International investors are becoming increasingly hesitant about allocating money to emerging market equity funds, a phenomenon that could reduce future capital allocation to SA’s listed equities should they fail to implement sufficient measures to reduce their carbon footprints.
That is the view of John Green, chief commercial officer at Ninety One, the London and Johannesburg-listed fund manager whose assets under management (AUM) reached £143.9bn (R2.9- trillion) for the year to end-March 2022. With about 65% of that AUM stemming from asset allocators in non-SA markets, predominantly in North America, the UK, Europe and the Asia-Pacific region, Ninety One is well-placed to say on the prevailing shift in international investor sentiment at a time of heightened climate change awareness.
Ninety One’s analysis of the carbon intensity of various MSCI indices shows that emerging market companies are on average far heavier carbon emitters than their developed market counterparts. The weighted average carbon intensity of the MSCI Emerging Markets index shows that companies included in the index typically emit 276.9 tonnes carbon dioxide emissions per $1m of revenue. That compares to a world average (which incidentally includes emerging markets) of 133.2-tonnes carbon dioxide emissions per $1m of revenue.
“Many asset owners have set aggressive portfolio carbon reduction targets and now they’re finding themselves between a rock and a hard place because they’re struggling to achieve them,” Green told Business Day. “As a result many are becoming increasingly hesitant to invest in emerging market equity portfolios because they feel they’re too carbon intensive. In fact, we have had asset owners indicating that they want to divest from emerging markets because it’s a quick fix to meet their portfolio carbon reduction targets.”
Green visits institutional investors in North America and Europe at least once every quarter and the Asia Pacific region every six months, an ideal vantage point from which to assess the shifting mood of private sector capital pools. Based on that experience he says European institutional investors and insurers are leading the global climate awareness through the Net Zero Asset Owners Alliance with the UK, Canada and Australasia after closely.
“In the US it depends what state you’re in,” he said. “The US is a lot more fractured and state dependent but it’s definitely happening in certain areas. California is very proactive but interestingly Florida is less enthusiastic.”
SA banks and asset managers are coming under increasing pressure to limit funding for carbon-intensive projects such as coal mines as international investors, particularly in industrialised regions such as the EU, place a greater emphasis on how their capital allocation may affect climate change. Nevertheless, Eskom is heavily dependent on coal to fire the vast majority of its ageing fleet of power stations which supply the vast majority of SA’s electricity.
The Blended Finance task force and the Centre for Sustainability Transitions at Stellenbosch University released a study in May saying SA would have to spend about $250bn (R4.5-trillion) over the next three decades to transition its coal-reliant economy to green energy.
“Emerging markets like SA face a lot of risk of capital withdrawal because we’re carbon heavy,” said Green. “We might not have enough electricity but we’re still very carbon heavy in our generation. As part of the process of fixing our power generation issues we also need to fix the power mix otherwise we risk putting our companies at a disadvantage.”
Yet SA companies are slowly beginning to step up their efforts to reduce their carbon intensity. In July pulp and paper manufacturer Sappi became the fifth SA company to have its carbon emission reduction target of 41.5% per tonne of product approved by the Science Based Targets initiative. Nedbank and FirstRand have made commitments to cease financing for new coal projects while Anglo American has begun rolling hydrogen powered trucks to reduce its carbon intensity.
But even so, Standard Bank has faced criticism for its involvement in the east African Crude Oil Pipeline though the lender told Business Day last month that it was unlikely to finance more than $100m of the project’s estimated cost of $4bn-$5bn, should it decide to participate in the financing.
However, Green cautions that global capital allocators are re-examining emerging markets’ contribution to carbon emissions as investing for climate action becomes more intensive. As global climate concerns become more severe so too will be the stringency with which these international capital providers view companies efforts to decarbonise.
“Private sector capital is saying at the portfolio allocation level that carbon levels have to be reduced,” said Green. “If you’re a company that exports or accesses global capital markets and you don’t have a transition plan, or are at least working on one, it’s going to become very difficult for you in the next five years, particularly if you’re in a carbon heavy industry.”
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