May 18, 2022
Since 1990, just 100 global companies were responsible for 71% of the world’s greenhouse gas emissions, according to data from CDP. Last November, more than 1000 companies collectively worth some US$23 trillion set emissions-reduction goals that line up with the Paris Agreement. Additionally, US$130 trillion in assets under management are committed to net zero by 2050 under the Global Financial Alliance for Net Zero (GFANZ), an independent body unifying private sector net-zero finance initiatives.
In June last year, Ninety One committed to ensuring that our portfolios achieve net-zero emissions by 2050 and became signatories of the Net Zero Asset Managers Initiative (NZAMI). But while net zero is the critical 2050 goal, we need to see tangible progress in the shorter term. Therefore, managers that have committed to NZAMI are also required to set a 2030 commitment.
Scientific analysis recommends a 7.6% per year reduction in emissions – or 50% by 2030 – to provide a greater than 50% probability of limiting global warming to 1.5°C. While we can point to laudable commitments, examples of short-term progress on emissions are few and far between. The reality is the transition will not be linear or simplistic, especially for companies in carbon-intensive emerging market economies. When one accounts for the complexity that socio-political, historic and economic context add to the carbon-reduction equation, it is clear that not all carbon is created equal, and net zero will for many not be a simple path.
We believe that remaining invested in the high carbon emitters in our existing portfolio, specifically those in emerging markets, is the right thing to do. It is not about where a company’s carbon position is today – rather it is about their willingness and ability to change. In contrast, divesting from high emitters to cleanse a portfolio does not contribute to real-world decarbonization.
The good news is that we are starting to see corporates in emerging markets taking the transition seriously, with many pledging to achieve net-zero emissions by 2050. They even include companies from the hard-to-abate industries, like cement manufacturer PPC, paper and pulp producer Sappi, and Sasol.
The bad news, however, is that most companies – globally, but particularly in emerging markets – do not yet have a clear plan on how they’re going to get to net zero by 2050. We believe it is our role as shareholders to encourage, measure and engage the high emitters in our portfolio on their transition, to go on the journey of transition alongside them, with special focus on emerging markets.
What does net zero success look like for us in 2030? As many companies as possible in our portfolio with credible, financeable, actionable plans to decarbonize by 2050.
To achieve this, we are taking the assessment of the viability of our portfolios’ transition into our own hands. We have developed a framework that scores companies’ transition plans on three key principles across nine elements of transition.
This is not just about the 2050 target, but assesses the quality of the emissions disclosure, and the milestones set along the way. We believe a sufficiently ambitious plan can be achieved via one of three routes. The first – and the simplest – is if the company manages to reduce emissions by the 7% a year required. Unfortunately, for most companies this linear recommendation is not realistic, particularly if they are in emerging markets and in high-emitting industries.
The second route is whether the pathway set by the company is broadly aligned with the country’s decarbonization pathway in which it is based, provided the country’s pathway is broadly 1.5-degrees aligned. A company with a plan that fits within these parameters would be considered as aligned to the country’s nationally determined contributions.
The third route is one in which modifications will be required for hard-to-abate sectors such as cement, steel and chemicals. We are starting to see sectoral pathways being developed, which would be considered to be 1.5-degrees compliant. The reality is that some sectors require significant technological developments to achieve net zero by 2050, and others will need to pivot their business models entirely to be considered as 1.5-degrees aligned.
Achieving net zero is a global problem. The expectation is for sectors and countries that can achieve it more easily to decarbonize faster, and for hard-to-abate sectors and developing countries to take longer.
The second principle on which we evaluate plans is on credibility; namely whether the company has a time-bound, clearly financeable, and just transition strategy.
Indicators of a credible strategy include:
In addition to strategy, financial planning and allocation to transition are critical considerations. The capital expenditure requirements, the impact on revenues and expenditures of this plan, and whether the company can afford it are all indicative of how seriously the company is taking transition planning.
Finally, the credibility of a plan hinges on the inclusivity of it, and how it addresses and supports justice for workers and communities who will be impacted by the transition. A credible plan is considerate of those most vulnerable and ultimately should contribute to building resilient, thriving, and healthy communities.
The final principle for consideration is the feasibility of a plan. We look at the governance structures, levels of stakeholder engagement, and metrics of progress that signify whether a plan is implementable. Cohesive engagement and lobbying efforts signify alignment of the company plan with the broader environment in which the company operates. If a company has 1.5-degree Paris-aligned lobbying positions and their direct lobbying activities align with stated values, this gives comfort that the company’s actions match their intentions.
Good governance structures, with clear oversight of transition-related strategy at board level is an indicator that the transition plan has full leadership buy-in, ensuring transparency and accountability.
Indicators of progress are the final element of measurement. Carbon reduction, of course, is the key metric of success. But carbon is not the only consideration, especially in the early years of transition. Rather, we look for tangible signs of progress, including:
We need real progress, not just pledges or commitments, and it is therefore important to the integrity of the process that we continue to measure these key elements.
If companies meet these three principles, we consider their transition plans strong and appropriate. If they show progress over time on elements that currently are not satisfactory, that too indicates success. For the bulk of companies, the development and implementation of aligned transition plans will take years.
Outside of arms and ammunition, and specific sustainable strategies, Ninety One does not have an exclusion policy. If we don’t exclude companies based on weak transition plans, the question then becomes how we integrate the assessment of transition plans into our portfolios. In our fundamental analysis, we need to establish whether risks that come from a weak transition plan are understood and adequately priced. For example, have we priced in the potential for assets to be stranded in the future, the output of a company to fall dramatically, or taxes such as a carbon tax or a European border adjustment mechanism (which would make it punitive to export into Europe) to be imposed?
Case Study: Sasol
Sasol is an integrated energy and chemical company based in Sandton, South Africa.
Sasol announced its transition plan in September 2021. The company is targeting a 30% reduction in Scope I and II emissions by 2030, and net-zero alignment by 2050.
The 30% reduction is broadly aligned to South Africa’s pathway, so if we were to score it according to our key principles, we would be comfortable that the target is ambitious enough. Secondly, we need to establish whether the plan has credibility, specifically whether costing for the plan has been provided. The answer is: not yet. It is a work in progress and in our discussions with the company, we have indicated that we need to see far more detail on both their short-term plan and their longer-term plan.
Their short-term plan essentially involves two elements – the first is converting an increased share of their power procurement from Eskom into renewables, and the second is changing a larger portion of their feedstock from coal to gas. What we need to see in the coming months is much more information on this and clarity on their timing. Sasol has indicated that they will provide more detail in the first half of this year.
Only with that detail can we address principles two and three, namely, whether their plan has been adequately strategized and budgeted for, and whether or not it is implementable through monitoring their progress.
It is essential to South Africa’s economy to execute on the decarbonization strategy. Local corporates have begun to engage, and in some instances, taken the lead on the opportunity and risk presented by the transition. The approach we are taking enables us to have a clear view on where we are today, and where we are going in light of where we desire to be. Net zero offers both a threat and an opportunity for South Africa and at Ninety One we continue to stand firm in our position of support for both a country and at company level for a just transition to a low-carbon, thriving future.