a more than two-fold increase in new Chinese ESG funds compared to the same period last year, according to Morningstar's conclusion eco statement from Chinese business information and financial data provider Wind Information. The size of new ESG also increased by about 60% year over year compared to the first half of 2021.

With state-backed funds pourring in, private equities are issuing carbon neutrality statements.

One of China's largest private equity firms, Hillhouse Capital Management, established a $1 billion green fund and a special investment devoted to low-carbon, sustainable, and ESG verticals in March. Investors in institutions are looking for opportunities. A long-term partnership with the brand-new clean energy company GCL enabled China Capital Investment Group, a private equity firm, to announce a 4-billion-yuan ($611 million) carbon neutrality fund.

According to a report from consultancy Cerulli, assets in ESG themed ETF domiciled in Asia doubled their total collective assets to $10.5bn during 2021, helped by sizable inflows and new fund launches. 

“ETFs have been a popular channel for asset managers to put forth the ESG/thematic ideas to reach investors in China and the popularity of funds of specific themes has been influenced by the Chinese government’s commitment to pursue economic transformation, “said Jackie Choy, Morningstar’s director of ETF research for Asia.

Chinese businesses must calculate and manage their CO2 emissions data in a way that is auditable and complies with carbon emission standards if they are to meet the goal of achieving full neutrality by 2060.

With its recent announcement that it has secured 100 million yuan in a series B round, Carbonstop, a Beijing-based provider of carbon emissions management software and consulting solutions, is the most recent to benefit from this rising tide.

Sequoia China, GL Ventures, and Matrix Partners took the lead in the round. Carbonstop, a company that was founded in 2011, offers a software-as-a-service solution to manage carbon emissions, enabling its users to examine and assess their emissions data. More than 1,200 institutional clients, including companies like Alibaba, Tencent, ByteDance, Baidu, Meituan, and JD.com, as well as government organizations like the National Development and Reform Commission, CNOOC, China Airport Construction Group, China Construction Bank, and Mastercard, are reportedly using its solutions.

Photo by Marcin Jozwiak on Unsplash