Sasol emits more greenhouse gases than any other private sector company in South Africa. Only Eskom accounts for more.
The company’s coal-to-liquids plant in Secunda is the world’s biggest single-point emission source. Sasol’s local operations emit more greenhouse gases annually than the entire economies of Denmark, Sweden or Switzerland.
In a world increasingly aware of the urgency of dealing with the climate crisis, this puts the company at material risk. South Africa has to manage down its greenhouse gas emissions, and that means that it has to manage Sasol.
“Sasol is not just a high carbon-emitting company,” says Tracey Davies, executive director of Just Share. “It is one of the highest carbon-emitting companies on the planet.
“And what shareholders are starting to understand is that – the impact on climate change aside – this poses a huge risk to their investment in Sasol, because the world is changing so fast and Sasol is simply not keeping up with those changes.”
Incentive for action
There doesn’t, however, appear to be much sense of urgency from either the company or government to address this impending threat. Sasol has been granted a carbon budget that actually allows it to increase its local greenhouse gas emissions. That being the case, there is no real government incentive for it to act.
Although the country did introduce a carbon tax law in May this year, many observers feel that the effective rate that companies like Sasol will actually have to pay is too small to force urgent changes to their behaviour. This may, however, change in time.
“While the new carbon tax is going to start off relatively low, the intention is for it to escalate over time and so it could ultimately prove to be burdensome,” notes Izak Swart, director of global investment and innovation incentives at Deloitte Africa Tax & Legal. “It is clear that environmental accountability is the new normal, and companies must begin looking for innovative new ways to reduce their emissions footprint now or risk suffering the consequences in the future.”
The challenge for Sasol is that it’s not clear how much it can do when it comes to Secunda.
“Sasol probably has two options,” says David Couldridge, head of ESG (environmental, social and governance) engagement at Investec Asset Management. “One is to shut down Secunda completely – although that is not going to happen in the short or medium term. The second is technology such as carbon capture storage, which is not fully proven and will be very expensive.”
South Africa’s soil is also very porous, making storage an even more unlikely possibility.
Neither of these options might therefore sound attractive, but ultimately Sasol cannot expect a free pass. There is no scenario under which it continues to operate Secunda indefinitely in its current form. At some point, something will have to change.
What is the plan?
“The discussion is not around shutting Secunda tomorrow,” Davies explains. “That is not the plan. But we do need to know what the plan is, and we don’t have that at the moment.”
This is the frustration that many of Sasol’s shareholders are starting to express: that the company has not publicly presented a comprehensive and credible strategy that shows how it is dealing with the very real risks it faces.
“These types of decisions, which are extremely complex, take real leadership to decide what is going to be in the best long-term interests of the company, and the country,” says Couldridge.
What complicates this matter further is that Sasol is South Africa’s biggest corporate taxpayer, and one of the country’s largest employers. Those are not factors that can simply be ignored when discussing solutions.
“The most material risks we face in this economy are unemployment, poverty and inequality,” notes Jon Duncan, head of responsible investing at the Old Mutual Investment Group.
“Climate change is a massive risk multiplier of those issues, but I think the key for us as a developing economy is how we manage a just transition.”
In other words, forcing Sasol to reduce its emissions cannot be a decision taken in isolation. There must be recognition of how it affects the people it employs, the profits it makes, and the returns it generates for its shareholders – two of the biggest of which are the Government Employees Pension Fund and the Industrial Development Corporation.
“That’s what makes the long term prospects for Sasol so complicated,” says Duncan. “Given that government is a big shareholder, and that Sasol is such a big employer, it is going to take quite a lot of political will to steer the Secunda business towards the sunset.”
Lack of urgency
However, just because there has to be a trade-off doesn’t mean that Sasol won’t need to address its emissions. Particularly if there is a change of government, or if global action to mitigate climate change escalates suddenly due to unforeseen factors, Sasol’s operations would be at risk.
“We are now, I think, seeing a shift in understanding among South African institutional investors that Sasol can’t carry on doing what it’s doing just because it employs thousands of people,” Davies says. “There has to be a process whereby Sasol explains how it is dealing with this massive risk to its sustainability. It’s not enough just to say we employ lots of people and we pay lots of tax, so leave us alone.”
That urgency, however, is not yet present. The phasing out of Sasol’s coal-to-liquids operations is not a priority at country level, since it is not part of the obvious first steps that South Africa should be taking to reduce its overall carbon emissions.
“Coal-fired power plants are the low-hanging fruit,” explains Allan Gray ESG analyst Raine Naudé. “A lot of them are already old, and so the least-cost transition is to take the coal power offline first.”
Eskom’s greenhouse gas emissions are, after all, three times those of Sasol.
The next logical step would be to promote the uptake of electric vehicles that could then be charged off a greener grid. It makes no sense having electric vehicles running off coal-fired power, so these two really go hand-in-hand.
It is only then that phasing out Sasol’s coal-to-liquids operations might be prioritised, and that may only happen around 2040 or 2045. If Sasol is modelling this outcome, that means it may feel comfortable that Secunda can continue in its current state for another two decades at least.
That means that there is presently not much incentive for the company to act in the near term. That may be leading to a lack of urgency and focus within Sasol, and this is causing investors a lot of frustration.
A number of the large asset managers that are big shareholders in the company note how ongoing engagements – around trying to secure better disclosure on carbon emissions, explanations for why and how these metrics move, and more clarity on mitigation strategies – are not realising the results they would like.
Some have said that while they are continuing to push these discussions, the lack of positive response from Sasol is driving them closer to a decision to disinvest.
That is something of a drastic option, because Sasol’s weight in local indices and the fact that it is the only energy company of meaningful size listed on the JSE makes it an important part of many portfolios. It is extremely difficult for asset managers to ignore it completely.
Disinvesting would also mean moving away from any hope of influencing the company’s direction. For Naudé, it is better to keep trying to make improvements than to walk away.
“You can argue about whether it’s translated into action, but at this stage we just have to keep going,” she says.
It is clear that whoever the company’s shareholders are, they will have to play a big oversight role. But as Duncan notes, this is an extremely difficult issue to manage.
“It is a wicked problem,” he says.
“Liquid fuels are an important part of the South African economy, as we are all still users of liquid fuels for our transport needs.
“So we need to really think carefully around what is the right way to support this organisation to clean up its act and slowly transition its business model away from liquid fuel use in a fossil fuel-driven economy.”
These challenges, however, shouldn’t prevent action. As Naudé says: “The enormity of the problem can’t stop us from moving forward.”