Tighten the ESG focus or face litigation

By Merlita Kennedy & Tobia Serongoane from Webber Wentzel

Litigation on Environmental, Social and Governance matters is rising in volume, both globally and domestically, but there are various steps that companies can take to mitigate the risks

Investor and social pressure on mining and energy companies to report on Environmental, Social and Governance (ESG) and consider renewable energy is immense. Recently, the South African state-owned power utility, Eskom, was named by the Centre for Research on Energy and Clean Air (CREA), as the world’s biggest emitter of the pollutant sulphur dioxide (SO2). Eskom on its own now emits more sulphur dioxide than China, the US, and the European Union’s power sectors combined.

According to the study by air pollution expert Mike Holland, these emissions contribute to high levels of ambient air pollution and to 2 200 air pollution-related deaths in South Africa every year. Most of these deaths are due to SO₂ emissions, which form deadly PM2.5 particles once released into the air.

The study poses a legal threat to the power utility, as climate change litigation is gaining momentum in South Africa, particularly in relation to air pollution.

Environmental, Social and Governance

ESG has risen to the top of the board agenda. Companies are increasingly aware that a failure to address these matters can be detrimental to the company’s business purpose, reputation, corporate values, approach to risk management, and relationships with host communities, investors, suppliers, customers, employees, and other stakeholders. As ESG continues to grow in importance, the number of ESG litigation matters will become self-perpetuating.

Companies and state-owned power utilities globally are employing ESG policies and procedures in the energy sector. Eskom, however, has lagged in this regard.

Litigation Risks

The consequences of falling behind can be severe and far‑reaching, for example by falling foul of climate‑change litigation (i.e. class actions). There is an increasing focus on whether a company is conducting its operations in a sustainable way, and without violating any human rights. In some cases, internationally and locally, both the state and a company were taken to task for not acting appropriately to improve air quality and thus the health and well-being of citizens.

Sharma and others v. Minister for the Environment – Australia

On 8 September 2020, eight young people filed a putative class action in Australia’s Federal Court to block a coal project. The lawsuit sought an injunction to stop the Australian Government from approving an extension of the Whitehaven Vickery coal mine. The court found that a novel duty of care is owed by the Minister for the Environment to Australian children who might suffer potential “catastrophic harm” from the climate change implications of approving the extension to the Vickery coal mine in New South Wales. Ultimately, the court ordered the Minister to pay costs.

Milieudefensie et al. v. Royal Dutch Shell plc – Netherlands

The environmental group Milieudefensie/Friends of the Earth Netherlands and co-plaintiffs filed a case against Royal Dutch Shell plc. (RDS) requesting the court to rule that the Shell group’s annual CO2 emissions and RDS’s failure to reduce them constituted unlawful acts toward the claimants; and order RDS to reduce, by end-2030, the Shell group’s CO2 emissions by 45% net, relative to 2019 levels.

In this ground-breaking decision, RDS was compelled to reduce its global group carbon emissions by 45% net (compared with its 2019 emissions) by 2030, with immediate effect.

In South Africa

In June 2019, the VEJMA and groundWork, represented by the Centre for Environmental Rights, launched landmark litigation against the state, asking the court to declare that the poor ambient air quality in the Highveld was a violation of Section 24 of the Constitution. On 17 May 2021, the Pretoria High Court for the first-time heard arguments in what has become known as the “Deadly Air” case: a case about the toxic air pollution on the Mpumalanga Highveld.

Mitigating the risks of ESG litigation

To manage and mitigate some of the risks of ESG litigation – the key is to be proactive and to:

  • involve legal counsel at an early stage to ensure ESG compliance with reporting and disclosure requirements;
  • conduct due diligence and environmental legal compliance with the suite of environmental laws;
  • point out possible exposure to liability under a changing environmental regulatory landscape;
  • audit the suite of contracts individually and ensure that they contain indemnification and other contractual terms to protect against the impact of environmental liabilities;
  • in the event of a breach, involve legal counsel to assist with crisis management;
  • undertake a feasibility study to see whether corporate structures and operations have the necessary resources and expertise to handle any ESG matters that may arise.
  • engage effectively with stakeholders, including regulators, investors, employees, consumers and communities; and
  • move beyond treating ESG as a tick-the-box exercise to ensuring robust governance and accountability at board level and integrating material ESG factors into strategic decision-making.

Also, any company should seek specialist legal advice before responding to any ESG litigation issues that they may face.

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Fossil fuels on fire

By Old Mutual Wealth Investment Strategists Izak Odendaal and Dave Mohr

These strange times have become even more unusual. Despite the enormous efforts to reduce the demand for carbon-emitting fossil fuels, their prices have shot up in recent weeks.

The upcoming COP26 Glasgow Climate Summit could ironically take place against the backdrop of coal and natural gas prices at record levels and oil at multi-year highs even though the share of renewables in the global energy mix has thankfully risen steadily.

