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Recognizing global trends, a Manulife equity team uses regional expertise and dedicated ESG resources to analyze the effects of environmental factors on the Indian market.


This case study from Manulife Investment Management originally appeared in the CFA Institute report "Climate Change Analysis in the Investment Process."


Manulife IM believes that ESG factors can contribute meaningfully to an investment’s risk–reward profile, and we also hold that careful consideration and management of relevant ESG dynamics can lead to long-term value creation. Our India Equity team uses its extensive research network and experience to quantify the opportunities that ESG trends create for Indian companies, particularly when strong governance enables the translation of these trends into greater stakeholder value. The team evaluates these factors in its research and security selection process, portfolio construction, and active stewardship of the companies in which it invests.

The team recognizes global trends around the low-carbon transition, particularly how these trends change sentiment and regulation in different countries. As an example, we identified how the implementation of new policies in China would affect the steel manufacturing industry, with significant implications for Indian companies upstream in the supply chain. Our team saw the potential for these changes to create a market-disrupting opportunity for certain companies to increase cash flow in a way that their share price did not yet reflect.

This example highlights one of the central challenges of ESG analysis: Global issues create different challenges and opportunities in different countries, with unique and variegated outcomes across sectors and companies. These global issues include environmental and social trends, and our India Equity team draws upon regional expertise across Manulife IM’s global platform and dedicated ESG resources to analyze the effects of these themes on the Indian market. They also discuss these secular shifts with experts in other regions in order to better understand the local impact of global ESG trends.

Cross-Border Implications of Climate Mitigation

Based in India, the two companies we examine here are the country’s two largest producers of ultra-high-power graphite electrodes (GE), a key consumable in the electric arc furnace (EAF) approach to steelmaking. EAFs commonly operate by melting recycled scrap metal. This process requires graphite made from a petrochemical byproduct called “needle coke,” which is one of the few substances that can withstand the extreme temperatures required for this steel production method.

As the global steel industry responded to stricter anti-pollution regulation in China, EAF-based steelmaking began to increase around the world, causing a substantial increase in demand for GEs. This shift occurred at a moment when the GE industry was consolidating in India, which meant a strong trend toward better capacity utilization and pricing power.

Although these two companies controlled more than 20% of the world’s GE capacity, they operated in a niche subsector with limited analyst coverage. Neither company was rated comprehensively by third-party ESG ratings providers at the time, which further created an opportunity for differentiated in-house analysis. Furthermore, awareness of both regulatory developments in China and industry dynamics upstream in India was necessary to recognize the opportunity.

The investment case resulted from multiple ESG-related dynamics coming together:

Regulatory change in China—The promotion of the “Beautiful China” initiatives increased the desire for environmental regulation compliance for all businesses, which led to a focus on reducing pollution and emissions. One outcome of this shift was increased emission regulation of steel plants in 2016 and 2017, resulting in the closure of approximately 20% of China’s total steel production capacity. As Chinese steel exports declined, market share shifted to other countries. The regulatory impact on the steel market changed the dynamics of how steel is produced, with an increased share moving to the EAF process, because EAF steelmaking has a much bigger share of the total industry outside China.

A less carbon-intensive steelmaking technology—EAF steelmaking emits lower amounts of CO2 than blast furnace processes. According to steelmaker ArcelorMittal, an EAF generates between 0.4 tonnes and 0.7 tonnes of CO2 per tonne of steel, compared with 2.3 tonnes of CO2 per tonne of steel made in a blast furnace. The difference is lower for high-quality steel, but it still shows improvement in emissions. Because regulatory pressures encouraging lower emissions shifted production from blast furnace steel producers in China to EAF steel producers in other countries, demand increased for the GEs used in the EAF process of steelmaking.

Industry consolidation—GEs are an essential consumable for EAFs. The rise in demand for GEs came at a point of industry consolidation, resulting in shortages and a reduction in GE supply. This dynamic increased supplier power for the remaining producers, allowing them to raise prices. In this way, the change in environmental regulations in China had a transformative effect on GE suppliers in India.

Other low-carbon emission trends—Another environmental dynamic that contributed to the fortunes of the GE industry was capacity expansion for production of lithium ion batteries to be used in electric cars. Battery makers were competing for the same graphite-related raw material used to make GEs—needle coke—because lithium ion batteries use graphite as the anode material. The suddenly intense competition for this raw material, in turn, meant that GE capacity and production across the world could not be suddenly ramped up to meet higher demand from the steel industry. This additional supply constraint further increased the pricing power of the GE manufacturing subsector.

India’s two GE producers had relatively thin margins in 2016 and 2017, as Figure 1 shows. Revenues declined for both companies in these two years, with single-digit net income margins. One even had negative earnings in 2017. The increased demand and concurrent supply shortage, however, drove prices up and allowed revenue growth of more than 100% for both companies in both 2018 and 2019. Simultaneously, their net income margins expanded above 40%. Free cash flow increased more than tenfold, leading to a broad repricing of these companies as shown in Figure 2.

Figure 1. Income Margin

Line graph

Sources: Company filings and National Stock Exchange of India.

Figure 2. Share Price

Line graph

Sources: Company filings and National Stock Exchange of India.

Although the opportunity appears logical in hindsight, many coordinated components needed to fall into place in order for the investment thesis to be successful. Our India Equity team observed both the global trend of climate change and the shift in environmental focus in China. They then spoke with other Manulife portfolio managers about the sentiment and political dynamics in China, as well as with others in their network about Chinese regulatory proposals, developments in the steel industry, and the management teams of companies in India. Through both research and coordination, we were able to take advantage of this cross-border supply chain opportunity.


We believe that incorporating climate change, emissions, and other ESG factors into fundamental research and portfolio themes can create value for investors. When done well, this approach can reveal opportunities stemming from the interconnectedness of systemic environmental and social issues.

Although climate change represents significant risk to economic growth as well as to many companies, changes in regulatory landscapes and industry dynamics create opportunities for some companies. The same approach can be applied with other climate-related themes, such as water scarcity, materials use, workforce trends, wellness, and longevity, among others. As our example illustrates, ESG analysis pairs well with deep fundamental research, active management, and a global platform.

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About the Authors

Koushik Pal
Eric Nietsch