Pension fund managers were reminded in August 2019 of their fiduciary duty to warn shareholders of the financial risks associated with investing in industries that are likely to become casualties of the transition to lower-carbon energy economies globally. Given the restrictions likely to be placed on today’s high-carbon polluting industries such as Sasol, as countries and companies are pressured to bring their emissions in line with the United Nations proposed carbon budget, there may not be any scope left for building new fossil fuel energy infrastructure, and existing infrastructure is at risk of becoming redundant, which will leave fossil fuel investments tied up in potentially worthless stranded assets.
This will put maturing pension funds at risk in the next two to three decades, says Tracey Davies, executive director of civil society divestment initiative Just Share.
During meetings in Cape Town and Johannesburg, pension fund managers heard how shareholder investments in large carbon polluting industries like the coal- and gas-to-liquid fuel-producing Sasol are at risk on several fronts.
Markets and shareholders are increasingly likely to migrate their investments into the booming and increasingly affordable renewable energy sector, which will drop the value of shares in fossil fuel companies. Coal, gas and oil-dependent industries are likely to find themselves unable to mine fossil fuel resources as pressure grows to leave these reserves in the ground in order to stay within the United Nations’ proposed carbon budget, set out by its Intergovernmental Panel on Climate Change (IPCC) in order to keep global average temperature increases below the critical 1.5°C required to keep the climate relatively stable.
For South Africa to meet its national emissions targets, and for those individual coal-using industries needing to adopt similar targets, this will mean halving the country’s coal capacity by 2030, and phase it out by completely by 2050, says Melita Steel, senior climate and energy campaign manager with Greenpeace South Africa.
This is likely to leave industries such as Sasol unable to operate at its current capacity if they can’t extract and process coal, and will be penalised for their carbon pollution through carbon taxes.
Other threats to these industries and their financial viability, says Davies, include the growing litigation trend globally as shareholders begin to sue large carbon polluting firms for the harm caused to society through disrupting the climate system. The future viability of a liquid fuel-producing giant such as Sasol will further be at risk as the transport sector switches to electric mobility.
Sasol currently produces 67.4 million tons of carbon pollution, according to its 2018 figures, and its Mpumalanga plant at Secunda is the largest single-point CO2 emitter on the planet. Sasol also ranks among the top 100 fossil fuel companies linked to 71% of global industrial greenhouse gas emissions since 1988, according to the Carbon Majors Report.
While Sasol recorded earnings of R3.367-billion in 2018, the company’s hidden cost to society from its carbon emissions amounted to R45-billion in the same year, argues Fossil Free SA’s David Le Page, another civil society group calling for divestment from coal industries in South Africa.
This cost is calculated using the concept of the social cost of carbon (SCC), measured at about R600 per ton of carbon (US$40 per ton). The SCC measure is a way to put a rands-and-cents value to the costs of atmospheric carbon pollution, which expresses itself through the damages to communities and the environment from extreme weather events that result from rising global temperatures and the buildup of carbon concentrations in the atmosphere.
In light of these changing global market and emissions policy trends, climate change poses a “material financial risk to investments”, argues Davies.
Regulation 28 of the Pension Funds Act means that trustees are obliged to include environmental, social and governance (ESG) in their investment considerations, to ensure the long-term sustainable performance of a fund’s assets.
“Elected pension fund trustees have a fiduciary duty to pension fund members and their beneficiaries to consider climate change risk in their investment decisions,” says Davies. “That applies not just to current members of a pension fund, but to future members and their dependents, which includes people who will be claiming benefits from a fund decades from now.”
Sasol doesn’t have any clear statement on how it would meet a global IPCC-determined emissions target of a 45% reduction by 2030, and zero emissions by 2050. The company is working with the state on the carbon budget process, says spokesperson Alex Anderson, and has a cap for emissions for the period 2016 to 2020, with mandatory carbon budgets expected for the period 2021 to 2025.
Anderson says the company is moving its growth strategy “away from further carbon-intensive growth paths”, has some efficiency measures planned, won’t invest in “greenfields coal-to-liquids and gas-to-liquids, or in new refining capacity” and will “drive revenue growth in less carbon-intensive businesses and on finding economically sustainable solutions”. However, the company doesn’t outline yet how much these will reduce the company’s overall emissions profile. The company will release its carbon reduction roadmap, based on scenario analysis, in November 2020, and a climate change report at the end of this month.
Today’s coal investments already at risk of becoming ‘stranded assets’
The global carbon budget has already been blown
The planet’s atmospheric “landfill” can absorb another 658 gigatonnes of carbon pollution, according to the IPCC’s carbon budgeting process. Beyond that, and the global average temperature will push beyond the 1.5°C threshold, and will settle the Earth’s climate system into an entirely new regime, one that is outside of the stable climatic conditions in which modern humans evolved.
But the IPCC’s calculations may be overly optimistic, and this budget may already have been blown.