Chart 1: Futures prices for coal, gas and oil, US$

Source: Refinitiv Datastream

A perfect storm

It is a perfect storm of events that got us here. On a positive note, demand for energy has increased from the lockdown-induced lows. For instance, IATA estimates a 26% growth in airline passenger numbers between 2020 and 2021, though they are still more than 40% below 2019 levels. However, this improvement in demand has not been met by rising supply. On the contrary, several factors have constrained supply.

One is simply the weather. Northern Europe relies heavily on electricity from wind, but it has been less windy than usual. Droughts in Brazil, China and the US mean hydro-electrical production has also been lower than normal. This has led to increased demand for natural gas and coal. However, natural gas inventory levels have been lower than usual at storage depots across Europe. This has created an opportunity for Russia, Europe’s main gas provider, to flex its geopolitical muscles and go slow on deliveries, although it has indicated a willingness to stabilise the market recently. With winter looming, natural gas prices in Europe have gone stratospheric, pulling up prices in other parts of the world.

In China, flooding has disrupted domestic coal production. China is already the biggest consumer of coal in the world, but demand has increased recently, and with it, its price. Geopolitics play a role here too. China blocked Australian coal imports, about a tenth of its total last year, after Australia questioned the origins of the coronavirus. Imports from Mongolia have also been disrupted by Covid.

Chinese electricity prices are heavily regulated, and utilities cannot freely pass on the cost of higher coal prices to customers. Many have opted to cut back on production, rather than sell at a loss. Beijing has now announced that selling prices will be allowed to rise somewhat. All this has happened at a time when local governments were already reducing electricity production from coal to curb air pollution and carbon emissions. The net result is something South Africans know well: widespread load-shedding.

Finally, in terms of oil, OPEC (along with Russia) has largely maintained the production cuts it put in place last year to prop up the oil price. In other words, there is no fundamental shortage of oil. Supply is being deliberately held back. OPEC can increase supply if it worries that high prices will choke off demand, but for now, its members seem comfortable with the revenues flowing in. Importantly, the price increase has not yet led to the associated increases in American shale oil production as has been the case over the past decade. Shale producers have largely abandoned the old production-at-all-costs mindset in favour of maintaining profitability and shareholder returns.

Chart 2: US oil prices and production

Source: Refinitiv Datastream

An associated factor is that these companies and their peers face increased difficulty in accessing the funding needed to increase short-term (in the case of shale) and long-term production (in the case of the oil majors). Banks and asset managers across the world are phasing out exposure to fossil fuels and some have already cut all ties. This has contributed to steep declines in capital expenditure by fossil fuel producers. 

In other words, the big move among global investors towards embracing environmental, social and governance (ESG) principles might have the unintended consequences of higher fossil fuel prices until such time as renewable sources reach critical mass.

Chart 3: Capital expenditure by listed oil, gas and coal companies

Source: Refinitiv Datastream

The good news is that elevated fossil fuel prices do create a strong incentive to increase investment in alternatives. This is where ESG can play a big role to make sure the alternatives are green, not brown. Economists have long argued that the best way to tackle climate change is to put a tax on carbon emissions. This is because the price we pay for a tank of petrol, for instance, covers the cost of production and distribution but not the cost of the associated air pollution. Since the cost of this externality is not included, petrol is too cheap. This leads to excessive demand. A carbon tax raises the price to its “correct” level and lower demand. The recent price increases could therefore achieve a similar effect.

A tax on your houses

Increased energy prices act as a tax for most consumers. Most of us have no choice but to fill up our car. If you live in the snowy Northern Hemisphere, you have little choice but to heat your home with gas.

In other words, this will be a drag on global consumer spending, the question is just for how long will prices remain elevated. It is somewhat compensated for by the excess savings that households in the rich world have built up, but it also appears that most of the excess savings are concentrated in the hands of more affluent households. Meanwhile, it is lower-income households that are most exposed to increases in energy prices and associated rises in food prices. Nonetheless, it is worth pointing out that at around $80/barrel, the oil price is nowhere near the $150/barrel record set in 2008 on the eve of the global financial crisis, or the $100+ levels that prevailed between 2011 and 2014, especially adjusted for inflation or growth in incomes.

The other complication is that these price increases come at a time when inflation rates are already elevated. The global production and delivery of goods are already severely constrained by Covid-related disruptions, shortages of inputs and labour, and logistical bottlenecks. But now production in China, the world’s factory, has to contend with electricity blackouts. This is likely to worsen the supply chain problems already besetting the world economy.

People often confuse higher fuel prices with inflation. Fuel prices are very visible since most motorists have to fill up at least once a month. But inflation refers to sustained price increases in a broad range of consumer goods and services. Energy is a component in consumer price indices and therefore higher energy prices do have a direct short-term impact. But the big question is whether firms can raise their selling prices to compensate for higher input costs. In this way, higher energy costs ripple through the economy. If workers then demand higher wages to compensate, we have the beginnings of a wage-price spiral. This clearly requires pricing power on the part of firms and bargaining power on the part of workers that have been absent for many years. However, in the current Covid-distorted global economy, there have been signs of both.

