The apparent slow progress being made by individual countries towards their net zero carbon emissions targets has left many of us questioning governments’ and the private sectors’ commitment to combating climate change. It is tempting to label the annual United Nations Conference of the Parties (COP) as merely a talk shop, producing nothing but hot air, if you will pardon the pun. While there is a substantial amount of talking going on, if you look more closely, the reality is that progress has been made (albeit incremental); and that should not be overlooked.
Through COP26 – and now COP27 – we finally saw a shift in focus from talk to action. The world has (finally) realised that the tipping point of the climate emergency is no longer somewhere in the distant future – it is already here, as evidenced by the increasing frequency and severity of extreme weather events. The building blocks needed to address climate-related challenges at scale have, understandably, taken time to develop amidst a collective sense that we are living through an era that offers us our last chance to change the course of the climate crisis.
As South Africa, we are under tremendous pressure globally to make our just energy transition work. We are seen as a pilot for other emerging market transitions; if we fail, there is a high likelihood that we would be robbing other countries in Africa of their opportunity – with international financiers unlikely to commit to mega projects elsewhere if they are unable to get things working in one of Africa’s most advanced economies.
The success of the just energy transition hinges on all stakeholders in South Africa playing their part in the overarching plan – to show the world what is possible. All South African institutional investors are universal owners of SA Inc – each of us own a little bit of everything. When SA Inc does well, we all do well. If SA Inc suffers, we all suffer.
As such, capital markets have a critical role to play in supporting the drive towards achievement of a just transition to a more sustainable and inclusive economy. The JSE has made significant advances with regard to listed company disclosure requirements and reporting frameworks to encourage transparency, while science-based measures for decarbonisation make it easier for investors to track progress on ESG factors and effect behavioural change in investee companies through solutions-focused stewardship.
Old Mutual Investment Group (OMIG) has witnessed a rapid acceleration of climate-related initiatives by listed companies over the past decade, in response to unprecedented pressure from customers, government, regulators, and shareholders (including ourselves) to do better when it comes to the environment and society. For OMIG, it is now an expectation that listed companies should have in place and disclose their plans to transition and commit to regular communication of progress made on things like emissions reduction, net job creation and socioeconomic impact assessment.
In all this, the focus on real-world impact is vital. We need to be working toward economic decarbonisation, not just portfolio decarbonisation. It is meaningless to achieve Net Zero on paper, if nothing changes on the ground. To achieve this real-world impact relies on investors engaging extensively with the companies in which they invest to make sure that they have appropriately ambitious, yet credible and pragmatic plans in place to reduce carbon dependencies over time – while keeping an eye on the impact of transition strategies on things like poverty, unemployment and inequality. We do not have the luxury of being able to focus only on a single objective (i.e. emissions). To make it through the transition, we need to be able to focus on multiple objectives at once.
Of course, there are some unique challenges to listed equity stewardship within the local context. For example, domestic allocators of capital are painfully aware that South Africa has a relatively small financial market, with an even smaller universe of investible listed equities. To further complicate matters, the Capped SWIX benchmark is far from aligned to the national net-zero target, including substantive allocation to some of the biggest carbon emitters on the continent.
OMIG is doing its part to address this constraint by building a local (South African) net-zero benchmark, which will be launching early in 2023. This will allow us to use capital allocation as a tool for incentivising change. Coupled with active stewardship of our assets, this would allow even holders of passive products to make investments secure in the knowledge that underlying assets are being actively stewarded in line with the national (and global) ambition.
As stewards of our clients’ capital, we are responsible for guiding companies as they transition to net zero carbon emissions; helping them to identify and mitigate risk; and take advantage of opportunities. While the transition to lower carbon ways of operating – the transition to net zero - is inevitable, ensuring that this transition is socially and economically just is not; that part is entirely up to us.