The release of Sasol’s long-delayed annual results last week contained a lot for investors to deal with. The most immediate was the decision to relieve the company’s joint-CEOs of their duties.
Sasol also, however, published something concerned with much longer-term realities – its first climate change report that addresses how the company is managing the many challenges it faces in a transition to a low carbon economy.
This is something many shareholders have been asking for, and for quite some time. At its 2018 AGM Sasol refused to allow a shareholder resolution that would have compelled it to detail how it was positioning itself to meet the Paris Agreement goals of keeping the global temperature increase to below two degrees Celsius above pre-industrial levels.
This is particularly critical to Sasol because it is the second largest emitter of greenhouse gases (GHG) in South Africa after Eskom. Its Secunda coal-to-liquids plant is the biggest single-point emissions source anywhere in the world.
Over the past few years, however, investors have been growing increasingly concerned that the company has not produced credible acknowledgement of the risks this poses. This is not just about being a good corporate citizen by reducing emissions. If regulation either forces Sasol to dramatically cut its emissions, or places a heavy tax on carbon, aspects of its operations would become unsustainable.
The climate change report is therefore an important first step towards a more frank engagement with stakeholders about where the company stands, and how it intends protecting value by shifting to lower carbon-intensive businesses, looking at alternative feedstocks and investigating new processes to reduce emissions.
“It is a meaningful improvement in disclosure,” says Raine Naudé, ESG (environmental, social and governance) analyst at Allan Gray. “They incorporated quite a few of the disclosure recommendations we requested last year.”
Tracey Davies, executive director of Just Share, which was one of the primary drivers behind the 2018 shareholder resolution, has also welcomed it.
“It acknowledges very clearly the risks to the business and it is very clear on the extent to which Secunda is the primary driver of those risks,” Davies says. “It covers a number of the elements that we asked for, like the impacts of climate change, the potential risks from policy changes and domestic law changes.”
Staying below two degrees
However, the core part of the shareholder resolution was the request for Sasol to detail how it is managing its operations in line with a ‘two degree world’. Although the climate change report does map two future scenarios, neither is explicitly in line with the Paris goals. This is despite Sasol being more categorical about the science of climate change than Davies believes it has ever been in the past.
“The scientific evidence for warming of the global climate system is unequivocal,” the report notes. “Measurable variations in the environment are being seen due to changes in GHG levels.”
Sasol also acknowledges that as the world transitions to a low carbon economy “business as usual is no longer possible”.
“Our business, particularly in South Africa, will be impacted in multiple ways,” it states. “These include potential changing demand for our products, new policy requirements, higher costs from the transition to a lower-carbon future and physical climate change impacts on our operations.”
The company therefore sets two key goals. The first is to reduce its GHG emissions in South Africa by 10% by 2030 from a 2017 baseline. The second is a 30% energy efficiency improvement by 2030 from a 2005 baseline.
Is it enough?
These are important because they are measurable and provide something by which shareholders can hold the company to account. However, not everyone is convinced that they are meaningful enough.
“They say the 10% reduction is based on what they can feasibly do from a technology and efficiency point of view,” Davies explains.
“But we don’t want to know what they think is easy to do, we want to know what they have to do if they are going to comply with what was agreed in Paris.”
The reality, which Sasol still appears to be skirting, is that in the not-too-distant future it may not be up to the company what its emission reductions should look like. It may be forced into far more aggressive cutting.
“This target must be set against the [UN] Intergovernmental Panel on Climate Change’s implied goal of reducing emissions by 50% by 2030 off a 2010 baseline – which shows the Sasol target is woefully inadequate,” argues David Le Page, vice-chair and co-ordinator at Fossil Free South Africa.
This is a part of the report that is missing – what are Sasol’s plans if regulation becomes much more hawkish? Does it have a plan to deal with this kind of major disruption to its operations?
The Secunda headache
This is particularly relevant for Secunda – because, of the 66.6 kilotons of GHG emissions Sasol was responsible for in its last financial year, 56.5 kilotons (84.9%) came from this single source. The risks to Secunda are therefore immense.
However, this is, as Sasol points out in its report, an enormously complex problem because of its broader importance:
“Our Secunda Operations have a significant positive socio-economic contribution in South Africa – this necessitates finding and developing a balanced approach in mitigating our emissions,” the report states. “Sasol’s Secunda Operations connects with a number of stakeholders as we are a significant employer, supplier and customer, with millions of people relying on us for their energy needs. Meeting those energy needs is vital to economic growth and development in South Africa. In recognising our responsibilities, we also recognise the imperative of reducing our GHG emissions.”
What complicates this issue further is that Sasol appears to acknowledge that meaningfully reducing emissions from this coal-to-liquids plant in its current form is impossible. It hopes to reduce its footprint by looking to produce more renewable energy to run the plant, but there’s not much else it can do. Carbon capture and storage technologies may be feasible, but are expensive and still being investigated.
‘There has to be a process’
If that is the reality, then Sasol really faces only two options. Either it will have to shut down Secunda at some point, or the plant will have to be reconfigured to do something completely different, with a much lower GHG profile.
The report does not, however, go this far. Sasol still appears to be working on the assumption that it can continue to operate Secunda with only marginal improvements.
“It’s difficult for anybody to contemplate the closure of a huge piece of their business, so you can understand why that’s a tricky thing for them to grapple with,” Davies says. “But there has to be a process.”
Sasol has committed to producing an emission-reduction roadmap by November next year, in which it will detail how it will reach its reduction goals over time. Dealing with Secunda has to be a critical part of this.
“If that roadmap doesn’t set out a credible plan to significantly reduce emissions from Secunda, that is going to be a real problem,” Davies believes. “That is what everyone is going to expect from that report. That will tell whether they have a real plan for Secunda or if they are just kicking the can down the road.”
What shareholders will find encouraging, however, is that Sasol committed to including climate change targets in management incentive structures from next year. The company’s bosses will therefore be judged directly on how well they deal with these issues.
“There is a very strong sense among the responsible investment community globally that you have to link targets to executive remuneration to stand any chance of achieving them,” Davies says.
Perhaps most encouragingly, the company’s management has also taken the opportunity that the report has afforded them to engage with major shareholders about what it contains. Given the frustrations that many institutions have recently expressed with Sasol’s lack of openness on climate risks, this is probably the most important development of all.
“They followed up on this report proactively by calling shareholders to discuss it,” Naudé points out. “Of course there is still a lot of work to be done, but I think this is a positive step.”