Putting sustainability first
For corporate SA, the issue of climate change is particularly challenging
In 2020, Norges Bank Investment Management (NBIM), the fund manager for the Norwegian sovereign wealth fund, dropped 15 companies from its portfolio. Five were excluded because of exposure to coal (either mining or power production), four for unacceptable greenhouse gas (GHG) emissions, four for serious human rights violations and two for serious environmental damage.
To some, this might look like the actions of a niche "responsible" investor. In fact, with more than $1-trillion in assets under management, NBIM is one of the biggest asset managers around: it holds about 1.5% of listed companies globally. And it’s not alone in its focus on environmental, social and governance (ESG) issues.
At the start of 2020, BlackRock, the world’s largest asset manager, with more than $7-trillion assets under management, said it would be exiting its thermal coal investments and putting "sustainability" at the heart of its investment decision-making.
Several factors are driving this. First, there is growing evidence that there does not have to be a trade-off between investment performance and better business conduct.
Several studies have shown that companies that effectively manage ESG risks are more resilient and tend to outperform their less sustainable counterparts. For example, the MSCI world ESG index for established markets has outperformed the MSCI world index for the past five years.
Second, investors are increasingly concerned not just with profits, but how those profits are generated. In February 2020, BlackRock described this transition as "tectonic", with "significant implications … for every asset in the investment universe".
Third, there is growing regulatory pressure on investors and other finance providers to incorporate sustainability factors into financial decision-making.
These factors, taken together, mean a surge in demand for sustainable investment opportunities. Assets in sustainable funds ended 2020 at a record high of $1.65-trillion, while the cumulative issuance in the green bond market broke through the $1-trillion mark.
The specific ESG issues that investors focus on vary, but climate change is a common theme.
For a start, investors are looking for companies to disclose their GHG emissions. They also want evidence that companies are taking action to limit exposure to climate risks and mitigating their own contribution to climate change. Companies failing to respond face the prospect of shareholder resolutions to compel action, votes against directors and, potentially, divestment.
One of the most prominent examples is Climate Action 100+, representing $52-trillion assets under management. The group seeks to compel action on climate change by focusing specifically on "the world’s largest greenhouse gas emitters". Of the 167 companies it has targeted for engagement, seven have debt or equity listed on the JSE: Anglo American, ArcelorMittal, BHP, Eskom, Glencore, Sasol and South32.
We believe this is the moment to seize the enormous opportunity that the climate transition presents
For corporate SA, the issue of climate change is particularly challenging.
The country ranks 13th in the world for absolute carbon emissions.
Its electricity grid depends almost entirely on coal-generated power, and coal-exposed companies are significant employers in a country with intolerably high unemployment. But these are not excuses for inaction.
We believe this is the moment to seize the opportunity that the climate transition presents. There is strong evidence that a shift to net-zero emissions, with the requisite investment in renewable infrastructure, can not only increase the absolute number of jobs available, but also the quality of jobs.
A shift away from fossil fuels also has positive effects on air quality, reducing the quantum of pollution-related illness and death. But it will not happen automatically and the longer we wait to act, the greater the likelihood that we will be faced with stranded communities, and stranded assets.
As the JSE, we see our responsibility in this context as threefold.
First, we must ensure that companies disclose their ESG risks, dependencies and impacts. In fact, companies should already be disclosing climate-related information, but we are working with the King committee to consider whether we should issue more guidance to companies around sustainability reporting.
Second, we will look to tap growing demand for sustainable investment opportunities by expanding the range of finance mechanisms available through our markets. For example, we are exploring the development of a framework for "transition bonds" that would be specifically aimed at companies/ industries looking to decarbonise but unable to access the traditional green finance market.
Finally, we will continue our work to support the national sustainability agenda and position SA’s leadership in this area on the global stage.
No single entity can address these challenges. But working together, we can achieve great things.
- Fourie is CEO of the JSE, Kana is lead independent director and Cleary is nonexecutive director
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