South Africa is the eleventh largest emitter of greenhouse gases globally due to its significant reliance on fossil fuels. As part of its Paris Agreement nationally determined contributions, the country has set a target to cut its emissions to 42% below its “business-as-usual” trajectory by 2025. For the country to meet this objective, the financial sector must consider the roles it can play in reallocating capital towards more sustainable investments and building climate resilience. Globally, the International Energy Agency estimated that the transition to a low-carbon economy requires nearly $1-trillion of new finance every year for at least the next 15 years.
Reorienting capital to more sustainable investments requires a comprehensive shift in how financial firms disclose their fossil-fuel exposure, climate-related risks, and future opportunities. The Task Force on Climate-Related Financial Disclosures (TCFD) was established by the Financial Stability Board in 2015 to provide recommendations for transparent climate-related disclosures. The TCFD recommendations are designed around four thematic areas: governance, strategy, risk management, and metrics and targets.
Detailed and transparent climate-related disclosures can help investors make more informed investment decisions to divest their portfolios away from carbon-related assets and assist them in selecting investments that are well-positioned to withstand the longer-term effects of climate change. By doing so, the TCFD recommendations help facilitate sustainable investments.
However, climate-related disclosures are not useful only for investors. Climate change is one of the most significant developmental risks to South Africa. The observed rate of warming in the country has been 2°C per century or even higher – with many regions experiencing warming at a rate that is more than twice the global rate of temperature increase. Sectors such as agriculture, transport and mining – which are responsible for employing roughly 14% of South Africa’s workforce – are particularly vulnerable to the effects of climate change. The National Treasury estimates that, by 2050, the cumulative impacts of climate change will cost the country over R530-billion (using an exchange rate of R14.39/$).
Therefore, while companies may have a short-term disincentive against accurately disclosing their climate risks and resilience (as it requires adequate resources and expertise), failing to do so can result in reduced ability to attract investment and lowered creditworthiness. As investors increasingly demand climate disclosures as a condition for investment, and as the country faces the costs of climate change, such a strategy could expose firms to sudden increases in capital flight and borrowing costs.
Using the TCFD recommendations as a tool to report climate vulnerabilities and opportunities can also help firms achieve better risk-adjusted returns over the long term. For example, while an investment in a coal mine may deliver short-term returns, it is unlikely to hold its value well over time as regulation and consumer preferences compel reductions in the use of coal-based energy. This is particularly important for funds that are fundamentally long-term investments, such as pension funds.
Yet, despite these incentives to communicate reliable climate-related financial disclosures, the percentage of companies reporting this information is still low. According to the TCFD’s latest status report in October 2020, while there are now more than 1,500 organisations globally supporting the recommendations, only 10 of these are South African financial firms. Furthermore, of the top 10 largest asset managers in 2020 (according to Alexander Forbes), only two – Ninety One and Nedbank – have released a separate TCFD-aligned report.
It is concerning that only a small number of financial companies in South Africa are currently reporting against the TCFD recommendations. We urgently need more firms to report reliable climate-related disclosures in order to reorientate capital towards more sustainable investments. Furthermore, it is in financial firms’ best interests to do so; companies that communicate their climate-related risks and resiliency to their investors will have a competitive advantage over those that do not. DM