There is no scientific doubt that the climate of southern Africa is becoming warmer, with wide reaching ramifications.
+4°C seems small but is potentially apocalyptic
On 22 July 2024, the Earth experienced its warmest day in history, according to the Copernicus Climate Change Service data. The daily global average temperature reached a new record high of 17.16°C, exceeding the previous high of 17.09°C the day before, and 17.08°C a year before that. We are now in an unchartered territory and these records are likely to be broken in shorter time periods.
South Africa has chronic social and economic challenges – particularly around food security – which is exacerbated by climate change. In the short term, the impact from extreme weather events includes reduced crop yields and livestock losses. However, this is only a small slice of the impacts of climate change. This SA-specific infographic illustrates that a 2°C increase in temperatures along coastal areas could have a potentially disastrous impact. Marine living resources could start dying out, affecting local livelihoods and associated tourism. Drought periods would become longer and more severe, impacting the agriculture sector. The impact on inland areas such as Limpopo could be even worse, with rising heat stress and constrained water resources making it more difficult to grow crops and livestock.
What is scary is that only another 2°C more – i.e. +4°C by 2060 – and the negative implications start sounding like an apocalypse-themed movie. Melting icecaps would mean that SA’s coastline would shrink materially and coastal cities would need to withdraw inland to higher ground. The majority of the Cape Floral Kingdom (fynbos) will most probably no longer exist due to changes in seasonal rainfall and severe fires. And there would be large parts of the country that would be uninhabitable due to heat and drought.
In this article we briefly discuss the impact of climate change on the economy, what the new Climate Change Act means and how the asset managers – as custodians of investors capital – are going about their respective businesses to ensure safeguarding our planet for future generations.
Far reaching ramifications for SA’s economy
It is not that easy to see the link between climate change and general economy. We have attempted to simplify the linkages
in the diagram below.
As agriculture-related supply chains are reduced, the cost of production increases. As governments attempt to combat
carbon emissions, they are expected to implement penalties on miners and fossil fuel-related businesses. This increases
the cost of energy and further increases production costs, which ultimately leads to HIGHER INFLATION. In addition, as
water scarcity increases, commercial agriculture and water-intensive mining operations will no longer be viable, leading to
potential job losses and lower ECONOMIC OUTPUT.
Lastly, from a social perspective, health problems could become rampant from food insecurity, poor water quality, the
spread of infectious diseases and social stress.
The New Act seeks to protect the environment
The Climate Change Bill was signed into law and published as the Climate Change Act, 2022 (Act) on 23 July 2024. The Act is not yet operational – it will only come into effect at a future date when the president issues a proclamation.
The Climate Change Act marks a crucial advancement in SA’s climate policy, providing a comprehensive framework for
climate adaptation and mitigation with a strong emphasis on inclusivity, equity, and sustainability. The new Act aims to protect and preserve the environment by reducing greenhouse gas emissions and building climate resilience, while reducing the risk of job losses, and promoting opportunities within the green economy. However, the real test will be in its implementation.
Our key takeaways are:
From our reading of the Act, we estimate that sector emission targets and carbon targets at an entity level will be developed
within three to four years.
BIG responsibility for our managers
The role of the SA asset management industry in the allocation of and custody over trillions of rands in financial assets, places asset managers in an ideal position to help manage and mitigate the detrimental effect that climate change is having on our country.
There is greater and greater regulatory and investor expectation that asset managers will use their substantial voting powers to help the shift to a more sustainable economy and, whilst there is more to do, there are many examples that this is already happening in practice. A long-standing component of our due-diligence process has been the evaluation of managers’ integration of Environmental, Social and Governance (ESG) risks and opportunities into their investment management and risk management processes.
Our framework for ESG evaluation has evolved over the past three years, taking into consideration principles from other frameworks such as the United Nations Principles for Responsible Investing (UNPRI), the second Code for Responsible Investing in South Africa (CRISA 2) and the CFA Institute’s ESG disclosure standards. In March 2022, Standard Bank published its group policy regarding climate change, which is part of a comprehensive roadmap to reduce the group’s exposure to climate related risk. The policy uses a target-setting approach and seeks to fully understand the impact of climate-related and environmental risk across all its segments and countries that the group operates in.
Our current four pillar ESG framework was established in 2022 and is depicted in the diagram that follows. To align with
the group’s policy of measurement and target setting, we assessed the willingness of our managers and their capacity to
formalise their climate policies and to measure the carbon emissions of their investment portfolios.
Highlights from evaluation
Clear commitment
Almost all managers have committed to either incorporating climate change mitigation as part of existing policies or to the implementation of a separate policy by the end of 2024. In addition, they have committed to measuring the carbon emissions of portfolios by the end of 2026. This information will enable us to measure carbon emissions across our multi managed portfolios.
We understand that this type of measurement is dependent on having the appropriate data at a company and issuer level. We believe that regulation and recent changes to IFRS could make it easier for managers to assess the financial impact of climate change on their portfolios. Furthermore, considering the new Act, the transition and carbon targets of industries and individual entities, is likely to provide useful additional data.
Measurement is a good start…but targets are needed
One of our commitments that aligns to Standard Bank’s group policy is the setting of emission targets by 2030. While we are not dictating what those targets should be, or the implementation time frame, almost all managers have pushed back against setting targets. The most common reason is that setting targets could conflict with their processes and the ability to generate alpha. Currently, most managers evaluate ESG risks and account for them in pricing or valuations; or in portfolio construction i.e. reduced position sizes in portfolios.
Our managers do not exclude investments or construct portfolios with ESG targets. Most of the managers have indicated that we would have to consider bespoke mandates if we wish to implement specific targets for carbon emissions. These engagements with managers are in the early stages and at the same time, the operationalisation of the South African Climate Change Act, may give managers food for thought.
Conclusion
Asset management may not come to mind as the most obvious solution to climate change but the industry – underpinning the economy – is in a very powerful position to act. Many asset managers are starting to make a tangible difference and can do even more by working to mobilise the power of finance, together with other stakeholders.
As a DFM, it is our fiduciary duty to ensure sustainable implementation of new processes and policies without compromising on the investment objectives of our multi-managed portfolios. We remain committed to continued engagement with managers and implementing policies and frameworks that contribute to a more sustainable environment, which ultimately benefits all investors.