Two key numbers and five key questions to understand climate change
- Climate change has become one of the most pressing issues because, if nothing else changes, the impact on our children and grandchildren will likely be catastrophic
- Bill Gates has outlined 2 key numbers to focus on and 5 ways of looking at the issue to help reach effective, practical solutions
Zoom, Uber Eats, Netflix, Fortnite. COVID has accelerated many trends - impacting the way we work, shop, learn, and entertain ourselves.
For the asset management industry, one of these trends has been the increased focus on sustainability.
Clients are demanding that asset managers challenge the management of the companies they invest in on a broad range of environmental, social and governance issues. Climate change has become one of the most pressing issues because, if nothing else changes, the impact on our children and grandchildren will likely be catastrophic.
For the uninitiated, trying to establish a sensible approach to climate change is not easy. For each grave warning or claim of a solution, there are counter arguments and complex trade-offs.
Bill Gates’s recent book, “How to avoid a climate disaster” provides a comprehensive but easy to understand explanation of the problem, as well as outlining what the most important things to focus on are and some potential solutions.
The book offers many valuable, practical insights and I found the context it provides extremely useful to understanding and unpacking some of the key issues and numbers and thereby be able to engage more constructively in the debate.
Two important numbers to remember:
tons of greenhouse gases are the approximate current global emissions which are added to the atmosphere each year.
is the number we need to get to by 2050, to stop global warming and avoid its worst effects.
Most governments have committed to achieve ambitious targets by key dates to the prevent dire consequences that will result from even seemingly small overall temperatures increases.
This sounds very difficult because it will be.
Part of the conundrum is that the world needs to achieve zero while, at the same time, providing more energy to improve the lives of the poorest. As Gates states: “Despite being hit the hardest by climate change, low-income nations are not responsible for causing a majority of the world’s greenhouse gas emissions and cannot be further held back by being forced to adopt the same policies as wealthier nations”.
In any conversation around climate change and the potential solutions and trade-offs, Gates recommends we ask five questions to properly understand and be able to sensibly evaluate:
1. How much of the 51 billion tons are we talking about?
This is a very useful first question to provide context to how effective certain solutions will be in solving the overall issue of achieving zero. Are we talking about something material or are we getting distracted by noise and irrelevant headlines?
2. Understand how much greenhouse gas is emitted by each of the different things we do.
- Making things (cement, steel, plastic): 31%
- Plugging in (electricity): 27%
- Growing things (plants, animals): 19%
- Getting around (planes, trucks, cargo ships): 16%
- Keeping warm and cool (heating, cooling, refrigeration): 7%
This gives context to what is most important to solve for and a reminder that we need to find a solution for all of them. I was surprised that electricity is just over a quarter of emissions as most press coverage focuses on electricity generation. Electric cars, another favourite of the media represents about 8% of emissions. It surprised me that cement is one of the biggest sources of carbon emission.
3. Trying to understand how much power we are talking about
When there are big numbers being bandied about it is often difficult to contextualise. For example, in discussing Eskom’s challenges, one will hear of a new power plant with x capacity or renewables that can add y watts. Gates recommends the following cheat-sheet:
- 1 kilowatt: an average suburban house
- 1 megawatt: a small town
- 1 gigawatt: a mid-size city
- 1,000 gigawatts: the USA
- 5,000 gigawatts: the World
So, when you hear that President Ramaphosa has increased the licence threshold for people to generate power from 1MW to 100MW you can immediately think of that as being the power for 100 small towns. Or to compare that to Medupi’s six units which are intended to have a capacity of 4 800 MW (or 5 mid-size cities) when fully operational.
4. Understand how much space we need
Different solutions take up different amounts of room. Power density is important as it tells you how much power you can get from different sources for a given amount of land (or water):
Measured in watts/sqm
- Fossil fuels: 500 -10,000
- Nuclear: 500 -1,000
- Solar: 5-20
- Hydropower: 5-50
- Wind: -2
- Wood and biomass: <1
For example, notice that the power density of solar is considerably higher than wind. This means if you are considering a wind solution you will require much more land (five to ten times more) than if you are looking at solar.
5. How much is it going to cost?
Part of the problem is that fossil fuels – if you ignore the long-term damage they do – are generally the cheapest available. Therefore, moving from dirty carbon technologies to ones with zero emissions will cost something. Gates calls this the “Green Premium”.
His recommendation is to deploy zero-carbon options where the Premium is lowest (such as solar and wind), and that can be deployed faster and smarter than other options. In some rare cases, the Premium is negative – for example it may make financial sense to fit a solar geyser - and with appropriate policy these should get traction quickly.
There has been some excellent progress in terms of reducing the costs of renewable energy projects as can be seen in the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP). The latest REIPPPP bidding window 4 prices showed the following reductions:
- Onshore wind: R0.62 per kWh (down from R1.14 in the 1st window)
- Solar PV: R0.79 per kWh (down from R2.85 in the 1st window!)
And although unofficial, some estimates have the all-in cost per kWh at Medupi and Kusile to be higher than both these.
Gates’s adjacent recommendation is that, as a society, we need to focus our research and development spend and expertise (using the best and brightest brains) where the Premium is largest. This is because at this stage, the short-term commercial incentive is lowest. The focus here needs to be on creating and rolling out new breakthrough technologies.
“But things can change. We already have some of the tools we need – and as for those we don’t yet have, everything I’ve learned about climate and technology makes me optimistic that we can invent them, deploy them, and, if we act fast enough, avoid a climatic catastrophe.”
What is Nedbank doing?
Nedbank, as the “Green Bank” has a long history of playing a pioneering role in the environment, including being one of the largest financers of renewable energy. In April, the Bank announced its new energy policy which saw it withdraw direct financing of new oil and gas exploration projects with immediate effect. It also committed to a phased approach to stop financing all fossil fuel projects and to scale up commitment to the fast-growing renewables sector.
What is Nedgroup Investments doing?
One of our focus areas has been upskilling and educating our key stakeholders – our employees, our Best of Breed fund manager partners, and our clients. We have conducted a very comprehensive annual survey of 46 fund managers assessing the status of their responsible investing journey. In these surveys, we ask specific questions relating to climate related risks and opportunities and how they have informed investment decisions.
We strongly encourage our fund managers to engage constructively with companies. You are able to track, on our website, how each of our Best of Breed fund managers has voted on your behalf in respect of each resolution and where they have voted against a resolution you will be able to see the reason for their opposition.
These are complex and important matters that we, our clients, and our investment managers are grappling with. Hopefully, by asking some of these questions we will all be able to have more meaningful conversations to jointly find sustainable solutions.