Institutional investors must play their part in driving real world decarbonisation

By Nicole Martens, Head of Stewardship at Old Mutual Investment Group

The slow progress made by countries towards their net-zero carbon emissions targets has left us questioning government and private sector commitments to combating climate change.

However, at COP26 and COP27, we finally saw a shift from talk to action. The world finally realised that the climate emergency is no longer in the distant future – it is already here, as evidenced by the increasing frequency and severity of extreme weather events. The building blocks needed to address climate-related challenges at scale have taken time to develop amidst a collective sense that we are living through an era that offers us our last chance to change the course of the climate crisis.

South Africa is under tremendous pressure globally to make our just energy transition work. We are seen as a pilot for other emerging market transitions. If we fail, we could be robbing other countries in Africa of their opportunity, with international financiers unlikely to commit to mega projects elsewhere if they cannot get things working in one of Africa’s most advanced economies.

The just energy transition’s success hinges on all South African stakeholders playing their part in the overarching plan – to show the world what is possible. All South African institutional investors are universal owners of SA Inc – each of us owns a little bit of everything. When SA Inc does well, we all do well. If SA Inc suffers, we all suffer.

As such, capital markets have a critical role to play in supporting the drive towards the achievement of a just transition to a more sustainable and inclusive economy. The JSE has made significant advances in listed company disclosure requirements and reporting frameworks to encourage transparency. Science-based measures for decarbonisation make it easier for investors to track progress on ESG factors and effect behavioural change in investee companies through solutions-focused stewardship.

Old Mutual Investment Group (OMIG) has witnessed a rapid acceleration of climate-related initiatives by listed companies over the past decade in response to unprecedented pressure from customers, government, regulators, and shareholders (including ourselves) to do better when it comes to the environment and society. For OMIG, it is now expected that listed companies should have in place and disclose their plans to transition and commit to regular communication of progress made on emissions reduction, net job creation and socioeconomic impact assessment.

We need to be working toward economic decarbonisation, not just portfolio decarbonisation. To have a real impact, investors must engage with the companies in which they invest to ensure they have plans to reduce their carbon dependencies over time – while keeping an eye on transition strategies on things like poverty, unemployment and inequality.

There are some unique challenges to listed equity stewardship in South Africa with its relatively small financial market and an even smaller universe of investible listed equities. Further complicating matters, the Capped SWIX benchmark is far from aligned with the national net-zero target.

OMIG is doing its part to address this constraint by building a local (South African) net-zero benchmark, which will be launching early in 2023. This will allow us to use capital allocation to incentivise change.

As stewards of our clients’ capital, we are responsible for guiding companies as they transition to net zero carbon emissions, helping them to identify and mitigate risk, and take advantage of opportunities.

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