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The realisation of a just transition into a green economy that is low in carbon emissions may force the industry to rethink how environmental, social and governance (ESG) outcomes are measured and reported on. Picture: SUPPLIED/OLD MUTUAL INVESTMENT GROUP
The realisation of a just transition into a green economy that is low in carbon emissions may force the industry to rethink how environmental, social and governance (ESG) outcomes are measured and reported on. Picture: SUPPLIED/OLD MUTUAL INVESTMENT GROUP

Global allocators of capital are at an important and timely inflection point when it comes to responsible or sustainable investment. The past decade of acceptance, a time when environmental, social & governance (ESG) stakeholders laid the foundation and built a framework for responsible investing, has now made way for a decade of transition.

This is at a time when allocators of capital stand out as predominant drivers of decarbonisation through a just transition, using the application of capital towards impact and sustainability. 

The just transition refers to the world’s shift to a green economy that is low in carbon emissions, resource-efficient and socially inclusive.

Between 2010 and 2020, select institutional investors focused on their own corporate social responsibility, underpinned by sound corporate governance in investee companies.

However, the focus has shifted to a holistic approach that incorporates environmental and social material risks alongside governance. Listed companies started to use their integrated annual reports to display their ESG credentials. 

Covid-19 catapulted this evolution into the mainstream as investors were forced to face ESG risks playing out in real time and affecting their investment performance. In addition, boardrooms across the world became acutely aware of the interconnectedness of social and biophysical systems and the powerful role that markets and capital flows can play in solving the long-term resilience of these systems. 

While the past decade catalysed awareness and acceptance of the need for responsible investment, the coming decade is set to be known as a decade of action, particularly with regard to climate risk and its impact on the social fabric of our society.

We are entering a challenging period, where a just transition to net-zero carbon emissions is the only way forward if we are to leave a sustainable future for our children. It will only be achieved by purposeful allocation of capital by investors to businesses that make impact and sustainability part of their corporate purpose. 

Tebogo Naledi, Old Mutual Investment Group MD. Picture: SUPPLIED/OLD MUTUAL INVESTMENT GROUP
Tebogo Naledi, Old Mutual Investment Group MD. Picture: SUPPLIED/OLD MUTUAL INVESTMENT GROUP

 

Committing to a net-zero world will change the way asset managers operate — their conversations with clients, financial products on offer, and internal management. 

Emerging market asset managers, such as Old Mutual Investment Group, are concerned their developed market peers have lost sight of the economic and social impact of the methodologies being adopted to achieve net zero.

A just transition requires that equal consideration be given to carbon emission reduction and the social impact of the steps taken to achieve it. This may force the industry to rethink how ESG outcomes are measured and reported on, particularly in a world of benchmarks that are calculated as the sum of carbon emissions of index constituents.

SA offers a perfect illustration of the challenge. The JSE Capped Swix, which is the most prominent local listed equity benchmark, has a weighted average carbon intensity of 363.8 tonnes of CO2 emissions per $1m in revenue. 

By comparison, the MSCI Emerging Markets Index has a carbon intensity of 270 tonnes of CO₂, while the North is keen to achieve a carbon intensity of just 67 tonnes of CO₂, considered necessary for a 1.5°C-aligned world in terms of the Paris Agreement on climate change response. 

SA’s trajectory to a 1.5°C-aligned index will have to look different to that of the rest of the world as it’s not going to be as simple as decarbonising companies listed on the Swix at 7% a year until 2050.

It is necessary for SA to develop its own listed market benchmarks that more accurately reflect the country’s on-the-ground economic and social realities. This can be achieved through collaboration between the local asset management community, local asset owners, industry bodies such as the Association for Savings & Investment SA, the relevant policymakers and regulators, and the JSE.

SA will be unable to achieve its 2050 carbon emissions targets without radical changes to Eskom’s electricity generation mix

This will develop an SA-centric low-carbon net-zero benchmark that facilitates the net-zero commitment asset managers make to their clients to decarbonise their portfolios of listed assets. Such collaboration would ensure that local financial markets remain investible while acknowledging the country’s social context.

The developed world is not oblivious to the social challenges facing emerging market economies in achieving net-zero. Glasgow’s COP26 acknowledged SA’s dependence on Eskom, with developed economies pledging billions of dollars to assist the country to transition away from coal-based electricity. 

It is widely accepted that SA will be unable to achieve its 2050 carbon emissions targets without radical changes to Eskom’s electricity generation mix. SA needs to shift electricity generation into renewables and other lower-carbon feedstocks without compromising energy supply, which remains constrained by the existing ageing infrastructure. 

An assumption is that SA cannot achieve a just transition if investors summarily divest from heavy carbon-emitting companies and sectors, at least for the time being. If investors divest from these companies, it doesn’t solve the decarbonisation issue, but worsens social ills such as unemployment. This is a misconception that needs to be rectified.

As a large allocator of capital, OMIG holds some companies in their clients’ investment portfolios. 

OMIG’s continuous and meaningful interactions with Sasol over seven years serve as an example of how this approach can succeed. Sasol, which is second to Eskom in terms of domestic carbon emissions, illustrates why an overnight exit from heavy carbon emitters is untenable.

The business contributes about 4.7% to SA's GDP, paid R9.5bn in direct taxes in its latest reporting period, and employs just over 31,000 people in 33 countries. 

OMIG does not intend to exit the companies that it holds domestically but is aware of its responsibility in assisting both institutional and retail clients to transition their portfolios to net zero over time. 

OMIG recently joined the Net Zero Asset Managers initiative of more than 236 global asset managers that are committed to the goal of net-zero greenhouse gas emissions by 2050 or sooner. In line with this commitment, OMIG will be setting and disclosing interim decarbonisation targets publicly within the next 12 months.

The time for talk is long gone if we are to ensure a sustainable future for generations to come. Initiatives such as the Net Zero Asset Managers will usher in an era of action.

It is up to organisations such OMIG and others to support these efforts and to take the urgent and necessary steps to affect real change for a more sustainable future.

This article was paid for by Old Mutual Investment Group.

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