Winners and losers

There are clear winners from this energy crunch. Net exporters of coal, gas and oil are clearly smiling, particularly countries such as Nigeria that have really struggled until recently.

In contrast, many countries are energy importers and face not only higher inflation rates, but also potentially balance of payments problems as they need to cough up more of their scarce dollars for each barrel of oil. Compounding matters, this comes at a time when the US Federal Reserve is planning to scale back its monetary stimulus, which has put upward pressure on the dollar. Some developing countries, therefore, face a triple whammy of higher energy costs, a weaker currency, and domestic central bank interest rate hikes aimed at stabilising exchange rates and inflation.

South Africa has one leg in this camp as an importer of petroleum products. The rand has been on the back foot in recent weeks, and this means a big petrol price increase is on the cards for next month.

However, we are also the world’s fifth-largest coal exporter (behind Australia, Indonesia, Russia and the US) and the rising export revenues limit downward pressure on the rand. Coal exports would be even higher if not for the capacity constraints on the Transnet rail corridor from the Highveld to the coal terminal at Richards Bay.

It also helps that inflation has been relatively stable in South Africa, with price increases excluding food and energy costs running at only around 3%. The SA Reserve Bank’s latest forecasts suggest that inflation should stay close to the 4.5% midpoint of the target range over the next two years. However, the risks are clearly to the upside. A gradual interest rate hiking cycle is therefore likely to commence in the next few months. How gradual will depend on where energy prices settle and how the rand responds. The Reserve Bank will also keep a close eye on what other central banks are doing, particularly the US Fed.

Oils well that ends well?

In summary, it is a delicate moment for the global economy, and could end up being a long, cold winter for people in the Northern Hemisphere. The big risks are a slowdown in consumer spending, further disruptions to production and persistent inflation that forces central banks to tighten monetary policy sooner than they’d like. None of this is good for markets.

However, it is worth repeating that the underlying cause is the strong recovery in demand as the world gradually puts the pandemic behind it. This is good. Moreover, energy prices are notoriously volatile. In April last year, a key oil futures contract briefly traded at a negative price. Traders were willing to pay to get rid of the oil rather than take delivery. The most recent price moves in gas and coal also have all the hallmarks of panic-driven trading, and therefore are unlikely to be sustained over time. Investors in diversified portfolios should similarly avoid making panicky moves in response to the recent dramatic headlines. The current situation is the result of a nasty confluence of events, and some of the contributing factors on the supply side could ease.

Finally, in the current context, it might be worth remembering that 13 years or so ago, “Peak Oil” was a dominant investment narrative. It was believed that the global supply of oil would peak and this justified prices surging to $150/barrel and beyond. The opposite turned out to be the case. Today, we’ve probably already passed the point of peak oil demand due to the rise of electric vehicles. Demand for coal could prove stickier, while natural gas could increase in importance as a “bridging fuel” while the world transitions to renewable sources. However, short-term price movements are clearly going to remain unpredictable.

This is relevant when thinking about investments more broadly. Dominant narratives can lead you astray. Just because you read about a “megatrend” or “structural change”, whether it is ESG, clean energy, blockchain, biotechnology, or demographic shifts, doesn’t mean that there is easy money to be made. It could be priced on already, or simply overhyped. You could be way too soon or too late already. Maintaining appropriate diversification across different asset classes and within each asset class remains the best way of investing, even if it sounds boring.

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Imperial creates value of over R200 billion over two years in Nigeria and South Africa

Imperial is pleased to advise that in F2019 and F2020, it created value of R146 billion and R98 billion for its stakeholders and communities in Nigeria and South Africa respectively, as confirmed by a recent Socioeconomic Impact Assessment study undertaken by Accenture.

“Imperial plays a key role in connecting Africa and the world and improving people’s lives with access to quality products and services. As a purpose-driven organisation with Environmental, Social and Governance imperatives embedded in our business strategy all our businesses remain committed to not just creating but sustaining value for all our stakeholders across our 25 countries of operation”, says Mohammed Akoojee, Imperial’s Group CEO. “We take a holistic approach regarding value creation wherein value is created not only for Imperial but also for other stakeholders in the value chain, including the development of our communities and countries of operation.”

In assessing the direct and indirect value created for Imperial’s stakeholders, these reports commissioned by Imperial, for Nigeria and South Africa looked at its impact through five themes, namely Imperial’s Greatest Asset (people), serving as the ‘Gateway to Africa’ (operations), reaching Beyond Imperial (external stakeholders), transforming by adopting a ‘Go Digital Go Green’ approach (adoption of digital technologies and focus on reducing negative impacts on the environment) and Going the Extra Mile (Corporate Social Investment). Each of these themes was assessed through a framework that systematically considered value to society, value to the logistics industry and to market access, as well as value to partners.

In addition, the socio-economic impact on society was reviewed in light of the United Nations 2030 Agenda for Sustainable Development and the African Aspirations for 2063 defined by the African Union, as various countries, including South Africa, have acted to integrate the goals and targets into their national development plans to align policies and institutions behind them. Imperial’s contribution to the applicable goals and aspirations is highlighted throughout these reports.

