It is almost impossible nowadays for an asset manager to talk about capital allocation without touching on critical issues around impact investing and sustainability. One of the most urgent issues within the environmental, social & governance (ESG) arena, and an issue that impact and responsible investors are increasingly incorporating into their investment decisions is the recognition of climate change risk as a potentially catastrophic factor for the world’s collective future.

There is growing recognition that investing for impact is a non-negotiable component in achieving both the UN sustainable development goals (SDGs) by 2030 and the tough carbon emissions reductions set at the various UN Climate Change Conferences to achieve net zero by 2050. Yet while the world must transition towards net zero carbon emissions to ward off the impending climate change disaster, there is also acknowledgment globally that there needs to be a just transition that decarbonises without causing social harm.

This is both a moral and a practical imperative. The 2021 GSG Global Impact Summit highlighted the flood of global investment capital towards impact investment opportunities. While globally impact investment started off in private market funds, it has since moved into the fixed-income space, with north of $1.5-trillion in green bond issuances in recent years, and is now moving into the public market space.

Over the next five to 10 years the impact investment theme is set to accelerate in public or listed markets, which is where the bulk of capital sits, as asset managers adopt a new investment paradigm that considers impact on an equal footing with risk and return. This is becoming far more mainstream than we have seen previously and will largely be driven by, among others, pension funds regulation and pension funds themselves as they seek to fulfil the greener mandates of individual savers.

Active ownership

This normalisation of impact investment will be defined by the deliberate tilting of portfolio holdings towards companies that have lower carbon footprints, particularly relative to market benchmarks — with funds that are aiming for zero exposure to fossil fuels at the extreme end of this spectrum — as well as by steering more investment capital towards sustainable investment opportunities such as renewable energy.

The third mechanism for bringing impact investment squarely into the mainstream will be through an increased focus on active ownership and stewardship of investee companies within investment portfolios. Engaging with these companies on their ESG exposures and climate plans is becoming more established in the portfolio management space. Ultimately, stewardship is critical in driving change. Governments cannot do this alone, and countries need to find ways to finance the transition, with public markets being an obvious means to do this. But engagement with these companies by capital allocators is necessary to steer the impact trajectory in the right direction.

Much of the debate around a just transition and how to ensure all of society benefits from the shift to a greener economy and net zero emissions, and certainly something that was discussed in detail at this year’s GSG Global Impact Summit, was the question of the scale of opportunity. Recent work by the Business & Sustainable Development Commission points to $1.1-trillion in private sector investment opportunities as Africa progresses towards its 2030 SDGs.

This investment is expected to create about 85-million jobs, while another study by the National Business Initiative in conjunction with Boston Consulting Group suggests SA’s just transition will generate between 2.7-million and 3.6-million jobs. That would make a big dent in the country’s unemployment number, with almost 15-million individuals unemployed.

Social risks

But while opportunity is growing from a business perspective, the broader just transition debate plays out differently depending on where in the world you are. The global investment community may laud many of these investment opportunities for their potential to leapfrog old technology and carbon-intensive industries, but there are social consequences, particularly in countries such as SA that have legacy dependencies on intensive fossil fuel industries.

SA produces more than 90% of its electricity from coal-fired power plants and about 30% of its domestic liquid fuels from a carbon-intensive coal-to-liquid process. With this dependency in mind, and entire communities reliant on the production of coal, the social risks involved would add to an already significant unemployment rate in an economy acknowledged as one of the world’s most unequal.

Collaboration will be key here. For SA to achieve a just transition to net zero it will need to have a synchronised effort from businesses, communities, the government and regulators.

It also requires the country to implement and manage interdependent reform processes over multiple years up to 2030, and ultimately 2050. For example, to reduce SA’s dependence on fossil fuels requires reskilling that section of the population that relies on the coal or oil industries for their jobs. Over the nine years to 2030 we must not only reskill workers employed in the fossil fuel economic value chain but consider replacement industries for the towns and cities that were built around fossil fuel dependent infrastructure. These measures will be critical in devising social and poverty nets so that no-one is left behind in the transition.

Just transition

There are many investment prospects that could support this approach and offer significant impact for relatively small amounts of capital, but we will need to tackle the challenge around scaling such projects and in expanding investment to include infrastructure projects that address education, healthcare and sanitation needs, among others.

Few will argue against impact investing to spearhead the African continent’s transition to net zero, but our challenge as allocators of capital is to ensure that the social component of ESG is addressed, thereby driving a just transition to solve social issues rather than exacerbate them.

Active stewardship on these issues across listed markets will be an essential aspect of investor effort to successfully create a decarbonised world that benefits everyone.

• Naledi is MD of Old Mutual Investment Group.


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