2019 Responsible Investment Report

By David Levinson

The release of our Nedgroup Investments 2019 Responsible Investment Report comes at a critical time as the Covid-19 virus tests our collective resolve and will no doubt leave a lasting mark on all of us for years if not decades to come.

Our thoughts go out to those affected by the Covid-19 virus and healthcare workers who put others before themselves every day. We are grateful and proud of the steps taken by the management of Nedbank Ltd, who have actively sought to play a leadership role as part of the country’s response to the pandemic and has pledged financial support to a number of mitigating initiatives.

Nedbank Ltd: Laying the foundation

Nedgroup Investments will be releasing its 2019 Responsible Investment Report in the coming days. As our parent company, Nedbank Ltd, further entrenches the United Nations Sustainable Development Goals into its business strategy, this has provided the stage to further embed responsible investment into Nedgroup Investments’ corporate culture and the way in which our funds are managed.

Socially, Nedbank Ltd has been at the forefront of Cyril Ramaphosa’s Youth Employment Service (YES), providing for and setting up job opportunities and apprenticeships for over three thousand previously unemployed South African youths. The bank has also maintained its B-BBEE level 1 contributor status, an incredible achievement considering the revised codes, which are more ambitious in its hurdles. In previous articles we iterated our view that the climate crisis is a social one, and the issues can no longer be spoken about as mutually exclusive. When we speak about the integration of environmental and social factors in the investment process, the two charts below illustrate that South Africa sits at the coal face on both.

Inequality in South Africa is one of the highest in the world, and measures since the turn of the century have done little to lift the household income of the poorest. South Africa has failed to materially transform its energy production away from fossil fuels to one that is more diversified and less carbon dioxide equivalent (CO2e) intensive. However, the current Minister of Energy has been more proactive in following through on the purchase agreements signed during window 4 of the Renewable Energy Independent Power Producer Program (REIPPPP). This was an area that his most recent predecessors were hesitant to do.

Regarding climate change, Nedbank Ltd has led the way among local banks, being one of the first to announce an end to financing any new coal-fired power plants. It is these kinds of steps that are required if South Africa is to get anywhere near meeting what was pledged under the Paris Agreement in 2016. But of course, the challenge will not be solved by a single company or sector, but will require breaking down traditional silos towards a more collaborative effort, from both public and private organisations. The chart below left illustrates the increase in CO2e particles in the earth’s atmosphere over the past one thousand years. These levels had been stable leading up to the Industrial Revolution in the mid-18th century. Since then, the burning of fossils fuels and a period of booming economic and population growth, led to CO2e parts per million (ppm) breaching the 400 mark in 2016.

The chart below right uses data supplied by the Intergovernmental Panel on Climate Change (IPCC), the US National Oceanic and Atmospheric Administration (NOAA) and Weather SA to forecast South Africa’s temperature increase if we continue on a ‘business as usual’ trajectory and do not implement measures to meet the Paris Agreement. These projections look to 2036 and beyond. Furthermore, a predicted mean national temperature increase in the vicinity of +2.5 degrees Celsius will be compounded by less absolute rainfall. A climate scenario such as this will test national food security and the ability to support a growing population, which current trends suggest will be migrating at an even greater rate towards resource-stretched urban areas.

Corporate engagement: A pivotal role

During 2019, we witnessed some of the most progressive shareholder activism seen in South Africa to date. Civil society was able to mobilise and table two climate change resolutions at both FirstRand’s and Standard Bank’s annual general meetings. In the table below we provide the voting results for the shares held within Nedgroup Investments actively managed funds.
The overwhelming desire for FirstRand and Standard Bank to develop and publicly disclose their policies on fossil fuel lending is clear. These policies will provide a forward-looking roadmap and provide the market with clarity on how the banks will develop their lending books. Investors are becoming acutely aware of the global trend away from traditional fossil fuels to greener alternatives, and the potential negative financial impact of stranded assets.

As we release our Nedgroup Investments Responsible Investment Report in the coming days, what will become clear is the emphasis we place on corporate engagement. This is the area which we believe can have the greatest influence on the behaviour of corporate South Africa. Significantly, this should allow investors to identify those companies that are willing to play a role in South Africa’s sustainability challenge. We believe that enterprises who embrace sustainability will outperform in the long term, and will align themselves with our clients’ interests and the investment horizons of our Fund offerings.