Can coal-fired anything survive climate change?

The fossil fuel industry is under scrutiny as global allocators of capital look for ways to exert their influence over carbon emissions and other factors that are believed to contribute to climate change. Calls for asset managers to reassess existing and future commitments to coal-fired electricity projects are also gaining momentum, as global leaders prepare for the 2021 United Nations Climate Change Conference (COP26) that will take place in Scotland later this year. Against this backdrop, Sanlam Investments chose climate change as the core focus during the second of three Critical Conversations scheduled for the year.

Tackling climate change can create jobs

The asset manager assembled a panel of climate change and financial market experts to debate how South Africa could achieve tough net-zero carbon emission targets by 2050 without creating undue socioeconomic hardship. Their comments and conclusions were forthright and included that climate change was real and that the steps necessary to address carbon emissions could be taken in such a way to be of net benefit to the economy and society. Professor Guy Midgley of Stellenbosch University, who spoke in his personal capacity observed that the transition from fossil fuel to renewable energy could positively benefit South Africa by building a secure and abundant clean electricity supply and creating millions of direct and indirect jobs. 

Midgley was emphatic that measurable, rising levels of atmospheric CO2 were responsible for global warming, which in turn was a major contributor to climate change. “The evidence is incontrovertible,” he said.  “There is no longer any doubt that climate change is real and that our business and industrial activities are causing it”. Scientific observations form the basis of tough global climate change targets for reducing global carbon emissions by 2050 in the hope of limiting the total increase in average global temperatures. The effects of climate change exhibit differently depending on geographic location; but have been blamed for reductions in the reliability of winter rainfall in the Western Cape, more extreme rainfall events and flash floods in Gauteng and KwaZulu-Natal and more intense droughts in the Northern Cape, among other events. 

Risk to economic and social outcomes

Climate change is also inextricably linked to a range of economic and social concerns. The World Economic Forum Global Risk Report, which has drawn attention to inequality and poverty over a number of years, has recently highlighted climate risk as an existential threat. “Climate and social issues are interconnected in how they function and unfold in our economy,” said Jason Liddle, Head of Institutional at Sanlam Investments. He observed that Sanlam Investments was addressing concerns on various fronts, including the recent launched of a Sustainable Infrastructure Fund, with starting commitments of R500-million. The asset manager hopes to attract R5-billion in institutional investment over the next two years, to invest in environmentally sustainable local projects that drive economic growth and job creation. 

Can South Africa’s developing economy simply abandon carbon intensive projects given their investment lifecycles of three, four or more decades. Dr Lucian Peppelenbos, ESG Climate Strategist at Dutch-based asset manager, Robeco, conceded that transforming an economy to achieve net zero carbon emissions would be costly. But he also acknowledged the challenge as “the investment opportunity for the current generation”. Transitioning to net zero is “an opportunity for countries such as South Africa, which are well endowed with natural resources in terms of its solar energy,” he said, adding that the solution would be for the country to tackle the problem via a gradual but intentional transition from a coal-fired to renewable energy system. 

Clean energy to address the triple-threat

Midgely argued that South Africa could address the triple threat of a failing energy system, the looming climate impact and unemployment by transforming the country’s energy system. “We could employ millions of people to build a new energy system,  sort out our energy problems and [do our part] to mitigate against climate change in one fell swoop,” he said. South Africa is well-endowed with the sun and wind resources necessary to make renewable energy investments viable; but the country currently generates around 85% of total energy supply from coal. To make matters worse, Eskom has only recently commissioned two massive coal-fired plants, Kusile and Medupi, which are intended to be operational for decades. 

Ramez Naam, Co-Chair of Energy and Environment at Singularity University observed that dirty energy was the single biggest contributor to climate change. “Coal power plants that run on old technology are not particularly efficient, a lot of that energy does not get used,” he said. “But South Africa has the capacity to build a modern energy system with a backbone of solar and wind [among other renewable sources] that could make it one of the cheapest electricity suppliers on planet Earth,” he said. Liddle observed that government and the private sector had already invested in a range of independent power producer (IPP) projects, with a target of expanding to around 13200 megawatts by 2030. But he admitted that there were major funding gaps that would have to be addressed. 

The warning to asset managers was that a continued focus on dirty energy projects could result in investors’ capital becoming tied up in stranded assets. “This is a very complex issue,” said Liddle. “Solar and wind is definitely the focus area within our energy mix [as we set about] diminishing fossil fuels”. One of the difficulties facing asset managers is that investments in renewable projects in, for example, the Northern Cape are unsustainable given the dearth of transmission infrastructure. You can build a massive solar or wind farm but have no way of getting that electricity to the grid. 

Imagining a 30-year transition

The panellists agreed that the transition to clean energy was not an all or nothing approach; but warned that high-level global carbon trade-offs were not always beneficial. For example, planting hectares of fast-growing Eucalyptus trees in Africa as a carbon offset for European companies would have massively negative long-term implications. “The best possible scenario for the global economy and for long term growth and value creation is a swift transition to net zero,” concluded Peppelenbos. “As an investor you always want to support and accelerate that transition, which means having a clear vision on that transition”. Thus, South Africa can have a strong vested interest in coal today alongside a vision for clean energy generation three decades from now! 

Writer’s thoughts:
The ongoing focus on ESG, impact and sustainability factors in allocating investors’ funds suggests that the clean energy arguments will win the day… And the sense we get is that institutional money will inevitably flow to clean energy investments over time. Do you agree that the transition to clean energy will create more opportunities for institutional investors to invest your client’s money sustainably over time? Or do you feel that the risk in under-funding coal-fired power projects outweighs the benefits of investing in clean energy? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za