In April 2019, readings from the Mauna Loa observatory in Hawaii by the Scripps Institution of Oceanography with the University of California San Diego measured atmospheric carbon concentrations at 410 parts per million (ppm). The last time carbon concentrations were this high was about 3 million years ago, when “global mean surface temperatures were 1.9°C to 3.6°C higher than for (the) pre-industrial climate”. This is according to the IPCC’s own Fifth Assessment Report, published in 2013.
But even with an optimistic interpretation that this amount of atmospheric space is still available to use between now and mid-century, if the existing fossil fuel infrastructure carries on with business-as-usual polluting, it will already have accounted for the entirety of that budget, meaning there is no scope to build new coal, gas, or oil infrastructure. This is according to calculations published earlier in 2019 in the journal Nature, which showed that the “(c)ommitted emissions from existing and proposed energy infrastructure” will amount to about 846 gigatonnes CO2, which “represent more than the entire carbon budget that remains if mean warming is to be limited to 1.5 degrees”.
If the carbon budget has already been blown, this makes the likelihood of new-build coal or oil infrastructure increasingly risky, and possibly unlikely, if individual industries are forced to align their emissions pathways with that of the emissions reduction obligations called on by the IPCC.
Cheaper renewables outcompete coal
The plummeting cost of renewable energy may already be leaving coal power stations like Eskom’s Medupi and Kusile subject to becoming stranded assets, according to energy analyst Jesse Burton at the University of Cape Town’s energy systems and policy research, formerly the Energy Research Centre. Burton was the co-author of a 2017 report into the viability of Kusile and older coal plants in the context of Eskom’s financial crisis. This report recommended that work on the unfinished boilers in Kusile be discontinued, owing to cost-overruns and the uncompetitiveness of new-build coal in the changing energy landscape.
“Developments like Medupi and Kusile are already stranded by the falling economics of new renewable energy,” she says. “These coal stations are so much more expensive than alternatives. In a competitive market, it would be impossible to recoup the costs (if the half-finished plants are completed). What is apparent is that despite the problems at the stations and the need to spend more money (to complete them), Eskom is pursuing their completion regardless of what would make sense for the country.”
Should the proposed Thabametsi coal plant in Lephalale, Limpopo, get Department of Energy go-ahead, this is another coal development that is at risk of becoming a stranded asset owing to future water shortages in this already water-scarce part of the country.
The 557 megawatt plant, whose bid by Japanese and South Korean independent power producers (IPPs) Marubeni and KEPCO is still waiting for contractual and financial closure, is mired in court challenges to its licensing application process and threatened by a changing appetite for coal investments in the domestic banking sector, according to Centre for Environmental Rights (CEJ) programme head-on pollution and climate change, attorney Robyn Hugo.
Three out of the four private sector banks that were initially earmarked to fund Thabametsi – Nedbank, Standard Bank, FirstRand Bank Limited – have indicated they won’t fund unviable and carbon-intense new-coal investments.
In April 2019, Standard Bank said its future investments in newbuild coal would be subject to “a strict set of parameters that will guide all future financing decisions” and that these are in line with the finance sector’s responsibility to help enable the implementation of the global emissions reduction targets established by the UN Conference of Parties.
Nedbank announced in its Sustainable Development Review in December 2018 that it would “not… provide project financing or other forms of asset-specific financing where the proceeds would be used to develop a new coal-fired power plant, regardless of country or technology”.
Meanwhile in November 2018, FirstRand Bank Limited announced its withdrawal from financing the Thabametsi plant “as currently proposed”.
In 2017 the Pretoria High court overturned the Department of Environmental Affairs’ approval of the plant’s water license, on the grounds that its environmental impact assessment did not consider the impact of climate change on the future viability of the plant, owing to the threat of water shortages to the plant’s future operations. This ruling is currently under appeal.
“Even if these IPPs are able to raise finance outside of the country, and get licensing clearance and financial closure on the Thabametsi project, the threat to the plant owing to the impact of climate change on this already water-stressed part of the country puts the plant at risk of becoming a stranded asset in future. Coal plants need a lot of water to operate.”
Creating ‘climate-resilient’ pension funds
According to Sasol’s annual financial statement report, the biggest fund managers currently invested in the company include PIC Equities, which has 67 million shares managed on behalf of the Government Employees Pension Fund (GEPF). Others include Allan Gray, the Industrial Development Corporation of South Africa Limited, Prudential Investment Managers, Investec Asset Management, Black Rock Incorporated, Vanguard Group Incorporated, Old Mutual Limited, and Sanlam Investment Management.
Davies warned that pension fund managers handling these sorts of investments have a fiduciary duty to alert the shareholders they represent of the risks posed to their investments by changes in the energy economy as it begins to move towards cleaner energy solutions and global emissions policies which will throttle back on carbon pollution.
By moving investments from fossil fuel intense industries across to renewable energy investments, pension funds can become more “climate-resilient”, argues Fossil Free SA’s Le Page.
“Retirement fund beneficiaries face physical, social and financial risks from remaining invested in fossil fuels,” argues Le Page.
“There are hidden costs to sticking with the carbon development paradigm. The capital still invested in fossil fuel companies is lost to better opportunities.” BM