A changing global environment and growing effort to reduce global warming will require an economic shift for carbon-intensive economies such as South Africa’s. South Africa is amongst the highest CO2 emitters globally (data from International Energy Information Administration (IEIA)).
New domestic policy direction recognises this transition risk, as well as the potential opportunities associated with emerging “green” industries. For example, a study by Accenture estimates green industries and technology could unlock economic activities to the value of USD 350 billion (R5 trillion) on the African continent.
The National Development Plan and National Growth Plan advocate a shift away from the unsustainable use of natural resources, towards new, clean technologies. One of the policy tools to achieve this shift has included the implementation of the Carbon Tax in 2019. However, it also recognises the challenges involved in this economic shift.
In order to ensure that the South African economy can benefit from these new technologies and industries, its National Employment Vulnerability Assessment and the Sector Job Resilience Plans must identify and quantify the risks posed by climate change on certain sectors. It must also find viable new green economic activities, quantify the value of these opportunities and understand which sectors have to change and how.
In this context, the concept of “stranded assets” is understood as the loss of economic viability due to changes in social and environmental trends, policy, technology and public sentiment. In a recent report, JP Morgan economists estimated that up to US$20tn could be wiped from stock market as a sizable portion of proved reserves held by energy companies may never be used. These ‘transition risks’ to the profits of the energy companies would be equivalent to 17% of the US$119tn global fixed income and equity markets.
South Africa’s reliance on coal-powered electricity requires trade-offs between meeting electricity demands associated with economic growth and environmental protection. As of 2019, about 70% of South Africa’s primary energy needs were powered by coal. This fact precipitates the need to seriously investigate the trade-offs the country will need to make in terms of providing sufficient energy to meet growing demand, on the one hand, and protecting its water resources, biodiversity and agricultural resources, on the other.
Responsible investment must therefore balance the short-term economic and environmental issues and focus on a plan for a just transition.
The increasing importance of understanding how the low-carbon transition will affect investment portfolios has rarely been more evident than today. As a long-term investor, CalSTRS acknowledges the significance of climate-related risks and the complexity of the global economy achieving the Paris Agreement’s goals. We manage a $240 billion pension fund by allocating capital globally across public and private asset classes while mitigating risks such as flooding, sea level rise, extreme weather and heat stress. We recognize transition risks manifest through climate-related policies and technologies. Our challenge is to best allocate capital in order to provide retirement security for our members and beneficiaries, while also creating solutions to enable future generations to live in an equitable, prosperous, low-carbon world.
In May 2019, as enhanced evidence of the Teachers’ Retirement Board’s commitment to managing climate risk and recognition that action around climate risk management is accelerating, the Investment Committee acted to approve new policy language that codifies their belief that global financial markets are responding to climate risk and that a transformation to a low-carbon economy is underway. Reflecting CalSTRS’ determination that the low carbon transition is an urgent priority, the board has recently embarked on a Low-Carbon Transition Work Plan to establish a consensus among the board and staff around how the low-carbon transition will impact the Investment Portfolio, analyze the transition readiness of the portfolio, expand stewardship activities that support an orderly transition, and continue our commitment to report and communicate actions around the low-carbon transitionCalSTRS Green Initiative Task Force Annual Report 2019
5 Accenture (2019) Unlocking Digital Value For Business And Society In South Africa6 https://www.bbc.com/news/business-51581098