“The outcome of the reports also supports Imperial’s objectives to continue to operate as a responsible corporate citizen that is committed to delivering sustainable value and extending its impact to all key stakeholders across the organisation’s value chain,” adds Akoojee. 

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Old Mutual Investment Group: Africa’s top ESG Responsible Investor

Leading African asset manager Old Mutual Investment Group has been named Best ESG Responsible Investor – Africa 2021 by Capital Finance International , a UK-based journal reporting on business, economics, and finance.

Commenting on the announcement, Managing Director of Old Mutual Investment Group (OMIG), Tebogo Naledi says, “The award reflects important and much-appreciated recognition of our commitment to responsible investment, which we have championed with much vigour over the past decades.”

OMIG integrates ESG factors throughout its investment decision-making processes, as well as offering proactive stewardship of investments by exercising proxy voting rights to push for better ESG performance from its investee companies. In addition, its ESG position as a business supports green economic growth aligned with socially inclusive, low-carbon and resource-efficient outcomes.

“We are very proud that the award recognises OMIG’s leadership in the research, analysis, and evaluation of ESG issues,” says Naledi.

Other assessment criteria included excellence, innovation, and overall contribution to long-term health, progress, and stability of the global markets and the experience of investment teams.

“Aside from progress on integration processes our core innovation has been bringing products to the market that capture the opportunity set of the transition to a low-carbon, resource-efficient and socially inclusive growth path.”

Jon Duncan, Head of Responsible Investing at OMIG

Highlights of CFI’s judging panel’s findings include:   

•         Acknowledgement of OMIG’s belief that responsible investing is a moral imperative as well as an opportunity to gain a competitive business edge.

•         Acknowledgement of OMIG’s development of investment solutions that use hard exclusions based on ESG leadership indices and Shari’ah investment principles.

“OMIG is committed to investing for a future that matters. We will continue to drive this agenda and focus our efforts on ensuring that retail and institutional investors are empowered to make sustainable, ethical and financially sound decisions”, concludes Duncan.

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AECOM launches Sustainable Legacies

Transformative ESG strategy to advance sustainability initiatives that deliver positive impact

  • Achieve operational net-zero carbon emissions by the end of 2021 and science-based net-zero by 2030
  • Introduce ScopeX™ to reduce carbon through design on all major projects

AECOM (NYSE: ACM), the world’s premier infrastructure consulting firm, has announced the launch of Sustainable Legacies, its strategy for reaching ambitious environmental, social and governance (ESG) objectives. This strategy integrates four key pillars that will embed sustainable development and resilience across the company’s work, improve social outcomes for communities, achieve net-zero carbon emissions and enhance governance.

“As leaders of our industry, we have a responsibility to embed ESG principles into everything we do and partner with our clients and communities to advise on their efforts to advance complex, multi-decade sustainability initiatives.”

AECOM CEO Troy Rudd

“With nearly 50 000 talented engineers, scientists, architects, consultants, programme and construction managers, along with our board of directors and executive leadership team, we are energised by the impact of our work and how we can contribute positively to society and the planet. We believe infrastructure creates opportunities for everyone, and directly integrating ESG principles with our technical excellence and capabilities puts us in the best position to deliver sustainable legacies for a better world,” highlights Rudd.

“Our clients have new, evolving priorities focused on sustainability and delivering social impact through their projects and services, and AECOM stands out as the company that can best advise and execute for them,” adds AECOM President Lara Poloni. “By developing our strategy with a focus on advancing our ESG objectives and supported by the strength of our technical excellence, global collaboration and local engagement, we will continue to drive innovation in our industry while leaving long-lasting impacts on the communities we serve and the planet as a whole.”

Key Pillars of AECOM’s Sustainable Legacies Strategy

  • Achieve net-zero carbon emissions: While developing and implementing best practices and achievable goals for its clients, AECOM has furthered its own carbon emissions goals by ensuring that the company will be operationally net-zero by the end of 2021. It has also committed to reach science-based net-zero carbon emissions by 2030 through the following actions:

Setting new 1.5°C-aligned emissions reduction targets.

Decarbonising fleet vehicles and switching to renewable energy tariffs.

Partnering with its suppliers to decarbonise and including carbon considerations into its procurement processes.

Implementing a 50% reduction in business travel.

Creating projects centred around using nature-based solutions to offset residual carbon.

