“Global trends continue to indicate that investing in renewable energy is investing in a profitable future” — REN21
On May 30 this year, Standard Bank shareholders voted on a resolution that would require the bank to disclose the climate-related risks to which its activities expose its investors. This comes on the back of mounting pressure globally for the private sector to take a more radical approach to tackling climate change.
Ultimately, the shareholders voted against the motion and opted to disclose only their coal financing policies. While this is a step in the right direction, more enforceable action is required. The world has come to recognise the financial sector poses risks beyond its operational footprint and its potential to influence the transition towards a low carbon economy.
Recognising the planetary emergency that is climate change, governments across the globe collaborated to create an environment that incentivised the transition towards decarbonisation, culminating in the Paris Agreement. Through government subsidies and policy incentives, renewable energy has become more financially feasible.
According to a report released by REN21, a global think-tank and multistakeholder network focused on renewable energy policy, investments in the sector have surpassed fossil fuel investments for the fourth consecutive year. A staggering $288-billion was invested in renewable energy in 2018 alone. Renewable energy generation now accounts for 26% of global energy generation. The renewable energy sector was responsible for creating 11-million jobs in 2018, which suggests that investing in renewable energy is capitalising on a profitable future.
Although a transition towards a low carbon economy is not far on the horizon, the co-operation of the financial sector is paramount to attain this dream fully. The progressive strides taken by the financial sector have been undercut by major banks, which continue to undermine environmental and social rights by funding fossil fuel expansion. In the three years since the Paris Agreement was ratified, JP Morgan Chase has invested more than $196- billion in fossil fuel expansion. JP Morgan, Wells Fargo and Goldman Sachs remain the top three largest investors in fossil fuels.
The same trends have been observed in South Africa. While the rest of the world has pledged to “quit coal” by 2030, Eskom has indicated no intention of slowing down its coal consumption and some of the utility’s major stakeholders in government and labour show signs of being threatened by competition from renewable energy. Eskom’s stronghold in the South Africa power sector has indefinitely derailed the Renewable Energy Independent Power Producers Procurement Programme, as the public enterprise has refused to sign more power producer agreements (PPAs).
The national utility continues to dictate the future of South Africa’s energy mix and, as a result, the country’s energy efficiency financing has plateaued in recent years. Adding to the public sector lethargy towards cleaner energy, our country’s financial sector is lagging international climate finance trends. Attempts to integrate environmental, social and governance analysis into its long-term strategic planning have been futile.
However, the financial sector, guided by the Task Force on Climate-related Financial Disclosure, has become cognisant of how exposed it is to climate change. Mark Carney, the governor of the Bank of England has highlighted three ways climate change can affect financial stability.
The first of these is physical risk, as climate-related events affect infrastructure, crops and business operations. Secondly there is the transitional risk: when businesses transition towards less carbon-intensive model suddenly or in a disorderly manner, they may suffer a loss from re-evaluation of asset prices. Lastly, there is the liability risk faced by insurers, which may suffer when businesses or people claim compensation for losses suffered from physical or transitional risks.
Ultimately, if the financial sector continues to invest in fossil fuels, climate-related events and the claims that result will eventually affect their bottom line. Through disclosing climate risks, the financial sector could facilitate early assessment of climate-related risks and opportunities, resulting in better allocation decisions.
Several international banks and insurance companies have become cognisant of climate risks and amended their policies accordingly. French bank Natixis has made a commitment to stop financing companies that are reliant on coal-fired power plants. Insurance companies Zurich, AXA and Allianz no longer offers insurance to companies that rely on coal for more than half of their turnover.
South Africa has already begun to feel the implications of this shift. Futuregrowth Asset Management has suspended more than R1.8-billion of debt finance to state-owned enterprises — notably Eskom in 2016 — with the aim of improving governance, transparency and disclosure for long-term sustainability of investments. Futuregrowth recently expressed a lack of interest in resuming lending to the national power utility.
However, South Africa has regulation 28 of the Pension Fund Act in its toolbox. This requires pension funds to consider environmental, social and governance factors in their investment decisions. Despite the existence of this regulation, few strides have been made by the financial industry to implement this adequately. Stakeholders in the financial industry need to be more assertive in using this regulation as a punitive measure to nudge institutions towards more sustainable investment as envisioned by the law.
Although South Africa’s private sector is dragging their feet, climate risk is imminent and it is imperative that these institutions have the foresight to perceive the risks, recognise the policy tools available and capitalise on opportunities for growth. In the past, satisfying stakeholder interests and environmental, social and governance concerns were viewed as mutually exclusive, but today giving due consideration to these issues not only makes financial sense but increases stakeholder value.
Thandile Chinyavanhu is a qualified environmental health practitioner and an IEMA-certified carbon footprint analyst.