Globally, asset managers can play a decisive role in redirecting institutional and retail investors’ capital towards achieving the decarbonisation goals set by the recent COP26 Climate Change Conference.
This is the message from Old Mutual Investment Group following the conference held in Glasgow, Scotland this November, which has singled out capital, or the impactful application of capital, as a vital cog in the world’s climate response machinery.
“As one of the largest asset managers on the African continent, our focus goes beyond identifying and funding impact opportunities, to understanding how climate impact and transition risk affect the companies we invest in,” says Robert Lewenson, Head of Stewardship at Old Mutual Investment Group.
One of the positive outcomes from COP26 is that the Green Climate Fund (GCF), which was created to support developing countries in responding to climate change, has announced some large value transactions, which benefit SA. In the first few days of the conference, a financing partnership totalling US$8.5 billion was announced between South Africa and a consortium consisting of France, Germany, the UK, the US and the European Union (EU). The partnership aims to support South Africa’s just transition to a low carbon and climate-resilient economy and society.
“The GCF’s recent decisions reinforce the shared, but differentiated, responsibility between developed and emerging economies; namely that countries that were historical polluters should provide access to capital and intellectual property while emerging market economies seeking growth, should do so the on basis of green economic principles,” says Jon Duncan, Head of Responsible Investment at Old Mutual Investment Group.
“This climate funding is a great opportunity for South Africa to reset our approach to climate governance across the markets, but it also presents us with an opportunity to imagine a new reindustrialisation pathway for the South African economy,” says Duncan
It is in the long-term interest of the allocators of capital to create an environment that enables the COP26 goals to be achieved. “It is in our interests to steward investee firms towards positive climate outcomes, take advantage of green economic opportunities and provide the market with world-class and ESG-focussed equity products to achieve this,” says Lewenson.
Meanwhile, listed markets have already seen a decline in the relative market capitalisation of primary producers of fossil fuel, which today account for a small percentage of the MSCI World index.
“Yes, investors should start thinking about decarbonising their listed equity portfolios; but they should also consider the real-world decarbonisation impact that comes from investments in infrastructure such as renewable energy,” Duncan says.
Support for portfolios that achieve ESG outcomes, including decarbonisation, is on the rise thanks to the growing understanding that sustaining ourselves and the economy requires capital to be directed in a manner that solves for returns, risk, and impact.
“Stewardship will emerge as our biggest impact in delivering Sustainable Development outcomes in the listed space; our North Star is to achieve impact-aligned sustainable development goals through our listed equity stewardship proactive targeted engagement plan,” says Lewenson.
In this context, all stakeholder engagements take place in cognisance of factors like climate risk, ethical leadership, social inequality, sound pay, and social justice and transformation.
However, South Africa will have to clear some tough socioeconomic hurdles to achieve a just transition away from fossil fuels. These hurdles will be overcome with a combination of reallocating capital from areas with high fossil fuels exposure towards renewables and ongoing engagements with listed companies on their transition plans.
The country’s main carbon culprits are easily identifiable, offering clear wins for purposeful policymakers. More than 50% of the JSE’s carbon intensity links to electricity grid emissions from Eskom’s aging coal-fired power infrastructure, while much of Sasol’s carbon footprint stems from its steam reformation Hydrogen extraction process.
An accelerated shift to renewables seems a sensible starting point.
“We are in the top decile in the world in terms of the quality of both our solar and wind resources and modelling has been done to show that our baseload peak demand can be met with renewable energy,” concluded Duncan.
South Africa’s private sector developers and funders, in partnership with the government, already have a solid track record of bringing solar and wind power projects on stream, quickly.
All that is needed for South Africa to meet its 2050 net-zero emissions target is to scale our renewable energy response.
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