Are net-zero goals realistic for South Africa?

By Vanessa Mathebula – Quantitative Analyst at Prescient Investment Management

The much-anticipated COP26 is fast approaching. This is the 2021 United Nation’s Climate Change Conference, where each participating country, including South Africa, is expected to set more deliberate and ambitious climate change goals.

With the introduction of the Asset Manager’s Net Zero Agreement, fund managers globally are also now able to join the movement. Interested parties can pledge their commitment to playing an active role in supporting similar climate change goals to those of the respective countries by 2050 or earlier. Globally, there are already great initiatives in place, such as green financing solutions (e.g., green bonds), but, given our many macro-economic challenges, where do we stand as a country? Can we realistically move to the same rhythm as the global players?

Committing to advancing the goals of the Paris Agreement shows our willingness to collaborate and play an active role in achieving climate-related goals. However, we might have bitten more than we can chew, especially given the expectations of upping the ante in the upcoming COP26.

Fossil fuels are still a crucial driver of the SA economy

As a country, we rely on fossil fuels. For instance, coal continues to be the primary energy source as it caters for about 77% of South Africa’s energy needs, according to the Department of Mineral Resources and Energy. Furthermore, no material changes in this trend are expected in at least the next two decades. Unfortunately, the coal dilemma stretches wider than the obvious coal mining industry.  As per the ripple effect theory, many other industries are, in fact, reliant on fossil fuels. 

Aside from the obvious coal mining and electricity-generating companies, transportation (e.g. Transnet as it transports coal) and financial sectors can also be indirectly linked to the coal industry. This, therefore, means that the majority of South Africa’s productive economy can directly or indirectly be linked to fossil fuels.

Admittedly, there are initiatives in place that are meant to shift the country to ‘greener pastures’. However, the transition to these alternative forms of climate-friendly options is relatively slow.  For instance, PWC’s Net Zero Economy Index shows South Africa is making minimal progress in decoupling emissions from GDP.

The country’s fundamental developmental challenges remain the main culprit. Not only do we lack the necessary infrastructure to enable such a transition, but the cost implications, especially for an overly indebted country like South Africa, coupled with the politics associated with such decisions, are other hurdles that cannot be ignored. We are, therefore, forced to acknowledge our shortcomings as a country and find ways to engage and promote realistic change.

In line with the Net-Zero goals, if asset managers were to restrict exposure to fossil fuel-linked companies and instruments materially, diversification and bottom-line investment performance would be materially affected. For instance, buying South African government bonds would be a questionable exercise as some of the proceeds are channeled towards assisting state-owned entities closely linked to the coal industry – e.g. Eskom. Bank paper would be questionable, too, as the average investor has no insight into the portion of the bank’s lending activities that are linked to the fossil-fuel industry.

This highlights the challenges we face as a country that still relies heavily on fossil fuels. Therefore, we are left with the question of whether we can materially limit exposure to the affected sectors without introducing any major adverse implications to the bottom line? Probably not! At least not any time soon, given the country’s sluggish progress towards introducing greener alternatives. However, this does not imply that we cannot take smaller strides each day towards having an overall positive impact from a sustainability standpoint.

A net positive contributor approach is a good start

One of the ways we can realistically advance towards achieving our sustainability goals, given the challenges we face, is to adopt a net positive contributor approach to overall Environmental, Social and Governance (ESG) factors. Not only does this enable us to factor climate-related factors into decisions in a less restrictive manner, but it also enables us to consider other sustainability factors, such as the social aspect, which is crucial for a country with a history of inequality like South Africa.

For instance, if we consider Eskom through a purely Net-Zero lens, no investor would touch it. However, once we accept that it is currently the primary producer of electricity, and thus supports economic activity countrywide and employs a notable portion of the country’s workforce, the scale would probably tilt to the positive for such a counter, keeping everything else constant. 

At Prescient, we continuously seek to invest in net-positive counters. We assess the overall contribution of a given counter from an ESG risk and opportunity perspective based on our in-house developed ESG risk scoring tool, the Prescient ESG Scorecard. The scorecard is quantitative and free from human biases. The derived scores are based on over 60 metrics and are free from sector and size biases as we also factor sector materiality and adjust certain metrics by the market cap of the given counter. The scorecard output is integrated across investment teams enabling us to play an active role in moving towards sustainability as we tilt our investments towards net positive contributors. Of course, this is nowhere close to where we want to be from an overall sustainability perspective. We, therefore, continue assessing how viable it is for the local market to transition to a comprehensive Net-Zero approach. Until we reach a point where this is possible, we will continue the search for greener alternatives that don’t undermine the economy at the expense of South African society.

