South Africa saw climate risk-related resolutions tabled for the first time on May 30 at the Standard Bank annual general meeting (AGM). The first resolution called on the bank to prepare a report on its exposure to climate risk in its lending, financing and investment activities. The second resolution called on the company to adopt and publicly disclose a coal power and mining lending policy. These resolutions, the first of their kind to be tabled by a South African listed company at its AGM, are a significant step in local shareholder activism on climate change.
While the majority of shareholders voted against the first resolution (62%), the second resolution received the support of 55% of the shareholders and is therefore binding on the company. The move may have set a new precedent and the industry can expect to see more shareholder resolutions and activism of this kind this year, as well as on other ESG-related issues. Despite the first resolution not being passed, the listed markets will nevertheless be forced to contend with one aspect of climate risk through the newly gazetted Carbon Tax Bill, which comes into effect from June 1, onwards. Ten years in the making, the Carbon Tax bill sends an important signal to the markets that the direction of travel is towards long-run decarbonisation of growth.
The Standard Bank resolution indicates that environmental, social and governance (ESG) issues will increasingly be showing up on the corporate agenda. The fact that climate risks were raised at a large corporate’s AGM shows that stakeholders and shareholders alike recognise that the risk associated with transitioning business models to align with a two-degree Celsius future are material. For long-term investors, having transparency on this risk is not an unreasonable request, and so we expect that the climate change debate in South Africa will gain further traction going forward. Additionally, we expect greater consideration of these risks in the context of how our national energy system is planned, rolled out and capitalised.
The risks posed by climate change can be seen through the lenses of physical risk, technology/ disruption risk and tax/legal risk. Importantly, climate risk is a social risk multiplier and given the triple social challenges faced by South Africa of poverty, inequality and unemployment, it is critical that these knock-on risks are considered. The climate models for South Africa predict that the country will generally get drier in the west and wetter in the east with higher intensity weather events. We have witnessed the effects of the droughts in Western Cape and recent flooding in the KwaZulu-Natal and the Eastern Cape and so, have first-hand experience of how these events impact the vulnerable, let alone industry.
In the Old Mutual Investment Group’s recently published Responsible Investment report, it is flagged that the remainder of 2019 will see a greater amount of shareholder proposed resolutions at company AGMs coupled with more vocal pushback from civil society organisations to corporate responses on ESG issues. Following the events relating to the Standard Bank AGM, the pressure that was applied to Standard Bank is sure to flow over to other companies and, from an ESG perspective, this should be seen as a positive move for the entire country.
The industry is starting to realise that the large asset owners will need to transition their asset registers and pay greater attention to the carbon intensity of their investment portfolios. While it might seem like applying climate risk factors into investment portfolios are timely and costly, the longer-term costs of not implementing this approach is far higher. It simply has to be done in terms of long-term portfolio returns.
The retail market in South Africa is also waking up to the fact that it can, and should have, a choice when it comes to how investments are managed. Our expectation is that there will be growth in demand for ESG-themed investment products and coupled with this, innovations in this area.
The new paradigm of investing requires a shift from balancing risk and return to balancing risk, return and impact. The climate change debate is an important one and as asset managers, we have to continue to actively engage with investee companies to reduce investment risk and, additionally, seek further opportunities to build out investments in the low carbon and renewable energy sectors.
Jon Duncan is the head of responsible investment at Old Mutual Investment Group.