Robert Lewenson | Head | Responsible Investment | Old Mutual Investment Group | mail me |
Following our recent announcement that we have joined the Net Zero Asset Managers Initiative, we have highlighted the urgent need for a tangible commitment by the local asset management industry through the establishment of a South Africa-centric low carbon and socially inclusive listed equity investment benchmark.
This should be done within the next few years to support the SA listed markets transition to net zero carbon emissions in accordance with the country’s national climate change commitments under the Paris Climate Agreement.
A proposed collaboration
Such a benchmark will align the local listed market with global efforts to limit global warming to 1.5 degrees Celsius.
The benchmark should be achieved through a collaboration between the local asset management community, represented by the Association for Savings and Investment South Africa (ASISA), and other important stakeholders such as business, labour and government, relevant regulators and the JSE. It would be a listed market benchmark that accurately reflects the country’s on-the-ground social and economic realities.
A collaboration of this kind would ensure that local financial markets remain investible in a rapidly decarbonising world while acknowledging the country’s unique social context and ensure a just transition for local listed companies and their stakeholders at the same time.
The JSE Capped SWIX, a local benchmark broadly used by institutional investors to evaluate asset managers’ investment performance, has a weighted average carbon intensity of 363.8 tons of CO2 emissions per US$1 million in revenue.
The local benchmark stands out higher than emerging market peers; by comparison, the MSCI Emerging Markets Index has a carbon intensity of 270. However, the carbon intensity of emerging markets indices stands in stark contrast with the recently developed Paris Aligned net zero benchmark being adopted by many global North investment managers with a carbon intensity of just 67, seen as necessary for a 1.5-degree Celsius aligned world in terms of the Paris Agreement.
Social challenges facing emerging market economies
South Africa’s trajectory to a 1.5-degree Celsius aligned index will have to look significantly different to that of the rest of the world and it is not going to be as simple as decarbonising the SWIX at 7% per annum until 2050.
The developed world is not totally oblivious to the social challenges facing emerging market economies in achieving net-zero investment targets, however, and at COP26, various developed nations acknowledged South Africa’s dependence on Eskom for its high carbon electricity supply, with developed economies pledging billions of dollars to assist the country to transition away from coal.
An obvious and widely accepted truth is that South Africa will be unable to achieve its 2050 carbon emissions targets without radical changes to the state-owned power utility’s electricity generation mix.
We need to realise that we can shift our electricity generation into renewables without compromising our energy supply, this transition will create an enormous opportunity for companies in the small- and mid-cap sector of the SWIX who have direct exposure in their operations to the production of the components necessary for the installation of mass renewable infrastructure and related green economy production.
A second truth, and one that is less popular among global allocators of capital, is that South Africa cannot achieve a just transition if investors summarily divest from heavy carbon-emitting companies and sectors on an exclusionary basis, at least for the time being. We have to hold some of these companies as part of the local indices we track, and that is why we remain committed to active stewardship over exclusion as the most viable solution.
Sasol, which is second only to Eskom in terms of domestic carbon emissions, illustrates why an overnight exit from heavy carbon emitters is untenable. In addition to its sizeable weighting within local equity indices, the business contributes around 4.7% to South Africa’s GDP, paid R9.5 billion in direct taxes in its latest reporting period and employs almost 30 100 people in 33 countries.
In conclusion
We do not intend exiting the indices that we tracks domestically but we are aware of our responsibility to assist both institutional and retail clients to transition their portfolios to net-zero over time.
Consequently, we have committed to announcing our portfolio decarbonisation targets within the next 12 months in line with our commitment to the Net Zero Asset Managers Initiative and encourage our clients to adopt a SA low carbon benchmark, as described above.
We have made a solid commitment to achieving net-zero across all of our listed equities and will manage our portfolios on a net-zero basis by 2050 or sooner. This will not be achieved by a kneejerk exit from domestic indices, but rather by a gradual, just transition that leaves nobody behind.
In order to achieve this, we need a net-zero benchmark in place that takes into consideration the unique composition of our local environment. We are ready to engage on this new benchmark and are exploring various avenues for its development.
