ESG Insights (Apr 2023): Power up a Green Transition with Hydrogen

Power up a Green Transition with Hydrogen

WHY HYDROGEN IS THE NEXT BIG THING IN CLEAN ENERGY?

The world is on a mission to achieve net-zero emissions by the mid-century. And the hydrogen economy is emerging as a key player in the transition to a green future as evidenced by numerous reports and studies published by reputable international organisations and industry associations. The International Energy Agency report "The Future of Hydrogen" (2019) highlights hydrogen’s potential to play a significant role in decarbonising our economy [1] . The report identifies key applications for hydrogen, including transportation, buildings, and power generation. In transportation, hydrogen fuel cell vehicles can provide a clean alternative to traditional gasoline and diesel vehicles. In buildings, hydrogen could be blended into existing natural gas networks particularly in dense cities while longer-term prospects could include hydrogen boilers or fuel cells. In power generation, hydrogen is one of the leading options for storing and transporting renewable energy - from regions with abundant solar and wind resources to energy-hungry cities. Another United Nations’ report also identifies hydrogen as a key element in achieving several Sustainable Development Goals (SDGs) including i) SDG 7 to ensure access to affordable, reliable, sustainable, and modern energy for all and ii) SDG 9 to promote sustainable industrialisation and foster innovation [2] . 

KEY CHALLENGES OF GREEN HYDROGEN ECONOMY

However, there are challenges to the widespread adoption of hydrogen as a clean energy source. One key challenge is the cost of producing and transporting hydrogen. While the cost of renewable electricity has dropped significantly in recent years, the cost of producing hydrogen from renewable sources remains relatively high. Significant investments will be needed to scale up clean hydrogen production and to develop the infrastructure needed to transport and store it. To materialise the potential of hydrogen, a coordinated effort by global governments is necessary to introduce policies and incentives, and to promote investments in research and development in the hydrogen economy. 

GLOBAL POLICY AND INVESTMENT SUPPORT

As such, many countries have introduced measures to support the hydrogen economy development. Hydrogen Council and McKinsey & Company found that as of 2021, over 30 countries have national hydrogen strategies in place, and over 200 large-scale projects with a total value exceeding US$300 billion have been announced [3] . Meanwhile, in China, the government has identified hydrogen energy as one of six “future industries” in its 14th Five-Year Plan (2021–2025) and set key targets under its hydrogen development plan 2021-2035 (see exhibit 1) [4] . 

In the wake of the above developments, market participants are increasingly turning to investment opportunities in relation to companies involved in the hydrogen value chain and innovation to participate in the growth of the hydrogen economy while supporting the transition to a green future. 

ARTIFICIAL INTELLIGENCE FOR IDENTIFYING MARKET LEADERS 

However, with so many companies across different industries and sectors operating in the space, it is difficult for investors to identify which ones are likely to be relevant to the hydrogen economy. One way that investors can gain an edge in the market is by using natural language processing (NLP), a branch of artificial intelligence (AI) that enables computers to understand and interpret human language. By analysing information from company disclosures in the public domain, NLP algorithms can identify keywords related to the hydrogen economy and screen the relevant companies involved in the production, transmission, distribution, and storage of hydrogen.

Leveraging on our success in launching the AI-powered thematic indexes [5] , we are thrilled to introduce the Hang Seng Stock Connect Hydrogen Energy Index which shortlists 30 most relevant companies in the hydrogen economy based on NLP algorithms as constituents. A key advantage of using NLP to identify keywords and phrases is the ability to process large volumes of unstructured data quickly and efficiently. While it would be impossible for a human analyst to read and analyze the massive amounts of data related to the hydrogen economy promptly, NLP algorithms can do so in a matter of seconds. That said, while NLP has made significant progress in recent years, human participation is still essential for the effective operation of NLP systems. For instance, ongoing review and research is needed to ensure accuracy, address biases, and keep up with the constantly evolving policy and market landscape in the NLP systems.

GREAT PERFORMANCE OF THE HANG SENG STOCK CONNECT HYDROGEN ENERGY INDEX 

Thanks to the policy support in China and growing global attention to hydrogen, the Hang Seng Stock Connect Hydrogen Energy Index has outperformed its benchmark since the overall market downturn in 2021 and delivered an average return of 1.7% annually, compared to -9.0% for its benchmark in the simulated performance presented in exhibit 2. On a longer-term horizon, the Hang Seng Stock Connect Hydrogen Energy Index also outperformed its benchmark with 5-year annualised return of 5.8%, whereas the benchmark only achieved 2.8% return annually.

With the increasing focus on clean energy solutions and technological innovation, we expect to see continued growth and investment in the hydrogen sector which will likely benefit the performance of the relevant companies in the years to come.  

Disclaimer

The information contained herein is for reference only. Hang Seng Indexes Company Limited (‘Hang Seng Indexes’) ensures the accuracy and reliability of the information contained herein to the best of its endeavours. However, Hang Seng Indexes makes no warranty or representation as to the accuracy, completeness or reliability of any of the information contained herein and accepts no liability (whether in tort or contract or otherwise) whatsoever to any person for any damage or loss of any nature arising from or as a result of reliance on any of the contents of this document, or any errors or omissions in its contents and such contents may change from time to time without notice. 

Hang Seng Stock Connect China A Low Carbon Select Index (the "Select Index") is published by HSIL. HSIL has contracted with ISS and Sustainalytics respectively to use the data from ISS ESG and Sustainalytics which forms part of the data included to maintain and calculate the Select Index. ISS ESG and Sustainalytics are trademarks of ISS and Sustainalytics respectively and have been licensed for use by HSIL. The Select Index is not owned, sponsored, endorsed or promoted by ISS or Sustainalytics and they do not make any representation regarding the advisability of investing in products that are based on the Select Index or otherwise relying on the Select Index for any purpose and neither ISS, Sustainalytics nor HSIL shall have any liability for any errors or omissions in the Select Index or any values thereof.

The information contained herein does not constitute any express or implied advice or recommendation by Hang Seng Indexes for any investments. Investment involves risks. Prospective investors should seek independent investment advice to ensure that any of their decisions is made with regard to their own investment objectives, financial circumstances and other particular needs. Prospective investors should also note that value of securities and investments can go down as well as up and past performance is not necessarily indicative of future performance. 

? Hang Seng Indexes Company Limited 2023. All rights reserved.

[1] International Energy Agency (Jun 2019): The Future of Hydrogen

[2] United Nations (2021): Leveraging Energy Action For Advancing The Sustainable Development Goals

[3] Hydrogen Council (17 Feb 2021): Hydrogen Deployment Accelerating with More Than $300 Billion in Project Pipeline; Including $80 Billion in Mature Projects

[4] National Development and Reform Commission (23 Mar 2022): 氢能产业发展中长期规划（2021-2035 年）

[5] Hang Seng China Metaverse Index and the Hang Seng Shanghai-Shenzhen-Hong Kong Genomics and Oncology Index