  • Embed sustainable development and resilience across its work: AECOM has introduced ScopeX™, a first-of-its-kind initiative to reduce carbon through design that considers embodied and operational carbon across the entire project life cycle. The company will further incorporate ESG action plans on all major projects to reduce carbon impact by at least 50%. It will also embed net zero, resilience and social value targets into its client account management programme.
  • Improve social outcomes: AECOM believes equity, diversity and inclusion enable better outcomes for clients, a deeper understanding of community challenges and more innovative solutions that propel the industry forward. As part of this pledge, AECOM has set an industry-leading, near-term target of women comprising at least 20% of senior leadership roles and at least 35% of the overall workforce. Its efforts extend to include developing project teams that reflect the clients and communities it serves and partnering with small and medium enterprises to generate social value through positive community investments. Additionally, the company is focused on delivering inclusive, accessible projects that proactively improve social value outcomes for individuals, communities and society.
  • Enhance governance: To better assess ESG risk factors in potential projects, AECOM is developing and deploying an enterprise framework supported by leadership accountability and advocacy through the audit of specific ESG targets and metrics on an annual basis. In addition to regular reporting to the board of directors on ESG matters, as part of the recently expanded charter of the board’s safety, risk and sustainability committee that includes direct oversight of ESG activities, the company will track and report on its ESG performance targets externally in line with leading industry benchmarks.

Reflecting AECOM’s commitment to advancing its ESG initiatives, in the fiscal second quarter the company executed an amendment to its existing senior secured credit facilities that includes incentives linked to achieving certain sustainability, and diversity and inclusion goals.

For more information on how AECOM is delivering Sustainable Legacies, please visit www.aecom.com/sustainable-legacies.

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Are businesses ready to attract tomorrow’s investors?

Thought leadership article by Joe Keenan, Managing director, BME, a member of the Omnia Group

The world has become rapidly alive to the threats posed by climate change, and mining companies are seeing their shareholders demanding more than just a financial return. Investors – both institutional and private – want their mineral portfolios to speak to their value systems, and these values now centre increasingly on sustainability and shared value for all stakeholders.

Like the mining companies they service, mine suppliers and technology providers should be looking beyond the customer demands of today to remain relevant to the investors of tomorrow.By the same token, others in the mining ecosystem should have similar concerns about their respective futures. The question for our sector might be posed along these lines: How does a blasting and explosives company, for instance, position its brand to be relevant not only to its current customers but to future investors?

To be sure, supply companies receive business from mines because they provide valuable solutions that make mines productive and help keep them viable. That is no longer enough, however. Just as the South African mining sector is subject to the country’s Mining Charter and BEE compliance requirements, so there is a growing expectation globally that mines prioritise environmental, social and governance (ESG) concerns. The once ‘optional’ approach that businesses serve the broader good is now becoming mainstream as more businesses aspire to make a positive impact and leave behind a better world.

In mining, there are already thresholds for suppliers to clear in the field of safety. Many mining companies will not entertain tenders from suppliers whose recordable case rate (RCR) exceeds a certain maximum level. The same often applies to inclusive procurement, where mines expect suppliers to support their efforts to place business with local firms in the vicinity of the mining operation.

While some companies are already driving compelling, integrated sustainability strategies, others are exploring how best to diversify themselves. The emphasis is on going beyond their current offerings and moving further into the sustainability spectrum, with a focus on ESG and ‘green mining’ imperatives. Looking ahead 30 years, for instance, it is clear that fossil fuels will be playing a much-diminished role in energy production – and will be in considerably less demand. European countries are applying their Green Deal, through which the region aims to achieve carbon neutrality by 2050. We are already seeing major mining players extracting themselves entirely from the coal sector – for reasons related partly if not largely to the strategic recalibration of many investors and lenders in the light of climate change. Equally, responsible businesses are increasingly choosing like-minded partners, who share their vision for sustainability.

It is worth remembering that coal is still the planet’s most mined mineral – at almost 8-billion tons in 2019. The anticipated decline in this segment of the market is therefore likely to have a considerable impact on most supply companies to the mining sector; it will certainly have an effect on explosives and blasting providers – although this will depend on regional location and other factors.

The uncertainty in mining’s future might not stop there. Alternatives to coal-fired generation will have to be found, and this is already leading to greater interest in other commodities such as battery raw materials. Some of these will continue to require blasting in a hard rock environment, while others will not – being mineable by free digging. As technology develops, there is even the prospect of energy being generated or stored using materials or substances that are not mined at all; for example, research is being carried out into the electrical storage capacity of certain plant-based material.

The pace of this technological change is being spurred on by tomorrow’s generation, who see in it an epochal opportunity for a more sustainable future. Those who make up this generation are not just the pioneers of a new age but are the investors of the future. It is they who will set the preconditions for investment in coming decades, and it is clear they will prioritise sustainability.

Many – perhaps most – financial institutions have set demanding goals for their investment portfolios, and it is increasingly vital for capital-seeking firms to know what those comprise. They are certainly not ‘tick box’ requirements that can be applied when capital is needed; they are strategic elements that require considerable planning and years of dedicated implementation.

As suppliers to mines, our current commitment to creating value for customers – and to building the technology that will help us to achieve this vital goal – should not blind us to the broader, tectonic shifts underway in society. These promise to drive our economies toward greater sustainability, but they will demand fundamental changes in value systems that many businesses do not yet seem ready to embrace.

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Water stress can put business models in jeopardy

South Africa’s recent droughts are teaching businesses a life-changing lesson: we can no longer simply assume that clean water will always be available to keep operations running smoothly.

