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Sustainability is a pressing concern in today’s world, with countries and companies increasingly focusing on environmental, social and governance (ESG) issues that affect long-term sustainability. While sustainability encompasses various aspects, one crucial issue garnering attention is the interplay between climate change (the E in ESG) and social equality (the S in ESG).


The South African perspective

In the context of South Africa, the social component of sustainability takes centre stage, given the country’s history of inequality.

We can summarise the relationship between environmental and social factors in a simple equation: Impact = S to the power E. As the environmental component (E) intensifies due to climate change, it magnifies the effects on the social aspect (S). To comprehend the gravity of this relationship, we will explore the reasons behind it.

Intensification of the E part: climate change and its significance

Scientific evidence overwhelmingly supports the link between human-induced greenhouse gas emissions and global warming. The average global temperature has already risen by 1.1 degrees Celsius above pre-industrial levels (1850-1900). This escalation in global warming leads to a cascade of effects, such as more frequent and severe climate-related disasters, including floods, droughts, rising sea levels, and heatwaves.

The economic toll

The economic ramifications of climate change are undeniable. Recent flooding in South Africa serves as a stark reminder of the economic implications that climate change can bring. A recent study focusing on climate-vulnerable countries, many of them in Africa, revealed that over the past two decades, climate change has already diminished 20% of their wealth. These economies have collectively lost around US$525 billion (approximately R10 trillion) in GDP, with an annual growth reduction of 1%.

Projected impact on South Africa

While South Africa may not be among the most vulnerable economies, the long-term cumulative impact of climate change is expected to be significant. Studies vary in their assessments, but the overall annual GDP is expected to reduce by 0.8% on average between now and 2050 if we assume:

  • effects in key industries in South Africa
  • unsuccessful action to prevent global heating
  • an ultimate heating of around 4 degrees above pre-industrial levels (which is also not the most pessimistic outcome)

This impact increases over time and reaches a reduction of 1.2% per year between 2040 and 2050.

Projected economic damages from climate risks from 2022 to 2050

Source: World Bank Group, Country Climate and Development Report, October 2022

Another important implication is what actions international trading partners take in the pursuit of mitigating climate change. One such action is the Carbon Border Adjustment Mechanism which the European Union is on track to introduce, effectively introducing tariffs on goods imported from non-EU countries. As a result of South Africa’s carbon intensive economy (3.2 times higher than the global average in 2019), the World Bank has estimated that around 50% of South Africa’s current exports are at high risk of being penalised by the introduction of this mechanism, losing about 1% of GDP because of this trade exposure.

The amplification of the S part: impact on jobs and investment

The link between climate change and social equality becomes even more apparent when examining its effect on jobs and long-term investment returns. Transitioning to a low-carbon economy necessitates the transformation of certain industries. A short-term concern is the potential impact on jobs and the livelihoods of communities dependent on the companies underlying those industries. Paradoxically, failure to address climate change adequately and continuing on the current trajectory would result in substantial job losses for South Africa in the long run.

To put this into perspective, our estimate is that between now and 2050 South Africa, based on long-term population and economic modelling, needs real economic growth of around 4% per year to avoid the unemployment rate reducing further. For every 1% per year lower growth rate, the unemployment rate worsens by between 8% and 10%. Put differently, for every 1% per year real growth reduction between now and 2050, we expect around 3 million additional South Africans to be unemployed by that time.

Balancing today’s jobs with tomorrow’s losses

As we confront these challenges, it is crucial to strike a balance between the jobs of today and the potential job losses of tomorrow if we fail to take action to mitigate against and adapt to climate change. This requires a just transition, ensuring a responsible shift towards a low-carbon economy. While there may be concerns about job losses in certain industries, transitioning to a sustainable future also brings new opportunities for employment and economic growth.

This shift can contribute to reducing unemployment and fostering inclusive growth.

Investment returns and climate change

Beyond its impact on jobs, climate change also affects the returns on long-term investments, including retirement funds. Emerging markets like South Africa are particularly susceptible to the pronounced effects of climate change on investment returns.

A 1% per year impact on investment returns is very plausible for South African investors. The effect of this will be felt by current pensioners but more-so future generations when they retire, as illustrated in the following graph:

Source: Alexforbes

There is, therefore, a direct link between climate change and investment returns. It is clear that emerging markets such as South Africa will be affected to a greater extent, especially with higher levels of warming.

Ultimately, this means a lower pension for individuals in retirement, affecting their livelihoods at and during retirement.

Our commitment to making a difference

In an era of increasing global concern for sustainability, addressing the interconnected issues of climate change and social equality is paramount. South Africa, with its historical inequalities and vulnerability to climate change, faces significant challenges but also opportunities for positive transformation.

Alexforbes has implemented initiatives such as the establishment of an impact centre of excellence, which helps clients address sustainability challenges holistically. With the improvements in company disclosure standards and the availability of ESG data, trustees can proactively work with us to embed the latest climate policies and ESG integration practices into their investment strategies. By leveraging our industry expertise and best-advice frameworks we hope to foster more impactful investment solutions into the future.

Our commitment to sustainability is not limited to our advice. As South Africa’s leading multi-manager, Alexforbes ensures that environmental and social considerations are integrated into multi-managed portfolios.The recently launched Alexforbes stewardship report showcases our dedication in addressing environmental, social and governance factors. The reports provide clear and comprehensive insights into our collective stewardship activities, engagement outcomes, and progress towards ESG integration goals. Through this reporting, we hope to demonstrate to our clients and stakeholders that we are well-informed about responsible investing practices and uniquely positioned to not only achieve sustainable long-term financial returns but also contribute to a more equitable, resilient and environmentally conscious future.

View the Alexforbes stewardship report here

Together, we can create a resilient and equitable future for generations to come. DM

Absa OBP

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