Climate crisis opportunity: Making money on the road to hell

If anything has happened in 2019, it is that the world’s climate crisis is finally on policy and investment agendas as pressure from ordinary citizens and investors pushes governments and companies to adopt resolutions for change.

Extreme weather events are reinforcing the urgency. In Alaska, more than 90% of days were warmer than normal in 2019, bushfires are raging in Australia and cyclones and floods hit parts of Africa that are not accustomed to extreme weather.

Facing this problem head-on is not altruism, or a nice to have. It is modern risk management. Earlier in November, more than 11,000 scientists published a joint statement in the journal BioScience, warning that humanity faces “untold suffering due to the climate crisis” unless there are major transformations to global society.

However, as the scientists also point out, “despite 40 years of global climate negotiations, with few exceptions, we have generally conducted business as usual and have largely failed to address this predicament”.

The uncomfortable reality is that urgent carbon reduction is required. For a start, fossil fuels need to be replaced with low-carbon renewables and other cleaner sources of energy. And ideally, the remaining stocks of fossil fuels should be left in the ground, the scientists say.

Currently, renewables account for about 20% of the global energy mix. This needs to rise to 85% to meet globally agreed climate goals.

For investors, the climate crisis has a tangible number.

“In terms of our estimates, climate change puts 15% of the value of global investments at risk in terms of what companies might have to do to offset their carbon footprints,” Charles Prideaux, global head of investment at Schroders, told media at a recent event in London.

Investors are alive to this and are increasingly using their voting power to press for change or propose shareholder resolutions at AGMs, he says.

In South Africa, this type of shareholder activism is at last emerging, and two AGMs scheduled for the last week of November 2019 have attracted the attention of shareholders.

At Sasol, which is SA’s second-largest emitter of greenhouse gases, the board recently rejected the tabling of a shareholder resolution by a group of six institutional investors.

The institutions — Old Mutual, Sanlam Investment Managers, Coronation, Abax, Aeon Investment Management and Mergence Investment Managers — had asked for greater transparency from Sasol on how its long-term greenhouse gas emission reduction strategy, and executive rewards, align with the Paris accord on climate change.

This is the second year in which Sasol has rejected a shareholder resolution asking for more disclosure on its climate change mitigation strategy, notes Tracey Davies, director of Just Share, a non-profit shareholder activism and responsible investment organisation.

As a result, Sasol investors and civil society activists will be attending the fossil fuel producer’s AGM to engage on these issues.

Similarly, at the FirstRand AGM on 28 November, shareholders will vote on the second set of climate risk-related shareholder resolutions to be tabled in South Africa (the first was Standard Bank).

The first resolution proposes that the bank prepare a consolidated report to shareholders, by end October 2020, on its assessment of its exposure to climate-related risks (transition and physical) in its lending, investing and financing activities.

The second proposes that FirstRand should adopt and publicly disclose on its website, by October 2020, a policy on lending to fossil fuel-related projects, including coal-fired power plants, coal mining operations and oil and gas exploration and production projects.

The board has endorsed the latter proposal, but not the former, arguing that it does not “have time” to achieve what is being asked for.

“Bank lending and investments make up a significant source of external capital for carbon-intensive industries,” says Davies. “Every rand invested by South African banks in new fossil fuels increases climate risk, renders it harder to achieve a just transition to a low-carbon economy, and exposes the banks to reputational and financial risks.”

From a shareholder perspective, climate risk poses a material financial risk to many classes of investments in the short, medium and long term.

The flip-side of this coin is that there is a massive opportunity available for investors willing to fund the transition to a low-carbon economy.

Schroders estimates that $2-trillion of annual investment is needed if society is to meet the Paris Accord agreements.

Investment opportunities lie in clean power generation, energy storage, transmission and distribution, energy efficiency, transport electrification and emission reduction technologies, says Alex Monk, global renewables analyst at Schroders.

He believes the transition to renewable energy is set to pick up speed and cites three reasons for this.

First, there is an emerging political will to confront the fact that the world is facing a climate catastrophe. Leaders from the UK, to China, to New Zealand have set ambitious emissions reductions targets for their countries.

Supporting this is that renewables are now competitive with fossil fuels in terms of cost.

And third, consumers are demanding that this happens and are voting with their feet.

This is more evident in Europe, the US (at a state, but not national level) and parts of the East. It is not evident across much of Africa and certain other developing markets, where reliance on fossil fuels is central to economic growth.

For instance, in the UK, 30% of electricity will be produced by renewables by 2020. In Germany renewables are now the main source of power generation and coal will be totally phased out by 2038 and Spain is targeting 100% of energy from renewables by 2050.

In the US, even conservative state Pennsylvania plans to source 100% of its power from renewables by 2050, while California is aiming for 2045.

“India and China have ambitious targets and are using climate change as an opportunity to solve pollution, emissions and energy poverty,” says Monk.

Companies are making changes, too. Online retailer Amazon has made a commitment to becoming net carbon-neutral by 2030 and in September 2019, Google signed clean energy deals worth about $2-billion to supply it with electricity from wind and solar projects across the world.

“The investment opportunity is huge,” Monk says. “It’s a simple choice: either we spend money mitigating, or we spend money picking up the pieces.” BM