24 Nov 2023
Sasol is a systemically important company in South Africa. The company produces one-third of South Africa’s liquid fuels, is the largest corporate taxpayer and employs over 22 000 people permanently in South Africa and is responsible for hundreds of thousands more jobs in the economy.
The problem is that their SA operations emit over 60 million tons of carbon dioxide per annum – making Sasol South Africa’s second largest carbon emitter after Eskom. These emissions were likely the reason Extinction Rebellion South Africa shut down the Sasol AGM earlier this month.
As the world grapples with the need to urgently reduce carbon emissions to limit global warming, the realities of transitioning a business as complex and important as Sasol are becoming apparent.
Transition is ultimately unavoidable. Sasol has already faced higher borrowing costs and declining valuation multiple as investors begin to question the longevity of its business model. Therefore, evolving the business is required for long-term financial sustainability. Sasol’s management has already made this realisation.
Figure 1: Sasol 1-year forward consensus EV/EBITDA
Source: Bloomberg and Ninety One 31 October 2023
Figure 2: Global oil peer group comparison (1-year forward EV/EBITDA)
Source: Bloomberg and Ninety One as of 31 October 2023
Once a company has accepted the need to transition, we believe that the role of investors is to work with them on ensuring that a credible plan is developed and implemented.
We at Ninety One assess the likelihood of a business reducing emissions in line with a Paris-aligned pathway using three pillars.
Firstly, we look at the quantum of emissions reduction and adjust this for sector and geography. The world needs to reduce emissions by 50% by 2030 from the 2019 level to keep the hope of limiting global warming to 1.5 degrees Celsius alive. However, more will need to be done by certain sectors, notably electricity generation. And developed markets will need to do far more than emerging markets.
Therefore, we assess Sasol’s decarbonisation targets of a 30% reduction in scope 1 and scope 2 emissions by 2030 as broadly Paris aligned, adjusting for sector and geography. This target is also aligned with the lower bound of South Africa’s Nationally Determined Contribution, which the cabinet approved in October 2021.
Figure 3: Sasol’s short- and medium-term Scope 1 and Scope 2 CO2e reduction targets
Source: Sasol Sustainability Report 2023 and Ninety One.
Our second pillar looks at the viability of the company’s plan to meet this target, while the third pillar looks at the implementation of the plan.
Sasol’s plan is based around a 25% reduction in coal used by 2030. This in turn relies on the following:
This combination of solutions will enable Sasol to turn down up to six coal power generation boilers. The turn down of each boiler will reduce one million tons per annum of carbon dioxide emissions and contributes approximately 18 percentage points of the 30% carbon dioxide reduction target.
The remaining 12 percentage points of the 2030 target is projected to come from reducing coal feedstock into the production process (gasifiers) from 2030. This will result in Secunda production volumes dropping to 6.7 million tons per annum. Therefore, sourcing cleaner alternative feedstocks – such as gas – to uplift production volumes back towards 7.2 million tons per annum is essential to ensure the affordability of the transition strategy. Without this, there is a large risk of delays in the company’s ability to meet its targets on schedule.
We view the plan as broadly plausible. However, in the last year the company has concluded that importing LNG is no longer financially viable. They are seeking to increase the gas they have available from Mozambique and potentially use biogenic feedstock to replenish their output.
This is partially mitigated by the increased comfort in their renewable energy procurement (which is now ahead of plan), and the subsequent boiler turn down.
With each year that passes, we expect our confidence in the company’s ability to execute their transition plan and meet their 2030 targets to rise. With only seven years to go, we do not have the luxury of time. Positively, Sasol’s management has accelerated the design of the coal briquetting solution, procured renewable energy ahead of their plan and extended the Mozambican gas supply plateau over the last year.
In contrast, the uncertainty on Sasol’s gas plan means that our level of confidence has in fact fallen in the last year. We are sceptical that Sasol’s management team in 2030 (which may look considerably different to the current team), will choose to sacrifice output for climate considerations and thus do not see that as a viable fallback plan. Therefore, we voted against their 2023 Climate Change Report.
This is not a wholesale rejection of Sasol's climate strategy. We remain confident in management’s commitment to developing and implementing a plausible transition strategy and encourage the board to support this.
Beyond 2030, the company is also working on creating optionality to deal with their longer-term emissions by forming partnerships to produce both sustainable aviation fuel with Topsoe and develop the Green Hydrogen economy in South Africa with a range of companies.
This vote is not intended to discourage Sasol from pursuing their climate strategy, but rather to encourage them to accelerate progress and demonstrate more tangible evidence of implementation to stakeholders to drive long-term sustainable value creation. If Sasol can provide more evidence of a credible feedstock strategy to restore volumes or demonstrate that the plant remains economically viable at lower production volumes from 2030, we will change our vote in 2024.
We plan to continue our open and constructive dialogue with the company. Sasol has a critical mass of engineering talent in a country that is desperately short of skills. If they can successfully transition, they can help create a new growth path for South Africa.
Successful transition for high-emitting companies will not be linear. Successful transition will be complex. It requires strong leadership. Not everyone will be happy with the pace of change – as evidenced by the disruption of Sasol’s AGM. Sasol’s newly appointed CEO designate, Simon Baloyi, has extensive technical and leadership experience with the company. He has a big task ahead. If he can use the climate imperative to successfully transform this high-emitting company, he will create immense shareholder value and do South Africa proud.