View more

MEC Ivan Meyer on celebrating Desertification and Drought Day

17 Jun 2021

Protecting and restoring our natural ecosystems will boost our economy

Today, the Western Cape joins the United Nations member states to celebrate Desertification and Drought Day.

“By doing so, we place the spotlight on the state of our land, without which it will be almost impossible to have a productive agricultural sector,” says Western Cape Minister for Agriculture, Dr Ivan Meyer.

The Western Cape experienced the worst drought in centuries during 2015-2018.

Average rainfall has since returned in wetter regions, but the impacts on agriculture will be felt for several years. In some parts of the arid and semi-arid Karoo and West Coast, the drought persists even though some rainfall this year has brought relief. Drought causes widespread plant mortality, loss of grazing and can lead to soil erosion.

It also causes stock watering points across the landscape to dry up. Livestock farmers were especially hard hit.

According to Climate Change and Risk Assessment Scientist Professor Stephanie Midgley of the Western Cape Department of Agriculture’s Programme Research and Technology Development Services, the climate experts of the University of Cape Town confirm that the drought was three times more likely because of climate change.

Midgley: “Relentless warming coupled with increasingly variable rainfall will increase the risks of drying soils and vegetation, resulting in land degradation and soil erosion, especially in the rangelands. As a result, more multi-year severe droughts may become part of the future that farmers must plan for. However, the Western Cape Department of Agriculture (WCDoA) has a roadmap to mitigate these risks, the SmartAgri Plan.”

Midgley continues: “Two priority projects will contribute directly to building resilience against desertification. Firstly, restored ecological infrastructure for increased landscape productivity, socio-ecological resilience and soil carbon sequestration (focus on more arid areas). Secondly, collaborative, integrated catchment management improves water security and job creation (i.e. clearing invasive alien plants). These and other climate-smart actions are already being implemented.”

Ashia Petersen, Director for the Department’s Programme Sustainable Resource Use and Management, highlights that invasive alien vegetation is a significant threat to land degradation.

Petersen: “By competing with indigenous vegetation, alien vegetation reduces biodiversity and increases soil erosion.”

Meyer says that his Department has invested R21 million in 2020/21 and R29 million in the 2021/22 financial years respectively towards ecological infrastructure to create functioning ecosystems.

Meyer: “As a result, 34 352 ha of invasive alien vegetation was cleared, and 1101 green jobs created.  Clearing the land of invasive alien vegetation prevents soil erosion and the loss of biodiversity.”

Petersen: “Our area-wide ecological planning and fencing in the Koup area of the Central Karoo enable sustainable land-use management practices.  In this area, WCDoA has constructed 110 km of fencing that resulted in positives – both environmentally and economically. The erection of the fences allows for rotational grazing that prevents the degradation of the Karoo veld and has seen lambing percentage increase by 400%.”

The construction of stock-watering systems prevents land degradation and allows for grazing throughout the landscape. Having the systems prevents overgrazing of the veld, and farmers can thus avoid the destruction of the veld, which mitigates the impact of droughts.

In the last ten years, the Western Cape has experienced at least three disasters per year. These include the current drought experienced in the Central and Little Karoo and the northern parts of Matzikamasome. As a result, bi-annual veld assessments are performed to monitor and evaluate the condition of our veld continuously. These assessments form part of our baseline data. In addition, they serve as early warning systems that support our decision-making process in identifying the areas needing drought fodder support and the frequency of fodder support.  Fodder support is critical as it prevents over-grazing of the natural veld and ecological disturbance that could result in land degradation.

Meyer: “As a result, the WCDoA has supported approximately 2658 farmers with a budget of R450 million over the last five years.”

Meyer continues: “Preventing further land degradation requires awareness among our stakeholders.  The WCDoA does this through capacity building interventions such as farmer days and workshops. In addition, our Junior LandCare programme plays a critical role in developing awareness and addressing issues that directly impact healthy ecosystems.”

“Investing in activities that protect and restore natural ecosystems will boost the recovery from Covid-19 for communities and the economy of the Western Cape,” concludes Meyer.


View more

Accelerating the development of the battery manufacturing value chain in South Africa

View more

Agrifood challenges and opportunities before and far beyond a global pandemic

According to the joint report issued by the Food and Agriculture Organisation of the United Nations, the International Fund for Agricultural Development, UNICEF, the World Food Programme and the World Health Organisation, almost 690-million people around the world went hungry in 2019.

Continue reading View more

As more go hungry and malnutrition persists, achieving Zero Hunger by 2030 in doubt, UN report warns

Securing healthy diets for the billions who cannot afford them would save trillions in costs.

Continue reading View more