According to Gert Nel, partner and principal hydrogeologist at SRK Consulting, responsible water management is becoming a cornerstone of any sustainable business model – with investors starting to look more critically at how water risks are mitigated. “When putting together a business model for a multi-million rand business development, a key factor will now be the reliability of water supply,” said Nel. “Can you trust the local and regional water services provider to always offer a sustainable water source, and what are the broader environmental, social and governance (ESG) issues you will face with securing your own supply?”

He highlighted that the signing of a contract with a public service provider does not necessarily guarantee water supply if all available the traditional sources simply run out. “Indeed, the experiences of severe drought in cities like Cape Town and Port Elizabeth show that the communities’ basic right to water will take precedence, and businesses will be left to develop their own solutions in a crisis,” he said.

In this context, groundwater remains the most readily accessible resource to businesses – as long as it is used and managed in strict accordance with ESG best practice. This means early-stage scientific investigations into the viability of boreholes, as well as careful adherence to the regulatory framework.

“While desalination has been considered in coastal locations, it is a relatively costly option and takes years to implement,” he said. “Drilling boreholes is generally the only practical option, but businesses might be located on a very poor aquifer which could be low-yielding or have an unacceptable water quality.”

To ensure the integrity of the business model, developers generally require the involvement of a professional groundwater specialist to investigate and highlight the groundwater development potential of the town, city or area in which the operation will be established. These studies will also include a consideration of the number of existing groundwater users in the immediate area, and their respective water uses.

“The question that needs to be answered is whether there is enough groundwater for your business, in addition to the other private and public users in the area.”

Gert Nel, partner and principal hydrogeologist at SRK Consulting

“A hydrogeologist can compile a numerical groundwater model that delivers scientific predictions on the future availability of groundwater in the area you’re investing in – taking into account both existing use and the likely increased demand in the future. This is standard practice in the mining sector, for example, and all sectors can learn from this.”

Legal compliance is of course a key aspect of ESG, and this requires early planning to accommodate the potentially lengthy permitting period. Boreholes require a water use license (WUL), which can take up to two years to approve. Having the necessary license in place gives a business the ability to start drilling and preparing the necessary infrastructure for self-supply of water in case of a drought.

“This creates the vital back-up water supply to mitigate the operation’s risk in situations when the usual water supplier is unable to deliver,” he said. “It does need the investment in studies and permitting well in advance, though, as it will be too late to respond once ‘Day Zero’ is in sight.”

He reiterated the importance of considering ESG impacts related to the drilling of boreholes, and the crucial need to follow due process.

“If you drill boreholes to provide a supplementary or sole supply to your business, and you don’t follow scientific, environmental and social due processes, you could face public resistance,” he warned. “Surrounding borehole users could well accuse you of depleting their groundwater, or even causing the failure of their businesses due to their only water supply source drying up.”

While it might be possible to address these claims through detailed hydrogeological investigations, it cannot always be assumed that the scientific answer will be accepted by all stakeholders. Careful processes of communication and consultation – and perhaps even collaboration over the use of available groundwater – will help to manage the risk of reputational damage or worse.

“Irrespective of the specific environmental and social context of the business, it is wise to engage experienced scientists and engineers in preparing a water solution for a sustainable business plan,” he said. “The regulatory, social and physical landscape is complex, and there are a number of pitfalls that a responsible business would do well to avoid.”

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AECOM ready to help get R100bn Infrastructure Fund off the ground

AECOM, the global leader in integrated infrastructure, is poised to play a role in potential projects that have significant support from the R100-billion Infrastructure Fund announced by President Cyril Ramaphosa in his State of the Nation Address on 11 February. This is according to Africa MD Darrin Green, who comments that there are opportunities in student housing, digitalisation and water infrastructure – all areas where AECOM has extensive experience and expertise.

President Ramaphosa stated that the Infrastructure Fund will blend resources from the fiscus with financing from the private sector and development institutions. Such partnering between government and the private sector is essential to get these projects off the ground and achieve results. Green notes that the government has also committed R791-billion worth of funding towards infrastructure in the 2021 Medium-Term Expenditure Framework (MTEF). Here efficient procurement is key in terms of the government’s capacity to bring projects to market in a timely fashion.

“We are all aware of the need for sound procurement principles, but real innovative thinking needs to happen so that procurement can be dramatically accelerated to have the necessary impact on the economy – and quickly.”

AECOM Africa MD Darrin Green

He adds that the consulting engineering and construction sector has been in serious difficulty and shrinking for some time, certainly prior to the Covid-19 pandemic, and is steadily losing skills and capacity to support the infrastructure drive. “The emphasis needs to be on fast-track procurement and delivery,” urges Green.

The biggest opportunities in terms of infrastructure in Africa at the moment are: energy (particularly renewables such as hydro, wind and solar power), Environment, Social and Governance (ESG), digital-related infrastructure such as data centres, and basic infrastructure, especially in terms of water management, reuse and sustainability. Capacity and skills remain a challenge, while funding is always a constraint, especially where budgets are being redirected.

