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Sasol and the need to tackle investment climate risk

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Sasol and the need to tackle investment climate risk

The news last week that Sasol has sold 50 percent of part of its recently commissioned Lake Charles plant to chemicals giant, LyondellBasell, has highlighted the company’s battle to save its balance sheet. Sasol consists of a cash generative South African energy and chemicals business, a cash generative European chemicals business and a 98% constructed ethane cracker chemicals plant in Lake Charles. Yet the company reported a R90 billion loss to the end of June 2020. Its most recent trading update announced that its financial results for the year to June were impacted by the Covid-19 pandemic and a severe decline in crude oil and chemical product prices, as well as a very weak macro-economic environment.

The primary issue before the Covid-19 global pandemic hit, however, was that Sasol paid for the construction of the US$13 billion Lake Charles facility largely with debt. The Saudi-Russia price war has put the oil price under pressure at a time when Sasol is at peak indebtedness, while its large project is just about to produce cash flows, creating a perfect storm. The share price collapsed by over 80% in less than a year by March 2020. And these challenges were already in place before the Covid-19 chaos took hold, contributing to even more significant losses.

The relevance of ESG in Sasol’s woes

There exists a degree of irony that Sasol has had to shut down its Lake Charles operations for the second time in the past three years due to interruptions caused by hurricanes; the most recent being Hurricane Laura last month, which forced the closure of its US based chemicals plant and further damaged its already battered share price. 

The impact of natural disasters on Sasol serves to highlight the role of ESG in the long-term sustainability of companies. Shareholder activists have long lobbied Sasol regarding its environmental, social and governance (ESG) disclosures, particularly its failure to provide stakeholders with adequate climate risk disclosure or to set greenhouse gas emission reduction targets. Old Mutual Investment Group’s proprietary ESG analysis classifies the company as falling within the highest categories of ESG risk, particularly in terms of its exposure to climate change-related risks. 

Although the company acknowledges climate change as a material risk to its future revenues, its previous disclosure, in our view, did not sufficiently set short-, medium- and long-term company-wide quantitative greenhouse gas targets (Scopes 1 and 2) aligned with the goals of the Paris Agreement. We also believe that these targets must be linked to executive remuneration on both a short- and long-term basis to be effective. 

What is the role of stewardship in driving change?

Years of experience has given us a deep understanding that long-term system change requires alignment across the markets on core sustainability issues. Based on this premise, Old Mutual Investment Group launched its Listed Equity Stewardship programme to help drive positive ESG outcomes at a company and a market level that ally with the United Nations Sustainable Development Goals and serve as a basis for fostering greater industry collaboration. Sasol is the perfect showcase to illustrate how stewardship aims to ultimately find a successful solution for all stakeholders.

What steps did we take to achieve a solution through our stewardship approach?

The core issues of concern were discussed on a number of platforms and included pre-AGM engagement and the filing of resolutions. Our team engaged with the Board on in October 2019 where Sasol explained its response to climate risk so far: a focus on building the governance necessary to address climate risk, including director training on climate risk and the appointment of directors with climate risk knowledge. The Board wanted to better understand the concerns of stakeholders and so published the Climate Change Report in 2019, dealing with matters not contemplated before. 

What were the main outcomes of our engagements and the release of Sasol’s Climate Change Report 2020?

Overall, Sasol has done a good job of engaging across a diverse range of stakeholders including staff, customers, communities, investors, suppliers, regulators. The concerns of their stakeholder groups are well set out in their latest climate report, released in the first half of 2020, and it is now abundantly clear that the business needs to evolve in the face of climate change. They have also set out a clear Governance structure for Climate management as well as a decision-making framework. Similarly, they have clearly set out their internal pricing framework for CO2 – all of which are positive. While these may be easy steps, they do take them in the right direction. 

They’ve also clearly shown their Scope 1 and 2 emissions for the whole group and additionally, they report Scope 3 emissions from customers using their end product. In respect of linking executive remuneration to climate risk reduction, they have indicated an increased weighting for climate metrics but have not defined what that looks like, although they did indicate climate and energy efficiency metrics, which we reviewed the stretch thereof. BM

To answer more of your investment related questions, contact us at [email protected] or visit https://www.oldmutualinvest.com/institutional/knowledge-room/media-and-insights for more news and insights.

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