Taking Stock Winter 2021

What is net zero and why should South African investors care?

A rush to net zero by developed-market countries could suck capital out of South Africa and other emerging markets. Ninety One is using its voice to fight for a fair transition.

Aug 25, 2021

5 minutes

Nazmeera Moola
A rush to net zero by developed-market countries could suck capital out of South Africa and other emerging markets. Ninety One is using its voice to fight for a fair transition.

The fast view:

  • In July, Ninety One became the first South African investment manager to sign up to the Net Zero Asset Managers Initiative, joining a group of 128 asset managers from around the world.
  • A rush to net zero by developed-market countries could suck capital out of South Africa and other emerging markets.
  • We are arguing that it is sensible to remain invested in high-carbon emitters – places and enterprises – on condition that investment is used as leverage to ensure they transition to net zero over time.
  • If South Africa is to avert a rush to net zero and any attendant capital flight and divestment, the country, its companies, and enterprises must argue for a fair transition and start planning and implementing genuine transition policies.
What is net zero?
Net zero refers to the balance between the amount of greenhouse gas the world produces and the amount removed from the atmosphere. Net zero is achieved when the amount produced is no more than the amount taken away. Reaching net zero is vital to avert the extremes of harmful global warming.

Pathways to achieving a net zero world

Pathways to achieving a net zero world

In July, Ninety One became the first South African investment manager to sign up to the Net Zero Asset Managers Initiative, joining a group of 128 asset managers from around the world. Together, the signatories manage a combined $43 trillion (almost half of the entire asset management sector globally) and by signing have committed to supporting the goal of achieving net zero by the year 2050 or sooner.

South Africa, like every country, is vulnerable to climate change. Ninety One’s decision to sign up was not taken lightly. Indeed, our motivation to join the initiative was to help effect a transition towards net zero that would work for all of the world’s 7.9 billion people. Therein lies both a challenge and opportunity.

While there is worldwide consensus to curb climate change, as articulated in the Paris Agreement, we want to use our voice not merely to support the achievement of net zero, but to do so in ways that take account of the special circumstances of South Africa and other developing markets. We want the world to get to net zero – but via a fair transition – not at the expense of the developing world.

Why we will use our voice to fight for a fair transition

South Africa and other carbon-intensive emerging market economies need time, encouragement, finance and other resources to transition to a lower-carbon environment and, ultimately, to net zero. After all, while emerging markets are often heavily reliant on fossil fuels, they are not responsible for the bulk of the world’s emissions to date.

There are many US and European asset owners and managers, policy makers, and organisations arguing right now that the path to net zero lies in a quick reduction of so-called portfolio carbon or reported carbon intensity. Such an approach is dangerous, particularly for South Africa and other carbon-intensive emerging markets. Why? Because it entails divestment from places and companies that are currently heavy emitters of carbon. The approach merely passes the problem on to another owner and leaves emissions in place. It does not give time or money to high-emitting places and companies to adjust. Let us also be clear that while this may result in a reduction of portfolio carbon, it is not a reduction of carbon emissions in the real world.

The world needs a transition to net zero that works for every country, not just for developed markets.

It is not yet clear which approach will carry the day, although the clock is ticking. Before a binding consensus forms, it is important that South Africa and other emerging markets realise the risks of being isolated and fight for what is fair. The world needs a transition to net zero that works for every country, not just for developed markets. We are arguing that it is sensible to remain invested in high-carbon emitters – places and enterprises – on condition that investment is used as leverage to ensure they transition to net zero over time. We will – where we can exert influence and create impact – actively allocate investment to companies and countries that can be encouraged to deliver on transition plans and, importantly, show the will to do so.

Ultimately, the drive to net zero is about the reduction over time of all the world’s carbon, not merely of ‘reported’ carbon, and true success is about bringing every country and sector along on the same journey.

The dire risks for South Africa if there is a rush to net zero

A narrow focus on reducing portfolio carbon, or reported carbon intensity, and a rush by developed-market countries and asset allocators to make such reductions could suck capital out of South Africa and other emerging markets. For example, there is a growing move by some developed countries to implement carbon tariffs on imports from high carbon emission zones.  This would negatively impact the cost competitiveness of South Africa to export goods into the relevant jurisdictions.  Europe seems to be furthest advanced on this issue – and they are South Africa’s largest trading partner. There could be divestments from assets of every kind, including stocks and bonds. Foreign capital could become scarce. Borrowing costs could increase.

Hence the importance of a fair transition to net zero.

If South Africa is to avert a rush to net zero and any attendant capital flight and divestment, the country, its companies, and enterprises must argue for a fair transition and right now start to plan for and implement genuine transition policies. Most importantly, to make the biggest impact for positive change, South Africa must show how it will reduce carbon intensity across its electricity grid by shifting innovation, build, and investment initiatives to renewable energy sources. With all of its power shortages and challenges, can the country afford to do this? Yes. Renewables are the least costly energy option. Besides, doing nothing and simply letting emissions creep up will have the worst of outcomes. The time for change is now.

In our next issue of Taking Stock we will share the steps Ninety One is taking through its Global Environment strategy (more than £1bn assets under management) to promote decarbonisation.

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Authored by

Nazmeera Moola
Head of SA Investments

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