Tuesday, January 18

COP26: South Africa faces the dilemmas of the coal-dependent economy

In an article published last month, Prescient Investment Managers grappled with the question of how local asset managers should consider climate imperatives in their portfolios.

“As a country, we depend on fossil fuels,” wrote Prescient quantitative analyst Vanessa Mathebula.

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“Coal remains the main source of energy, satisfying approximately 77% of South Africa’s energy needs. Furthermore, substantial changes in this trend are not expected in at least the next two decades.

Unfortunately, the coal dilemma extends beyond the obvious coal mining industry. According to the domino effect theory, many other industries depend on fossil fuels ”.

These industries include transportation, petrochemicals (Sasol is a massive CO2 emitter), and the financial industry, which has indirect interests.

Mathebula said there are initiatives to move South Africa to a greener economy, but the transition is slow and progress has been minimal.

“The fundamental challenges of the country’s development continue to be the main culprits. Not only do we lack the necessary infrastructure to enable such a transition, but the cost implications, especially for an overly indebted country like South Africa, along with the policies associated with such decisions, are other obstacles that cannot be ignored.

“Therefore, we are forced to acknowledge our shortcomings as a country and find ways to get involved and promote realistic change.”

Credible path

To speak of a “realistic” change could be seen as a euphemism for saying that South Africa’s dependence on fossil fuels is simply too difficult a problem for asset managers to understand. The country’s investment markets are concentrated and limited, and there aren’t many options for asset managers. Discarding fossil fuel investments entirely would limit managers’ ability to diversify portfolios and impact returns.

Ninety One recently noted that investors’ approaches to capital allocation must change if the world is to achieve net zero at a pace aligned with the Paris Agreement.

With the UN declaration of its latest climate report as a ‘code red for humanity’, there can no longer be any doubt that we must act quickly to address climate change. The first step in addressing this issue is for investors to better assess whether an investment or portfolio is aligned with a credible net zero path that works for the world’s 7.9 billion people, ” wrote Ninety One’s chief fixed income officer. , Peter Eerdmans. .

However, the company is one of the largest investors in Sasol, which operates the world’s largest greenhouse gas emitter at a single point. In 2020, the company’s Secunda plant emitted 56,000 kilotons of CO2.

Sasol’s emissions have barely changed in years, as the company has failed to meet any of its own reduction targets. Therefore, this investment would appear to fail in any objective assessment of being aligned with a credible net zero path.

Are local asset managers just lip service about the climate crisis?

They may argue that divestment could make their portfolios greener, but it doesn’t really make any practical gains. This is true. Whether Ninety One owns Sasol shares or not does not change South Africa’s carbon trajectory towards a low carbon economy.

There is also concern that a company like Sasol is an important cog in the South African economy. Having shareholders like Ninety One to oversee its activities to ensure that it continues to be a positive player may be more critical than reducing emissions at the level of an investment portfolio.

Net positive

This is an argument that Prescient also makes.

“One of the ways we can realistically move toward achieving our sustainability goals is to take a net positive contribution approach to overall ESG factors,” Mathebula wrote.

‘This not only allows us to take into account climate-related factors in decisions in a less restrictive way, but also allows us to consider other sustainability factors, such as the social aspect, which is crucial for a country with a history of inequality. like South Africa. ‘

If investors prioritize the climate crisis above everything else, for example, no one would provide funds to state power company Eskom, which is one of the world’s largest CO2 emitters. But Eskom supplies most of South Africa’s electricity, without which almost no economic activity would be possible.

Does that tip the balance? Is it okay to buy Eskom bonds or invest in Sasol stocks on the basis that the social positives outweigh the environmental negatives?

Nobody knows. If we don’t address the climate crisis, nothing else will ultimately matter. It is the greatest challenge facing humanity.

What means are justified? If Sasol were forced to close Secunda tomorrow, that would put 22,000 people out of work in a country where unemployment is already a crisis.

This reality cannot be ruled out in a developing country like South Africa. Asset managers may be genuine about their desire to support a move to net zero, but getting there is fraught with trade-offs where short-term imperatives will almost always prevail.

Patrick Cairns is editor of Citywire South Africa, providing knowledge and information for professional investors around the world.

This article was published for the first time hereand republished with permission.


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