2021 has been cited as being the most critical year since the adoption of the Paris Agreement in the fight against climate change. Based on the target deadline set by the Paris Agreement, we have three decades to decarbonise the global economy. What happens in this current decade will greatly influence what is possible in the remaining two decades. Further to this, what occurs in the next two to three years will greatly influence the likely outcome by 2030. The window of opportunity to act is slowly shrinking which is why so much hinges on the success of the Climate Change Conference COP26 in Glasgow in November.
Climate change has migrated into the realm of a “genuine” political issue that has consequences for global power dynamics. In recognition of this, the Biden Administration held urgent open dialogue in April with 40 leaders from across the world’s high-emitting countries. This meeting saw the US pledge to lower its carbon emissions by 50% to 52% by 2030 from 2005 levels, nearly doubling prior targets for 26% to 28%, while Canada pledged to lower by 40% to 45% by 2030, from a prior target of 30%, Japan pledged to lower by 46% by 2030 from 2013 levels, from a prior target of 26%, and China reiterated its plans to reach peak carbon emissions by 2030 and reach net-zero by 2060.
What is important to focus on are the interim commitments to 2030. Removing 40-50% of emissions from the European or Japanese economy in the next decade is no easy feat. What is certain is that the race to decarbonise is on and we should anticipate enhanced policy support, shifts in capitals flows, and technological disruption.
South Africa is the 12th largest GHS emitter in the world, with the 38th largest per capita emissions. At roughly 8.2 tons per capita we are double the world average, about 15% higher than China and about 4.5 times the Indian average. We can also boast being home to Sasol’s Secunda-complex – reported as the single largest point-source of GHG emissions on Earth – and to Eskom, the largest GHG-emitter in Africa. Solving this decarbonisation challenge will be critical for South Africa’s competitiveness in the global context.
This makes our NDC’s mitigation ambitions an important element for understanding our national decarbonisation pathway and the attendant implications for the economy and society. South Africa has a difficult path to navigate that is narrowing the longer we delay action. Our latest NDC is an update to the first one lodged in 2015. Notable improvements include tightening of the 2030 emission range to 398 to 440 Mt CO2 e. These ranges are based on SA getting its fair share of the remaining global GHG budget as a developing country. This is to be welcomed, however, SA’s NDC, along with many other nations, still falls short of what is required by science to keep warming well below 1.5°C. Current estimations are that the global NDCs will have the world achieving closer to 2.8°C to 3.2°C. Given the iterative nature of the NDC, we should see additional pressure mount going into the COP26.
This brings us to the issue of SA’s ‘just transition’, a real concern for the country’s emission reduction ambitions given the massive scale of our economy’s coal reliance. Pulling capital from underneath the feet of carbon-intensive companies may be detrimental in the short run, particularly for those companies that are central to our current energy mix, are large taxpayers and providers of jobs. Having said that, the need to decarbonise over the long run is inevitable and therefore being directly engaged with these companies is critical. This inevitability will have consequences for SA investors and society – and balancing just transition concerns is an integral part of this process.
However, as an emerging market country, we expect South Africa to have more carbon headroom to grow its economy. This means that coal assets will have a role, albeit a diminishing one, in our economy over time. For global diversified miners with coal assets in emerging markets this creates pressure for divestment, particularly those miners with big foreign shareholdings. We have seen that this decarbonisation pressure can inform the decisions that big miners, such as Anglo American, make when considering which assets to sell. This will have implication for companies like Exxaro and Sasol.
For investors with long-term liability horizons, strategies to decarbonise holdings will be critical. We have not adopted a hard-exclusionary approach on primary fossil fuel producers at this stage as our approach is informed by a recognition of the just transition dimension of climate change. We are therefore aligned with the idea of a decarbonisation pathway over time. We support our commitment to this pathway through a proactive approach to engagement on climate-related issues with clear escalation pathways to drive impactful change among our investee companies, an approach known as stewardship or active ownership. At the same time, we do see growing investor appetite for investment products with low carbon attributes, which funds such as our Old Mutual ESG Equity Fund cater for.
Business, government and society will need to collectively face the urgency of the climate change challenge. Ultimately, the investment community has a unique role to play in both pushing investee companies for greater action, while simultaneously supporting clients to better understand climate risk in their portfolios. The time to act is now. BM/DM
This article was written by Jon Duncan, Head of Responsible Investment, Old Mutual Investment Group