Private sector investment lags in climate adaptation

• ESG strategies must operate in tandem with climate change awareness to mitigate business risks, writes Denene Erasmus

In its latest report to inform the global response to climate change, the UN’s Intergovernmental Panel on Climate Change (IPCC) says that global temperatures have already increased 1.1°C above industrial temperatures and are now likely to reach 1.5°C by 2040 or sooner.

This will result in more intense extreme weather events that pose a growing threat to nature and people in every region of the world.

For businesses a growing awareness of the impact of climate change and global warming on their operations has unfolded in parallel with greater focus on environmental, social and governance (ESG) strategies and an understanding of how to manage risk and opportunities arising in these areas.

ESG in the context of climate change can include a company’s implementation of environmentally sustainable practices to mitigate their negative environmental impact while continuing to make profit.

Companies surveyed in the recently launched Sanlam ESG Barometer, a report compiled in partnership with Intellidex and Business Day, ranked environmental factors as the secondgreatest ESG risk to their businesses after social aspects such as maintaining good employee relations.

The environmental risks of concern were climate change, greenhouse gas emissions and responsible use of water.

SA’s energy landscape poses a dual risk to companies. Not only does Eskom’s overwhelming reliance on coal to generate electricity create a hurdle for electricity users to achieve their own emissions reduction targets (an important metric in most ESG ratings), Eskom’s poor performance and intermittent supply makes it difficult and expensive for companies to maintain efficient levels of output.

According to the Minerals Council of SA mining operations in SA are running at 20% to 30% under capacity due to the electricity constraint from loadshedding and load curtailment.

Many companies in SA are investing in renewable energy supply. This offers not only the benefit of securing electricity at a more affordable price and without interruption, but companies can also include such interventions as part of the environmental objectives within their larger ESG strategies.

In the SA mining sector there is already a pipeline of about 7GW of renewable self-generation projects. These projects are able to make a significant contribution to companies’ carbon emissions reduction targets and overall climate-mitigation plans.

But, said IPCC author Dr Christopher Trisos, it is important that companies focus not only on climate mitigation aspects, but also adaptation within their operations and in their communities.

Trisos, the co-ordinating lead author of the IPCC report and the director of the Climate Risk Lab at the University of Cape Town, said increased private sector engagement in reducing greenhouse gas emissions and in climate change adaptation is essential.

“There are huge needs for increased private sector finance, in both mitigation and adaptation. In a country like SA, there isn’t enough public finance to fully close our adaptation funding the gaps.”

There’s still more private sector finance flowing to fossil fuels than to renewable energy.

He said this increases the risk of costly investment by companies and fund managers in assets and classes of assets that will become stranded over the next 20 years. “If we are going to limit warming to close to 1.5°C, then an investment in fossil fuels today runs the risk of that asset becoming stranded.”

There needs to be greater alignment of private sector and public sector action on climate change, he said.

This will require of governments to send clear signals through co-ordinated policies. But it also requires the private sector to better price the risks from future climate impacts and their exposure to fossil fuels.

Equally, the private sector needs to play a far bigger role financing climate adaptation. Up to now, overwhelmingly, the finance for adaptation has come from the public sector, according to Trisos.

The IPCC report identifies that for the most vulnerable people and places that will probably continue to be the case in the near-term.

The reason for this, Trisos explains, is that although adaptation often has a very high return on investment, those returns are often in the form of public good or benefits to low-income and marginalised communities. The returns manifest in such a way that it is difficult for the private sector to monetise the return.

For example, if the business is based in an area that is exposed to flooding, if improved flood protection is put in by restoring the river catchments that flow towards this area, then property values can go up.

A municipality can get some of that investment back through rates on the increased property. But if you are in the private sector that’s a much more indirect way of funds being returned compared with a direct cost saving from installing solar power or the earning that can be achieved from selling that power to a utility, for example.

“We know there are huge needs for increased private sector finance, but there is currently a challenge in the financing models being applied by the private sector. Equally, government regulation needs to be put in place that will be able to facilitate the right types of financial return models for private sector investment in adaptation.”