Impactful application of capital is vital in the climate change fight
18 Jul, 2022

The furore surrounding Shell’s seismic survey plans for the Wild Coast of South Africa has highlighted the powerful role that civil resistance can play in the decarbonisation drive. But there are other weighty tools that can influence the direction of the world’s climate change response, foremost among these being the role of long-term capital allocation.

Capital, or the impactful application of capital, is one of the most vital components in the world’s climate change response machinery to date, says Robert Lewenson, head of Responsible Investment at Old Mutual Investment Group (OMIG).

He argues that asset managers globally can and must now play a decisive role in redirecting institutional and retail investors’ capital towards sustainable investments.

“As asset managers, we have a responsibility to understand how climate action affects the companies we invest in,” says Lewenson.

OMIG, which stewards approximately R415 billion in client capital, is among the many savings and investment industry stakeholders that are aligned with the global climate goal of reducing carbon emissions to limit the global average annual temperature increase to less than 1.5°C between now and 2100. Last week it announced that it has joined the Net Zero Asset Managers Initiative, a large group of approximately 220 global asset managers with an estimated $57 trillion of assets under management that have pledged to align their businesses with global efforts to limit global warming to 1.5 degrees Celsius by 2050 or sooner.

“In line with our commitment to the Net zero Asset Managers Initiative, OMIG will be working on decarbonisation investment targets and will be disclosing these publicly in the next 12 months,” says Lewenson.

Talk of a second seismic survey planned by Australian geoscience data supplier, Searcher Seismic, has followed Dutch petroleum company, Shell’s, most recent efforts. This raises the question of the role of developed markets in helping to steer emerging markets such as SA in the right direction to support a just transition, in addition to the role of developing markets to plan the pursuit of a less carbon-intensive growth path.

Among the notable developments in the climate change fight are the recent large value transactions by the Green Climate Fund (GCF), which was created to support developing countries in responding to climate change.

“The GCF’s decisions reinforce the shared, but differentiated, responsibility between developed and emerging economies, namely that countries that were historical polluters should act early and support access to technology and financing, whereas emerging market economies should plan the growth of their economies to be low carbon and socially inclusive,” says Lewenson.

At last year’s COP26 event, it was announced that SA had secured funding commitments totalling US$8.5 billion from developed market countries to invest towards a just transition to net-zero carbon emissions.

“The funding is an opportunity to reset, not only from a governance perspective, but also, to imagine a new reindustrialisation pathway for the South African economy,” says Lewenson.

He points out, however, that asset managers are not responsible for enforcing or monitoring climate change targets. Instead, allocators of capital must create an environment that enables for climate goals to be achieved.

“It is in our interest to steward investee firms towards positive climate outcomes and provide the market with the debt and equity products to achieve this,” he says.

Global listed markets have already seen a big shift away from primary producers of fossil fuels, which today account for only 2.5% of the MSCI World index. But decarbonisation is not as simple as steering portfolio investments towards listed companies with high environmental, social and governance (ESG) ratings.

“Yes, investors should start thinking about decarbonising their investment portfolios; but we must also consider the real-world infrastructure investments in, for example, renewable energy, needed to achieve net-zero targets over the next three to four decades,” says Lewenson.

Support for portfolios that achieve ESG outcomes, including decarbonisation, is on the rise thanks to growing evidence that sustainable investing enhances rather than impedes investment returns.

“Stewardship will emerge as our biggest impact in delivering sustainable development outcomes; our North Star is to achieve impact-aligned sustainable development goals through our proactive stewardship,” 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.

SA will have to clear some tough socioeconomic hurdles to achieve a just transition away from fossil fuels. These hurdles will be overcome by a combination of reallocating capital from areas with high fossil fuel 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 use which in turn causes electricity grid emissions from Eskom’s ageing 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.

“South Africa is in the top 5% of the world in terms of the quality of both our solar and wind resources; and modelling has been done to show that our base load peak demand can be met with renewable energy,” says Lewenson.

“SA’s private sector developers and funders, in partnership with government, already have a solid track record of bringing solar and wind power projects on stream, quickly. All that is needed for SA to meet its 2050 net-zero emissions target is to scale our renewables response,” he concludes.



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