Looking ahead, Green predicts that 2021 is likely to be a year of consolidation and adaptation for AECOM. “The vaccine rollout will play a major role in both South Africa and the rest of Africa in terms of bringing back economic activity and confidence. The consulting engineering industry is key to economic recovery, being second in the supply chain after government and client procurement.”

On the international front, AECOM recently announced its ‘Think and Act Globally’ strategy to extend its industry-leading, global expertise to each of its projects around the world, transforming the way it delivers work through technology and digital platforms, and enhance its position as a leading ESG company.

Green highlights that this strategy is having a major impact in providing access to in-house subject matter experts around the world. “We now have prioritised time to talk with our global counterparts and share our expertise, opening up our knowledge networks exponentially. Also, as our digital communication tools utilisation becomes mainstream, accessing this network remotely has never been simpler, allowing innovative new client solutions to be shared quickly and efficiently.”

Here the focus is increasingly on digitalisation and innovation. “We certainly see these trends accelerating, and perhaps more so in Africa, where innovation and digital technology can leapfrog and bridge the relative absence of hard infrastructure,” notes Green. AECOM is spearheading all aspects of digital design tools, including virtual environmental stakeholder digital rooms and virtual whiteboarding tools for client planning sessions in the client interaction and project stakeholder realm. The use of remote sensing, drones and digital tools on-site for streamlining inspection requests, test results and approvals is also becoming more prominent, as with the pilot site at the Polihali Western Access Roads project in Lesotho.

Responding to the ongoing challenge posed by Covid-19 and the altered working landscape, Green stresses the importance of collaboration in meeting clients’ requirements in this difficult time. Face-to-face meetings, for example, have evolved into more complex remote experiences. However, technology tools and platforms are catching up. “The key is flexibility and using digital and physical tools to enhance the client experience in a tangible way through to the delivery of the project. Clients are now more digitally aware; we can provide digital twins for projects once the modelling is complete and work together to have efficient data at our fingertips,” elaborates Green.

“It is important to note that we can leverage AECOM’s world-leading skills for our clients. We can assist in more areas than one might realise – from digital engagement tools to ESG advisory to hard infrastructure and project management and controls. We strive for the flawless delivery of our projects. Considering all environmental impacts is crucial; at the core of what we do is our belief in building sustainable legacies. Sharing our significant internal data and solutions certainly allows us to build on our innovative experiences so that we keep improving and staying ahead of the pack,” concludes Green.

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Harnessing the power of ESG risk premia in systematic investing

Jessica Phalafala, Quantitative Analyst, Prescient Investment Management

Socially responsible investing (SRI) has undergone a profound evolution since its origins in colonial America, where religious groups abstained from investing their endowment funds into anything associated with the slave trade. Centuries later, it transformed into mutual funds screening out investments that were directly or indirectly associated with gambling, alcohol and tobacco.

SRI was further used as a tool to express the moral values of institutional investors and their support for historical movements. As a case in point, during the apartheid regime in South Africa, many global mutual funds screened out companies that were engaging in business in the country.

At the dawn of the 21st century came a heightened global awareness of the myriad of acute challenges we face as a planet, ranging from climate change, socio-economic inequalities, and the rise of unjust and exploitative institutions. This heightened the awareness of the need to introduce responsible investing methodologies that were significantly more extensive and far-reaching than the traditional screening approach.

The term Environmental, Social and Governance (ESG) investing was first coined by the United Nations Global Compact in 2004 and involved the systematic integration of these factors into the investment processes of financial institutions. ESG investing has since gathered significant momentum and continues to gain traction in line with the fundamental shift in investor perceptions as they recognise the material impact ESG factors can have on investment returns.

The United Nations-supported Principles for Responsible Investment (UNPRI) were launched in 2006, with just over 60 signatories representing $6.5-trillion in assets under management. Support for the UNPRI has since exploded, and now it has more than 3 000 signatories, representing $103.4-trillion in managed assets, all of whom are committed to integrating ESG factors into their respective investment processes.

This remarkable growth in ESG investing can be ascribed to the growing evidence that ESG-related performance may be a proxy for company productivity and stability, thereby providing an additional source of excess returns. Risk premia strategies have been used for decades in systematic investing as a method for harvesting excess returns.

This is achieved by investing in factors that have been proven academically and in practice to provide the investor with a positive payoff for undertaking the risk associated with each factor. Commonly used risk premia include the value risk premium, which is the excess return derived from companies that are trading at a low-price relative to their fundamental value; the momentum risk premium, which favours stocks that have displayed a sustained positive return trajectory over a given period; and the market risk premium, which is the differential between the market yield and the risk-free rate of return.

These factors have all been proven to yield higher long-term risk-adjusted returns. The overwhelming evidence confirms that using ESG factors in the portfolio construction and security selection process based on factor analysis and risk premia strategies allows investors to yield additional risk-adjusted returns.

