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Investors are stewarding gradual move to decarbonisation in emerging markets

Investors are stewarding gradual move to decarbonisation in emerging markets
Mining News Pro - Investment manager Old Mutual Investment Group responsible investment head Jon Duncan tells Mining Weekly that, while the mining industry cannot ignore the global climate change context, which in part is driving international divestment from the likes of coal miners Exxaro and Anglo American, the reality is that, locally, the decarbonisation debate is more nuanced and needs to consider the social challenges that threaten South Africa as a whole.

Although investors are becoming acutely aware of climate change risks, hence the increased focus on environment, social and governance matters, they also remain cognisant of the need to generate appropriate risk adjusted financial returns.

Duncan explains that many investment managers in South Africa, therefore, take a risk-managed approach to domestic fossil fuel exposure and not a hard exclusion approach.

Old Mutual Investment Group nonetheless recognises the growing demand for low-carbon investment products and, therefore, in 2020, launched its Old Mutual South African ESG Fund, which has a mandated 40% reduction in carbon intensity compared with the capped shareholder-weighted index (SWIX) of the JSE.

The SWIX has the same underlying companies as the Top 40 on the stock exchange, but the allocation to each company will differ because SWIX only includes local shareholders in the index calculation, to counter volatile foreign investment.

“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 and so is 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,” Duncan states.

He tells Mining Weekly that the Integrated Resource Plan 2019 sets out a decline in new coal build over time, which leaves coal mining assets such as those of Exxaro exposed to both the international and domestic market.

However, Duncan believes that if a low-cost fossil fuel producer maintains good-quality assets, operates within the national decarbonisation limits and has good ESG credentials, they could have a role to play in South Africa’s just transition.

As an equity investment manager, Old Mutual Investment Group continuously engages with its customers on the issue of carbon exposure in their portfolios. He says the company is seeing a lot more appetite in developed markets to undertake a hard exclusion approach and simply divest from coal.

However, emerging markets require a more nuanced approach, says Duncan.

“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 asset to sell.”

Investment managers such as Old Mutual Investment Group take their cue from multiple angles when considering investments in diversified miners, including financials, commodity cycle, public policy trajectory, client mandates, climate science and social concerns, to name a few.

“Regarding diversified miners, we don’t take a hard exclusionary approach on coal, never-the-less we do interrogate the attendant ‘just transition risk’ of such coal assets and so play close attention to the overall commodity mix within diversified miners,” says Duncan.

Decarbonisation pathways are becoming clearer both globally and locally, and Duncan hopes that South Africa will, within the next few years, have translated this into a science-based carbon intensity benchmark for our local exchange that would open up the possibility of aligning long-term assets with science-based target outcomes.

As part of the group’s climate risk management, Old Mutual Investment Group will typically undertake baseline assessments as a basis for engagement with those companies that are exposed to climate-transition risk. As a long-term investor, we see such engagements as critical for supporting companies on the decarbonisation journey.

Moreover, Duncan believes that active stewardship from investment managers on climate risk is a critical aspect to supporting just transition outcomes for South Africa.

In South Africa’s case, the issue of a just transition is a real concern as 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, and are large taxpayers and providers of jobs. Having said that, the long-run need to decarbonise is inevitable and so being directly engaged with these companies is critical.

“Ultimately in respect of climate risk management we want to play a productive and helpful role as managers of large pools of institutional capital.”

Renewable energy has a critical role to play in South Africa’s decarbonisation journey, Duncan notes.

Confidence around the opportunities for renewable energy investment is growing and subsequent rounds of the Renewable Energy Independent Power Producer Procurement Programme are creating space for more investment.

“As an individual investor, it is quite difficult to play the renewable energy theme as most of the existing investment has been in the institutional market space, principally unlisted equity and debt..

“However, the opportunity to play in the renewable energy space is slowly but surely moving into the listed markets. We expect more private equity participants in the renewable energy space exiting into the listed investment vehicles and that this will creates more opportunity for the individual investor to hold these kinds of assets,” he points out.

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