The transition to net zero will not be linear or simplistic, especially for companies in carbon-intensive emerging market economies like South Africa. A high-emitting company of today will only have a role to play in the net zero economy of tomorrow if it has an ambitious, credible, and implementable plan to transition toward a greener, cleaner future.
As asset managers who are invested in these companies, it is our responsibility to support their transition to net zero, to use our shareholder vote responsibly and to approach decarbonisation from a real-world world-perspective and not from our own portfolio perspective. We do not support ‘portfolio purity’ or divestment.
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 the company’s or country’s carbon position is today – rather it is about their willingness and ability to move the needle on their carbon emissions. In contrast, divesting from high emitters to cleanse the portfolio does nothing for contributing to real-world decarbonisation.
Corporate South Africa is making progress, with several firms pledging to achieve net-zero emissions by 2050, inclusive of companies from the hard-to-abate industries, like cement manufacturer PPC, paper and pulp producer Sappi, and Sasol.
However, 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. Therefore, 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. To ensure that we do this with integrity, we have developed an in-house ‘Transition Plan Assessment Framework’ that scores our heaviest emitters on three key principles: level of ambition, credibility of plan, and implementation of plan.
Transition plan assessment principles
- Level of ambition
Ambition is critical to signal how seriously a company takes climate risk and it’s transition strategy. Measuring ambition can be subjective, and therefore including objective indicators ensure a robust, scientific and credible assessment. This can be achieved by assess the following three indicators:
- Disclosure of Scope 1, 2 and 3 emissions (all categories) with independent verification and public disclosure via a disclosure platform such as the Carbon Disclosure Project
- Time bound reduction targets across short, medium and long term of Scope 1,2 and 3 emissions
- Official commitment to achieve net zero by 2050 or sooner, with 1.5C science-based targets and SBTi approval (where possible)
- Credibility of plan
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:
- if the plan is based on existing low-carbon technology rather than new, unproven technologies;
- if the company is not relying on divestment of high-emitting assets or carbon offsets to decarbonise; and
- if the company has planned to generate significant revenue from low-carbon products and services.
Additionally, financial planning and allocation to transition is critical to consider. 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 and of the potential for transition success. Included in the assessment of transition is the consideration and measurement of social impact to ensure that the transition is sustainable both for people and planet.
- Implementation and measurement
Engagement and lobbying alignment signify alignment of the company plan with the broader environment in which the company is embedded. Additionally, good governance structures, with clear oversight of transition-related strategy at board level is a good indicator that the transition plan has full company-level 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:
- investment in transition-related capacity building;
- new partnerships and acquisitions that enable the company to transition; and
- a growing share of green revenues generated by the company
It’s about progress, not just pledges
Achieving net zero is a global problem. The ideal outcome would be for sectors and countries that can achieve it more easily to decarbonise faster, and for hard-to-abate sectors and developing countries to have slower pathways.
It is essential to South Africa’s economy to execute on the decarbonisation 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.