DAVID LE PAGE: The true cost of investing with Allan Gray

The increasing gulf between facts and policy in current global politics may have hit a tipping point when the 2000—2008 Bush administration that initiated the illegal, brutal and disastrous Iraq War infamously dismissed the “reality-based community”.

Unfashionable though reality may be for elites, oligarchs and those most comfortable riding elite-oligarchic coattails, many of us are still attached to reality as the best starting point for long-term decision-making.

But it’s really not clear to what extent many of SA’s asset managers inhabit the reality-based community. For example, many of them still trumpet their commitments to 2050 net zero targets for carbon neutrality — even though emerging climate science strongly indicates that 2050 is an absurdly late date to target for zero emissions.

It is now clear that net zero targets are an irrelevant political abstraction established at climate talks that are both absurdly dominated by fossil fuel interests and so detached from scientific reality that the most obvious strategy for combating climate change — a fossil fuel phase-out — was only allowed into the climate diplomacy lexicon two years ago.

Take Allan Gray, for a few reasons: first, because for reasons that remain obscure to us, more of the supporters of our #InvestFossilFree campaign calling for fossil fuel-free investment funds are clients of Allan Gray than of any other asset manager. Second, because Allan Gray’s marketing misleadingly claims that it builds returns for clients “without undue risk”. But the following critique applies in good measure to many other SA asset managers too.

Allan Gray loves to trumpet the returns it offers its clients, boasting on its website the fact that R10,000 invested in 1998 in its Equity Fund was worth R944,000 by December 2024. But it claims to have achieved these returns “without undue risk” while it has also long been one of the most steadfast investors in Sasol, the second largest carbon emitter in SA after Eskom, one of the top 57 global polluters responsible for most climate damage.

As the reality-based community knows, climate change, more precisely understood as fossil fuel industry carbon pollution, poses immense risks. What was the climate cost to global society of that hypothetical R10,000 investment so carefully stewarded by Allan Gray? The short answer is probably at least R30m attributable to investments in Sasol alone — without considering the considerable costs of non-climate impacts such as air pollution, and impacts from other polluters in which Allan Gray was invested over that time.

Bear in mind that there has been an international climate convention since 1992, so Allan Gray cannot claim ignorance of the global scientific consensus or of the extreme risk of climate change. Yet it has for most of the 27 years since 1998 behaved as if climate change does not exist.

When Fossil Free SA started advocating for fossil fuel divestment in SA in 2013 climate change was nowhere on Allan Gray’s radar. As the world readied itself to sign the Paris climate agreement in 2015, there was not a single mention of climate change in Allan Gray’s stewardship report, nor in the 2016 report that followed that milestone in international climate governance. Only in 2018 did Allan Gray at last belatedly catch up with over 100 years of hard science, and begin engaging with reality.

It’s clear that in respect of climate issues Allan Gray remains a follower, not a leader, and a most reluctant follower at that. That’s a huge pity given that the company’s founder, Allan Gray himself, was a trailblazer. Allan Gray’s sister company, Orbis, said in its 2023 stewardship report that part of its approach to responsible investment is to: “Reject judiciously: while our overwhelming preference is to be proactive, engagement has its limitations and sometimes walking away is the most responsible thing to do.”

But we see no sign that Allan Gray is ever going to judiciously reject Sasol, even as that company’s share price declines, even as it appointed a gas evangelist to be its new CEO, even as it builds on its impeccable record of missing its own carbon emissions reductions targets, even as it nails its colours firmly to the mast of running itself into the ground.

There are further profound inconsistencies in Allan Gray’s approach to Sasol. It keeps telling us that key reasons it continues to invest in Sasol are that being invested gives it leverage to push Sasol towards transformation and sustainability, that it is a more responsible owner than others might be, that Sasol is an indispensable pillar of the SA economy.

But an asset manager’s most profound fiduciary duty is to its clients and their long-term financial wellbeing. Allan Gray has no place behaving as if it is the Industrial Development Corporation or African Development Bank. Being invested in Sasol is a profound threat to Allan Gray’s clients’ financial and general wellbeing for several reasons — the continuing visible decline of an energy company that refuses to enter the 21st century, the damage being done by companies like Sasol to both the SA and global economies, and the mounting physical risks posed by climate change.

Sure, the Allan Gray Equity Fund outperforms its benchmark — but the benchmark is increasingly crippled by climate damage compounded by Allan Gray-style investment strategies. In these circumstances, being proud of beating your benchmark is like saying, “We’re better farmers than the farmers downstream from us whose water we’re polluting.”

Too many professional economists are far from being part of the reality-based community, their reputations reliant on alignment with the vested and narrow short-term interests of their corporate clients. Environmental economists do base their opinions on reality, starting with the obvious fact that the economy is embedded in and dependent on the environment, with no sector exempt from some level of nature dependence, according to research by PwC.

James Kinghorn is an environmental economist. He is also an Allan Gray client. He’s a supporter of our #InvestFossilFree campaign — and his professional opinion of the value of his Allan Gray retirement annuity is a stark warning to all of us: “It's not going to be of any use to me under our current [climate-emissions] trajectory.” Perhaps pause here and consider that last point for a minute... so much for Allan Gray’s “risk-free” approach to their clients’ “best interests”.

What can and should Allan Gray be doing? Yes, we know it likes to keep its fund line-up simple — and simplicity is indeed usually a virtue. We recognise its good recent commitment to phasing in some science-based emissions targets, and we sympathise with elements of its environmental, social & governance (ESG) policy scepticism — ESG is no blanket panacea, such strategies must be judged individually.

Allan Gray’s Sasol holdings are typically far smaller than in the past — that is good too. But it really should stop patronising those of its clients who want a fossil fuel-free fund — a list we have provided — and give it to them. It should adopt a truly Paris-aligned decarbonisation trajectory, find out about climate tipping points and not leave the climate anxiety to its sustainability team.

It must start communicating properly with its clients about externalities, climate and stranded asset risk, and understand that it cannot claim to be deploying value-driven investing when its approach drives real long-term value destruction via the irreversible environmental and societal costs associated with fossil investments.

Allan Gray should set clear short-term emissions reduction targets for Sasol that if breached will result in at least partial formal divestment. Because its right that Sasol is a pillar of the SA economy that we don’t want collapsing in a disorderly fashion — but a refusal to countenance formal divestment sends the most dangerous signal of unlimited tolerance to the medievals in Sasol management, making collapse more likely.

That’s the reality here, alongside the immense climate debt and risk Allan Gray has accumulated for its loyal clients. 

• Le Page is director of Fossil Free SA.