The South African economy & net zero emissions: a transition or whiplash?
This blog is the first of a three part series of articles looking into the implications of a net zero emissions future on South Africa and the role that the investment community can play to help or hinder that transition. The first is available here and second blogs here. Written by Blaise Dobson with the acknowledgment of inputs from Ameil Harikishun, Lowell Scarr, Adhila Mayet & others along the way.
In the previous posts in this series, we looked at the science and implications of the assumption that the South African economy is required to transition to a net zero greenhouse gas emission profile by 2050. We also looked at the role that institutional investors play within the structure of the South African economy and how they can have great agency to either enhance or frustrate the processes by which the country can move towards this emissions profile. However, these two principles – firstly: the science is settled – human induced climate change is causing disruptions (in some instances catastrophic ones) with the scientific community having divergent views on the magnitude of these impacts. Secondly: the knowledge of which renewable and green technologies need to funded to address these concerns. These two principles seem to prompt logical action from policymakers, the business community, labour unions and civil society.
Moreover, some will argue that it is morally corrupt to continue to invest in fossil-fuels if we are aware of the science and required urgency to transition away from the human species reliance on coal, oil and gas. Statements such as those made in disclosures by institutional investors like Allan Gray are insightful: “while this matter does give rise to uncertainty regarding the future performance of the company, we have continuously incorporated these concerns into our fundamental research and adjusted our assessment of Sasol’s intrinsic value accordingly” are equivalent to “we know the science, but will still invest.” The statement amounts to an admission of the science and acknowledgement of the impacts yet a statement to continue to profiteer from a stock option that has no stated plan to retool itself to be sustainable in the short to medium term. However, shouldn’t we be expecting more from institutional investors who are safeguarding assets that should (in principle) be protecting the future environments into which we will retire to?
Rob Dower (COO of Allan Gray) wrote in September 2016 that: … “unlike social change, successful investing is an exercise in logic, not emotion. At times when fear and pessimism prevail, there are often opportunities to buy assets for less than what they are worth on a rational assessment of value and risk. This is because the most important factor of success in long-term investing is the relationship between the actual (not popularly perceived) prospects and risk of an investment, and its current price.“ Is there a responsibility for institutional investors to request fossil fuel companies fully disclose the risks that they businesses face (including the risk of key assets becoming stranded)? Should we expect them to review their portfolios for consistency with 2° celsius scenarios?
Ultimately, the South African investment community need to do their due diligence on their internal pricing models to check that they are aligned with the latest science in order to identify stranded assets within their portfolios. However, if the risks of stranded assets exist (highly likely within the South African economy), then what are our expectations of the role that institutional investors play in the “just transition” from fossil fuels? Some investors (e.g. FutureGrowth) are beginning to call the fossil fuel industry out on their sustainability plans in the interest of safeguarding their clients long-term capital. But, where do we expect institutional investors to put our capital if not in fossil-fuel heavy industry? Based on my interactions with institutional investors, it is often cited as a struggle to re-invest funds diverted from coal, oil and gas without scaled alternatives in the South African market.
Outside of the (now oversubscribed) REIPPPP, there are limited net zero emissions investments that are at the scale that institutional investors consider. Objectively, there is a supply-side issue for large investment alternatives and positions of the trade unions regarding opportunities like REIPPPP that complicate matters in the face of government delays. This is a broader issue that just institutional investors as shown by the recent media critique of Nedbank, Standard Bank, ABSA and Rand Merchant Bank’s investments in fossil fuel energy projects. In March 2017, the Pretoria High Court set aside the environmental approval for the proposed new Thabametsi coal-fired power station, because there was inadequate consideration of the project’s significant climate change impacts given South Africa’s international obligations (see: Earthlife Africa Johannesburg v Minister of Environmental Affairs & Others). Nedbank, Standard Bank, ABSA and Rand Merchant Bank were all invested in Thabametsi proceeding.
At the very least, institutional investors should be looking to take heed of the recommendations of the Global Task Force on Climate-related Financial Disclosures. In its latest Stewardship Report, Allan Gray has made a start. Beyond this, I would argue that they should be placing pressure on companies exposed to climate change risk to drive constructive discussions at key forums especially in the context of what constitutes an “inclusive and just transition” in South Africa. There is international precedent for this – the recent positions taken by BlackRock at the end-May Board meetings of a number of fossil fuel companies is an interesting development (BlackRock own 2.9% of Sasol and also have a significant Pan-African investment subsidiary – the BlackRhino Group).
We need to be encouraging more discussions with South African industry about what “life after coal” looks like and how we plan to get there in an inclusive manner as possible. Organisations like the Carbon Disclosure Project, JustShare and Full Disclosure are doing good work to bring to light the fossil fuel intensive industries with a view to encourage them to change whilst hold them responsible for their actions. The emergence of organisations like JustShare will further add pressure to publicly listed firms to take stock of their fossil fuel holdings.
What changes do we need to make today to safeguard tomorrow?
In closing, when the International Energy Agency issued a global warning that US$ 13 trillion in energy assets are at risk, institutional investors would be well advised to check their internal pricing models. Have Allan Gray effectively priced the risk of instillations like Secunda in their models and the risk that their clients are exposed to given national priorities? Even if Allan Gray acknowledged the risk that divestment was required – where are the local alternatives for institutional investors to redeploy capital in a manner that is aligned to a carbon-constrained future. While the REIPPPP provided a window of opportunity, it is unlikely that ESKOM will proceed with the next round of renewables procurement (a US$ 58 billion investment) until the Integrated Energy Plan has been updated which – apparently – will be February 2018 (at the time of writing this remains unclear).
Until there are scalable green investment opportunities on the table for long-term capital to be deployed, we will continue with a sub-optimal system. We need to give institutional investors an excuse to divert capital towards scalable investments that do not undermine the future of our planet. It has been argued that this will require South Africa to undertake a gear-change in order to escape a failing second industrial revolution (ironically car gear boxes will be obsolete in a net zero emissions future). At the end of the day, we need pivot existing businesses in South Africa to become competitive in a future world that no longer uses fossil fuels as an energy source. We need to encourage businesses who are going to deliver goods and services in a radically different manner and to retool in a way that doesn’t whiplash the economy (and its workers). With this in mind, growing high-employment green (net zero emission) enterprise is essential to provide South African workers a prosperous future in this inevitable transition. It is essential, that we have a cadre of entrepreneurs growing these types of companies.
Coherent investment policies that embed climate change as an cross cutting issue are essential. However, reforms and plans must work with the broadest range of South African stakeholders. In particular, those workers whose jobs are at risk of becoming “stranded” because of climate change and its socio-economic implications. In addition, in an uncertain climate, entrepreneurial thinkers considering the impacts of net zero emissions on our economy become an essential element of a just transition towards a climate compatible future.