Are net-zero goals biting off more than we can chew?

The much-anticipated 2021 UN Climate Change Conference, Cop26, where each participating country — including SA — is expected to set more deliberate and ambitious climate-change goals, is fast approaching. These include committing to reduce greenhouse gas emissions to net zero and restricting global warming to no more than 1.5°C by 2050 or sooner, as per the Paris Agreement.

With the introduction of the asset manager’s net-zero agreement, fund managers globally are also now able to join the movement. Interested parties can pledge their commitment to playing a role in supporting similar climate change goals to those of the respective countries by 2050 or earlier.

Globally there are already great initiatives in place, such as green financing solutions (green bonds). But given SA’s many macroeconomic challenges, where do we stand as a country? Can we realistically move to the same rhythm as the global players?

Committing to advancing the goals of the Paris Agreement shows our willingness to collaborate and play a role in achieving climate-related goals. However, we might have bitten more than we can chew, especially given the expectations of upping the ante in the upcoming Cop26.

As a country we rely on fossil fuels. For instance, coal continues to be the primary energy source as it caters for about 77% of SA’s energy needs, according to the department of mineral resources & energy. Furthermore, no material changes in this trend are expected in at least the next two decades. Unfortunately, the coal dilemma stretches wider than the obvious coal-mining industry. As per the ripple effect theory, many other industries are, in fact, reliant on fossil fuels.

Aside from the obvious coal-mining and electricitygenerating companies, transportation (including Transnet, as it transports coal) and financial sectors can also be indirectly linked to the coal industry. This therefore means the bulk of SA’s productive economy can be directly or indirectly linked to fossil fuels.

There are initiatives in place that are meant to shift the country to “greener pastures”. However, the transition to these alternative forms of climate-friendly options is relatively slow.

For instance, PWC’s net-zero economy index shows SA is making minimal progress in decoupling emissions from GDP. SA’s fundamental developmental challenges remain the main culprit.

Not only do we lack the necessary infrastructure to enable such a transition, but the cost implications, especially for an overly indebted country like SA, coupled with the politics associated with such decisions, are other hurdles that cannot be ignored. We are therefore forced to acknowledge our shortcomings as a country and find ways to engage and promote realistic change.

In line with the net-zero goals, if asset managers were to restrict exposure to fossil fuel-linked companies and instruments materially, diversification and bottom-line investment performance would be materially affected.

For instance, buying SA government bonds would be a questionable exercise as some of the proceeds are channelled towards assisting state-owned entities closely linked to the coal industry, such as Eskom. Bank paper would be questionable too, as the average investor has no insight into the portion of the bank’s lending activities that are linked to the fossil fuel industry.

This highlights the challenges we face as a country that still relies heavily on fossil fuels. Therefore, we are left with the question of whether we can materially limit exposure to the affected sectors without introducing any major adverse implications to the bottom line.

The answer is, probably not. At least not any time soon given SA’s sluggish progress towards introducing greener alternatives. However, this does not imply we cannot take small strides each day towards having an overall positive effect from a sustainability standpoint.

One of the ways we can realistically advance towards achieving our sustainability goals, given the challenges we face, is to adopt a net-positive contributor approach to overall environmental, social and governance (ESG) factors.

Not only does this enable us to factor climate-related factors into decisions in a less restrictive manner, it also enables us to consider sustainability factors such as the social aspect, which is crucial for a country with a history of inequality like SA.

For instance, if we consider Eskom through a purely net-zero lens, no investor would touch it. However, once we accept that it is the primary producer of electricity and thus supports economic activity countrywide and employs a notable portion of the country’s workforce, the scale would probably tilt to the positive for such a counter, keeping everything else constant.

At Prescient we continuously seek to invest in net-positive counters. We assess the overall contribution of a given counter from an ESG risk and opportunity perspective based on our in-house developed ESG risk scoring tool, the Prescient ESG scorecard.

The scorecard is quantitative and free from human biases. The derived scores are based on more than 60 metrics and are free from sector and size biases as we also factor sector materiality and adjust certain metrics by the market cap of the given counter.

The scorecard output is integrated across investment teams, enabling us to play a role in moving towards sustainability as we tilt our investments towards netpositive contributors.

Of course, this is nowhere close to where we want to be from an overall sustainability perspective. We therefore continue assessing how viable it is for the local market to transition to a comprehensive net-zero approach.

Until we reach a point where this is possible, we will continue the search for greener alternatives that don’t undermine the economy at the expense of SA society.

THE COST IMPLICATIONS, ESPECIALLY FOR AN OVERLY INDEBTED COUNTRY LIKE SA … CANNOT BE IGNORED