Global pressure on SA banks to cut out carbon emissions is intensifying. Last week a relatively minor occurrence was the separation of Standard Bank and its PR firm Edelman after the latter refused to work on Standard Bank’s involvement in the East African Crude Oil Pipeline (EACOP).
But that teacup has faced a minor storm compared with the increasing pressure coming from global investors and lenders.
The UN’s “Race to Zero” campaign, one of the most influential net-zero carbon pressure groups, has now declared that all members must commit to phasing out “unabated” fossil fuel projects as “part of a just transition” by June 2023.
“Unabated” means no effort has been made to reduce carbon output such as the use of carbon capture and storage technology. The Net-Zero Banking Alliance and the Net Zero Asset Managers’ initiative are members of the UN campaign, and Investec, Old Mutual and Ninety One can be found on the global list of signatories. But that list includes many substantial international shareholders and lenders to our banks who can be expected to cascade their commitments onto SA institutions.
The worldwide effort to reduce carbon emissions has accelerated, driven by major high profile events such as the Conference of Parties (COP) and increasing evidence of the destructive impact of climate change. Countries such as SA are being swept along. As a major carbon emitter, SA is in a unique position as a global demonstration case on how emissions can be reduced. This is partly why the Just Energy Transition Partnership was set up at COP26 in Glasgow with promises of $8.5bn in funding from several developed countries to support SA’s transition. This gives SA the opportunity to access substantial funding, if it plays its cards right, and ensure a net developmental benefit from a transition.
The challenge we all face is to ensure that transition is not at the cost of development. The race to net zero seems to have become the dominant global driver of action, overshadowing other important objectives such as the sustainable development goals.
The 17 goals are based on a much broader conception of human development and flourishing and are tracked through 231 indicators, which cannot compete with the focus and simple messaging of net zero campaigns. The goals require complex development that is hard to measure and track, whereas reduction in carbon emissions is straightforward and now fits the developed world zeitgeist. There is a complicated relationship between net zero, sustainable development goals and the global environment, social, governance (ESG) investing movement.
There is growing evidence that the ESG movement is leading to a reduction of capital flows to emerging markets as investors down-weight countries that have weaker emissions standards or simply don’t have the necessary data.
While ESG practices vary widely, it is astounding how closely the factors that many ESG models use to upweight or down-weight countries correlate with how poor those countries are (corruption perceptions, media diversity, and so on). In contrast, investors aiming to improve outcomes in line with the sustainable development goals should be biasing capital towards the world’s poorest areas where one would expect it can make the biggest difference to the quality of life of citizens.
A single focus on net zero, without the more complex and nuanced consideration of wider developmental impact, risks compounding the impact on capital flows that ESG appears to be having. That was my immediate thought on reading of Edelman’s move. The EACOP has been controversial — it is displacing many people and the environmental concerns are obvious, but it also has economic effects in East Africa that will have positive development implications.
There is no evidence that Edelman or anyone else thought through these wider implications. The SA financial sector needs to clarify the investment case for international funders. There is a net-zero opportunity — the decommissioning of Eskom power stations and construction of renewables plants is obvious. The “just” part of the just energy transition needs to be fully conceptualised to include consideration of the wider developmental impact of transition, as conceived by the sustainable development goals. One of the biggest challenges is that developmental affect is harder to measure, but we need to become better at it.
We need good evidence for the effects of a project on the sustainable development goals. This data needs to be clear and available to sit alongside data on emissions impact. As it stands, the net zero focus is facilitated by the absence of data on the social impact of investment.
If we solve for the data problem, we can bring more balance to the conversation. We would be able to ensure that the race to net zero does not come at the expense of development. SA’s financial sector needs to prepare the case.