The logic that value-creating ESG-related practices contribute to company outperformance upholds the thesis. For instance, a well-managed company that adheres to environmental and social regulations is less likely to face litigation, the higher costs associated with the management and disposal of hazardous waste and elevated employee injury rates.

Therefore, ESG factors may provide better insight into the probability distribution of company returns in the same way as the traditional risk premia incorporated in classical asset pricing frameworks. Also, ESG factors are strong candidates for inclusion in long-term factor investing. They display strong explanatory power over a wide range of securities, offer a positive payoff over reasonably long horizons, have a significantly low correlation with other factors and, above all, they make intuitive and economic sense.

In identifying ESG factors as risk premia, the systematic investor needs to move beyond traditional screening methodologies and policy implementation towards a rules-based, scalable and measurable ESG integration strategy. To do so requires practical, quantifiable metrics  that can be readily integrated into an existing investment process, together with other strategies to construct a well-diversified portfolio.

To this end, we have developed the Prescient ESG Scorecard which is an in-house risk analysis tool designed to evaluate and measure the ESG risks and opportunities associated with the credit and equity counterparties in which we invest. It is a data-driven and systematic scorecard that rates companies relative to their sector-specific peers while accounting for industry materiality and market cap biases. We employ over 60 metrics to gain granular insights into the proficiency of the ESG practices of the underlying counterparties.

Each of the metrics is conscientiously identified and selected to address a broad range of globally recognised material ESG themes. These themes include board and workforce diversity, board structure, water usage, greenhouse gas emissions and the safety of employees, to name a few. A combination of extensive ESG research, active engagement with our investees and this cross-sectional scoring tool has significantly enhanced our ability to integrate ESG into our investment process alongside the traditional risk premia we consider. It also enables us to interrogate practices that historically eluded systematic investors.

The last decade has seen ESG find a permanent place in everyday investing. Its rise in popularity has shown no signs of slowing down, with Bank of America forecasting a “tsunami of assets”, as much as $20-trillion, flowing into ESG funds in the US alone over the next two decades.

At Prescient, we believe it is  our responsibility to preserve our clients’ capital by deploying it in a manner that promotes sustainability and delivers on our goal to achieve superior risk- adjusted returns. We accomplish these two goals by managing absolute and relative downside financial risk, as well as non- financial operating risk. We consider ourselves well-equipped to deliver on these twin objectives given our comprehensive responsible investing philosophy and approach, as well as our expertise as a seasoned systematic investor.

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AECOM ranked No. 1 by Fortune magazine as World’s Most Admired Company in its industry

Premier infrastructure consulting firm AECOM has ranked No. 1 on Fortune magazine’s list of the World’s Most Admired Companies in their industry. This is the seventh consecutive year that the company has been recognised on the list.

“Leading Fortune magazine’s World’s Most Admired Companies list in our industry highlights our employees’ ongoing dedication, resiliency and innovation in delivering transformative solutions, especially amid the uncertainties of the past year,” comments AECOM CEO Troy Rudd.

“Behind our Think and Act Globally strategy, our professionals deliver exceptional quality services and technical expertise for our clients, building on our strong financial performance and creating value for all our stakeholders.”

AECOM CEO Troy Rudd

Despite the challenges presented by the coronavirus pandemic, last year AECOM continued to deliver to their clients, employees, communities and stockholders, resulting in a strong financial performance that exceeded guidance on nearly every key financial metric. AECOM’s teams mobilised quickly and safely to lead the industry in disaster response and developed innovative digital consulting solutions that continues to increase engagement and streamline processes critical to economic and social recovery.

AECOM’s multidisciplinary approach makes them unique on the continent, ranging from cost management to quantity surveying, engineering and environmental services.

“Adding value to clients by providing them with the necessary solutions to navigate the current crisis has never been more critical.”

Darrin Green, AECOM Africa MD

Significant investment in digital innovation and remote working is enhancing AECOM’s flexibility and adaptability. This includes bespoke tools such as AECOM’s Environmental Engagement platform to streamline environmental documentation and stakeholder engagement. Their Virtual Public Consultation Tool enables virtual community engagement in an interactive online platform.

Together, these solutions provide powerful support to clients managing existing and future projects through the key planning and approval gates. “The end result is a much better understanding of what projects will go forward and where we need to relook at projects in terms of either budgetary constraints or different drivers due to the pandemic,” comments Green.

Additionally, as a leading Environmental, Social and Governance (ESG) firm, AECOM last year continued to partner with clients in advancing sustainable solutions, set their own Science-Based Targets initiative (SBTi), approved emissions reductions targets and launched the Thrive with AECOM initiative to further their commitment to equity, diversity and inclusion.

Fortune collaborated with management consulting company Korn Ferry on the survey of corporate reputations. The survey determined the best-regarded companies by asking executives, directors and analysts to rate enterprises in their own industry on nine criteria; from investment value and quality of management and products, to social responsibility and the ability to attract talent.

The complete World’s Most Admired Companies list and details on the methodology can be found on the Fortune website at: https://fortune.com/worlds-most-admired-companies/.

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