Short-term volatility is a smokescreen: invest in clean energy now

There’s no doubt many mining companies have benefited from the recent surge in commodity prices. However, we are seeing a pullback in those prices as global demand slows due to growing concerns about a pending recession worldwide as the impact of the conflict in Ukraine becomes entrenched.

Nevertheless, miners can take advantage of current bolstered balance sheets to accelerate investments into renewable energy to meet their ESG requirements. The long-term benefit of doing so far outweighs the short-term cost, and it makes good business sense. 

As with other sectors, the mining industry must invest in renewable energy if it wants to meet the UN sustainable development goal of reducing global CO₂ emission to net zero by 2050.

To reach this goal, companies must ramp up their spending on clean energy assets such as wind, solar PV and hydrogen electrolysers. These may have relatively high upfront investment costs, but companies will see the benefit on their bottom line in years to come as operating costs are contained.

The International Energy Agency's net zero emissions by 2050 scenario estimates that 70% of clean energy investment will need to be carried out by private developers, consumers and financiers over the next decade.

To achieve a just transition, low-cost financing is also needed.

Nedbank has taken the lead in providing innovative funding for green and renewable energy. It was the first bank in Africa to release its energy policy, in which it committed to stop the financing of fossil fuel projects by 2045 — well ahead of the UN's 2050 net zero goal. 

Nedbank is an active participant in both the renewable energy and sustainable finance space by supporting multiple projects in this arena. Recent successes in the mining space include Harmony Gold mandating Nedbank Corporate & Investment Banking as global co-ordinator, bookrunner and sustainability co-ordinator on a significant sustainable finance debt package.

The bank also sees opportunities to offer similar innovative sustainability-linked funding to other players in the mining sector. 

Investing in the future

The real value comes from making decisions with a long-term lens instead of being swayed by the current market sentiment. Any sound capital allocation framework must take a much more measured approach in that current conditions must be considered, but companies must also look at the future environment.

At the same time, mining companies need to consider ESG, which has become a key driver in capital allocation decisions, especially in terms of environmental factors.

Another critical point is that a company should not make capital expenditure decisions based on an expected rise in the price of the minerals. Instead, companies must consider where prices will be over a longer-term horizon, typically, in this case, over the next five to 10 years. This means working out the cycle to take a responsible view of investing in either expansion or renewable energy projects.

Deciding when and where to allocate capital investment can be tricky. Investors will always want to see a return on their investment, regardless of the unpredictable long-term outlook for commodity prices, which may affect profitability.

The question then becomes how to improve the effectiveness and efficiency of capital allocation when the outlook is constantly changing.

Changing world

According to EY, the drivers behind capital allocation are changing as more companies seek to achieve a balanced range of objectives. These include ensuring the business is sustainable and providing returns to shareholders, while also being agile enough to adapt to a changing environment.

In this way, companies secure a social licence to operate, supplied through all their stakeholders — including shareholders, employees, consumers and the public — accepting their business practices. 

As a result, capital allocation is no longer about assessing, planning, reviewing and prioritising how a company spends its money, but about benefiting all stakeholders. 

However, when EY surveyed more than 500 global CFOs working in various sectors, the majority (72%) said the process of capital allocation requires improvement. Moreover, only 40% said their capital allocation approach had enough flexibility to cater for an ever-changing operating environment. 

When it comes to mining, other factors affecting capital allocation are volatile exchange rates and commodity price uncertainty. Fortunately, it is a mature industry with a well-bedded approach to capital allocation — the fact that mining has been the cornerstone of the South African economy for so many years is testament to this.

Miners have the experience to make decisions in consideration of current volatility, but are keenly aware that the best actions are informed by a through-the-cycle perspective of their operating environment. 

Capital allocation to invest in the future is the only sustainable option for ensuring a social compact with all stakeholders and leaving a better planet for future generations.

• About the author: Vusi Mpofu is sector lead of mining and chemicals at Nedbank Corporate & Investment Banking.

This article was sponsored by Nedbank.