Companies feeling climate heat
As extreme weather events become the new normal, companies are under pressure to factor in climate risk and mitigate it
As global warming spurs on erratic weather patterns, drought is threatening food security while floods are sweeping away homes and lives in some of the world’s poorest countries. In the Amazon wildfires have wreaked havoc. And the UN has warned that the Paris Agreement goal to keep global temperatures from rising beyond 1.5°C is at risk of failing.
Climate change events appear to be accelerating, and corporates that pollute, as well as their funders, are increasingly coming under fire for not moving fast enough to avert disaster.
Companies, by their nature, are more likely to focus on profits than on koalas burning to death on the other side of the globe.
But as the pressure mounts, climate change is threatening to hit corporates where it hurts — in their pockets.
Sasol’s recent AGM was perhaps one of the most exciting in SA’s history: shareholder activists took management to task, not just for the poor execution of the Lake Charles Chemicals Project (which is 45% over budget) but also for its reluctance to disclose the full extent of its exposure to the risk of climate change. (An impassioned outburst from an activist even prompted the AGM chair to call security personnel.)
At FirstRand’s AGM the next day, climate change was also on the agenda. And though shareholders voted in favour of the group adopting and disclosing a policy on lending relating to fossil fuel, they turned down a resolution for it to report on its total exposure to carbon-emitting activities.
It was a similar outcome to that of Standard Bank’s AGM in May — the first AGM in SA to table climate change-related resolutions.
For activists to implore companies to take environmental issues more seriously is not new. What is new now is that investors are starting to insist on this too.
Ahead of Sasol’s AGM, a group of institutional investors — Old Mutual Investment Group, Sanlam Investments, Abax Investments, Coronation Fund Managers, Aeon Investment Management and Mergence Investment Managers — jointly filed a shareholder resolution seeking greater transparency from the company on how its long-term greenhouse gas emission-reduction strategy and executive rewards align with the Paris Agreement. But Sasol — the largest emitter of CO² after Eskom — refused to table the resolution, saying the substantive issues had been addressed in its recently released climate change report.
At FirstRand’s meeting, Mehluli Mncube, an asset manager representing various pension funds, criticised the board for its unwillingness to endorse the resolution to report its exposure despite waxing lyrical about taking climate change seriously.
"As long-term investors, our pension funds will always be exposed to FirstRand … we expect the board to look at this with more urgency, even if it is not affecting us right now," said Mncube. "We find your nonendorsement of this a bit two-faced."
In response to a comment by former FirstRand chair Laurie Dippenaar, who suggested that calculating the group’s exposure to emissions is an impossible task, Mncube said FirstRand should not do the calculations itself but rather obligate those it finances to disclose that information.
"Even from the pension fund point of view we are going to be held to account for our portfolios in terms of how much they are exposed, and we are going to rely on pressing our invested companies to disclose [this]," he said.
Mncube tells the FM there is already pressure on asset managers to consider environmental, social and governance (ESG) aspects, and any responsible investor should in any case take these into account.
Mncube notes that the regulator, the Financial Sector Conduct Authority, this year issued a guidance note on the sustainability of investments and assets in the context of retirement funds’ investment policy statements.
"These guidance notes later tend to become law," he says. "When that happens, asset managers will have to disclose their environmental exposure."
Jon Duncan, head of responsible investment at Old Mutual Investment Group, says the group needs disclosures from Sasol to understand whether, for example, it is a growth company or a yield play. "Having details on decarbonisation will provide us with the ability to model the stay-in-play capex, as well as long-term carbon liability costs," he says.
From a legal perspective, Duncan says there is a growing body of law that points to the fiduciary duty of asset owners and managers to consider all risks — including those of an ESG nature. Globally, there is an increase in court cases that aim to test where this "liability" lies.
In SA, the carbon tax that came into effect in June this year is intended to concentrate the corporate mind on reducing emissions. In its first phase, which runs to December 2022, it provides for a range of allowances that could reduce a company’s tax liability by as much as 95%.
In this phase, Eskom is exempt from the tax, leaving Sasol as by far the largest carbon taxpayer in the country.
Every company knew it was a matter of time before they had to explain what they were doing on climate change
By the company’s own estimates, these taxes could be as high as R1bn in the first year and scale up thereafter, though Cova Advisory estimates the starting liability at more than R1.5bn.
Nicholas Simpson, a research fellow with the University of Cape Town’s global risk governance programme, says insurers were among the first to consider the true business effect of climate change.
"As far back as 2005 the insurance sector, being highly skilled risk assessors, recognised that climate was going to be the biggest risk to their business model, if it was not that already," says Simpson. "So in a very self-seeking way it took the lead on a huge research agenda."
Through the Resilience Alliance research group, all the big reinsurance businesses pumped millions of dollars into research & development initiatives relating to climate risk.
Santam really began to take climate risk seriously after heavy losses in 2017. In its 2018 integrated report it names climate change as a "material risk" to the business, says Simpson. "But I don’t see most companies really comprehending the scale or implication of [the] change necessary to accommodate the full breadth of immediate, or future, climate risk."
There is an assumption that the insurance sector will put pressure on companies, but this has not been the case.
"[Insurers] are actually not allowed to manipulate their clients in that way. It’s not as direct a relationship as you might assume," says Simpson.
Insurers may also be reluctant to price in climate risk for fear of losing clients in a highly competitive market, he says.
Australia offers a glimpse into how insurers may deal with climate risk. Across the country, a raft of once highly desirable properties are now considered uninsurable as high risks — of flooding, for example — cause valuations to go through the floor.
"It’s a fulcrum to move society away from high-risk investment. It’s not too far away from what might manifest in Southern Africa," Simpson says. For example, there are parts of the Strand in the Western Cape that insurers are reluctant to cover. "If insurance isn’t provided to those areas, municipal rates will go down."
Another precedent has been set in California, where, after huge fires last year, the state insurance regulator produced a report, "Trial by Fire". It found that insurance providers need to reconsider climate risk within their businesses and for their clients.
What it means:
Shareholders are increasingly putting pressure on companies to disclose their climate risk — and to divest from fossil fuels
Many observers believe what is most likely to push change among companies is a wave of disinvestment.
Glen Tyler-Davies of international environmental organisation 350.org says about $11-trillion has been divested from fossil fuels, up from an estimated $52bn in 2015.
Though initial attempts to drive change through divestment came from faith-based and philanthropic institutions, "we are starting to see organisations divesting for financial reasons", says Tyler-Davies.
For example, global investment giant BlackRock lost $90bn over the past decade due to its investments in fossil fuels, he says. And this year, Norway’s $1-trillion sovereign fund — which was built up by North Sea oil revenues — took a decision to divest from fossil fuels in favour of renewables.
"We are starting to see really big players divesting, and I think increasingly we will see that happen for financial reasons," Tyler-Davies says.
Piet van der Merwe, an ESG analyst at Momentum Investments, says SA seems to be waking up to climate change risks for companies, following an overwhelming focus on governance issues in the era of state capture. As climate-related resolutions started filtering into AGMs in recent years, "every company knew it was a matter of time before they had to explain what they were doing on climate change", says Van der Merwe. "And all realised that the answer could, if handled incorrectly, be a reputational and branding disaster."
He cautions, however, that companies cannot merely pay lip service to climate change mitigation efforts.
"Society will accept only concrete actions," he says. "To regard it as merely marketing will cause even greater damage to companies."