The shift towards more nationalist politics in the recent European parliamentary elections has caused markets to price in a move away from green pledges made in recent years by some of Europe’s largest economies, says Schroders, one of the UK’s largest asset managers.
Kondi Nkosi, the head of Schroders in SA, said the consensus position was that the European-level push for a green industrial policy would be nixed.
“That has a huge implication on potential long-term returns due to the effect of rising temperatures on different countries, and the impact that it has upon output and productivity. If you don’t have Europe leading on the climate agenda, and you therefore slow down the move to dealing with climate change, it has implications for long-term returns and some companies,” Nkosi said.
“There will be some winners and losers in a way that we haven’t had over the past 15 years, in which you’ve often seen very high correlation within sectors.”
Nkosi said Schroders, which has more than £750.6bn (R17.5-trillion) in assets under management, was seeing discounts in some areas as the global market was already pricing in a move away from green pledges.
“For the property sector this could be things such as flood risks. For insurers it could mean having to pay out a lot more than they have previously for certain climate-related events,” Nkosi said.
Insurance major Allianz earlier this year warned that some risks associated with climate change were exceeding the capacity of insurers to take them on their books.
The Munich-based group, which has recently partnered with Sanlam in Africa, said in a research note that 2023 was likely to be the fourth consecutive year in which insured costs from natural disasters worldwide exceed the $100bn mark.
That Schroders is pricing in a retreat in green pledges raises questions for SA’s more than R1-trillion just transition blueprint.
SA’s cabinet approved the Just Energy Transition Implementation Plan (JET-IP), which sets out several interventions and investments needed for the country to transition into a low-carbon and climate-resilient economy. The success of the JET-IP will depend on the scale and availability of concessional finance.
International Partners Group (IPG), which includes Europe’s economic powerhouses Germany, France and the UK, with the US have pledged more than $9.3bn to help SA’s just transition efforts.
June’s election left the European parliament more fragmented and more conservative than before. In the US, Donald Trump, the front-runner in the race to win the White House in November, has already said he would renege on a $3bn pledge by the US to a global fund meant to help developing countries cut emissions and adapt to climate change.
Azad Zangana, senior European economist and strategist at Schroders, said Europe’s biggest mistake in the past decade was focusing “too much on carbon pricing — the ‘stick’ to punish people for using fossil fuels”.
Zangana said: “One thing that we learnt with the introduction of the Inflation Reduction Act in the US was that subsidies are more popular than taxes. They do exactly the same thing: close the gap between the cost of renewable energies and fossil fuels.
“The EU’s carbon border adjustment mechanism is a potential fix, especially if we can see some multilateral agreement here. It’s encouraging that the UK, Canada and even the US are also looking at similar schemes.”
The mechanism — known as CBAM — is the EU’s tool to put a fair price on the carbon emitted during the production of carbon-intensive goods that enter the EU. It is due to be phased in from 2026 to 2034 and will initially cover imports of iron and steel, cement, aluminium, fertiliser, hydrogen and electricity. The EU is SA’s largest trading partner.
The SA Reserve Bank has already warned that CBAM could slash SA’s exports 10% by 2050, wiping out about 2.6-million jobs.
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