COP26: South Africa grapples with dilemmas of 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 rely on fossil fuels,’ wrote Prescient quantitative analyst Vanessa Mathebula.

‘Coal continues to be the primary energy source as it caters for about 77% of South Africa’s energy needs. Furthermore, no material changes in this trend are expected in at least the next two decades.

‘Unfortunately, the coal dilemma stretches wider than the obvious coal mining industry. As per the ripple effect theory, many other industries are reliant 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 in place to move South Africa to a greener economy, but the transition is slow and progress has been minimal.

‘The country’s fundamental developmental challenges remain the main culprit. 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, coupled with the politics associated with such decisions, are other hurdles that cannot be ignored.

‘We are, therefore, forced to acknowledge our shortcomings as a country and find ways to engage and promote realistic change.’

Credible pathway

Talking about ‘realistic’ change could be seen as a euphemism for saying South Africa’s fossil fuel reliance is a problem simply too difficult for asset managers to get their heads around. The country’s investment markets are concentrated and limited, and there are not that many options for asset managers. Ruling out fossil fuel investments entirely would limit managers’ ability to diversify portfolios and impact returns.

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

‘With the UN declaring its latest climate report 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 tackling this problem is for investors to get better at assessing whether an investment or portfolio is aligned with a credible net-zero pathway that works for all of the world’s 7.9 billion people,’ wrote Ninety One’s head of fixed income Peter Eerdmans.

Yet the firm is one of the biggest investors in Sasol, which operates the world’s largest single-point emitter of greenhouse gases. In 2020, the company’s Secunda plant emitted 56 000 kilotons of CO2.

Sasol’s emissions have barely shifted in years as the company has consistently failed to meet any of its own reduction targets. This investment would therefore seem to fail on any objective assessment of being aligned with a credible net-zero pathway.

Are local asset managers merely paying lip service to the climate crisis?

They may argue that divestment might green their portfolios but it doesn’t actually achieve any practical gains. This is true. Whether Ninety One owns Sasol shares or not does not change South Africa’s carbon trajectory to a low carbon economy.

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

Net positive

This is an argument Prescient also puts forward.

‘One of the ways we can realistically advance towards achieving our sustainability goals is to adopt a net-positive contributor approach to overall ESG factors,’ Mathebula wrote.

‘Not only does this enable us to factor climate-related factors into decisions in a less restrictive manner, but it also enables 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 prioritise the climate crisis above everything else, for example, nobody would ever provide funding to state power utility Eskom, which is one of the largest CO2 emitters in the world. But Eskom supplies the majority of South Africa’s electricity, without which almost no economic activity would be possible.

Does that tip the scales? Is it okay to buy Eskom’s bonds or invest in Sasol’s shares on the basis that the social positives outweigh the environmental negatives?

Nobody knows. If we do not address the climate crisis, nothing else will ultimately matter. It is the single biggest challenge humanity faces.

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

This reality cannot be dismissed 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 in which the shorter-term imperatives are almost always going to prevail.

Patrick Cairns is editor of Citywire South Africa, which provides insight and information for professional investors globally.

This article was first published here, and republished with permission.