Different shades of green

By Ockert Doyer, Head of Credit and Portfolio Manager of the Sustainable Infrastructure Fund at Sanlam Investments.

– GREEN INFRASTRUCTURE IS JUST ONE ELEMENT OF THE GREEN ECONOMY

Allocators of capital and investors must take care when navigating the green economy and transitioning to net zero because there are countless terms and phrases they may trip over. A significant challenge in the evolving field is that words like ‘green infrastructure’ and the ‘green economy’ are poorly understood, as are the concepts of ‘transition’ versus ‘just transition’.

Green infrastructure can be defined as integrating construction and urban development with nature, for example, designing a building or industrial complex to be energy and water-efficient. It refers to installing new infrastructure to ensure that cities and urban environments have as green a footprint as possible.

The term is more applicable in city planning and construction, though financiers have some influence over green outcomes when funding large infrastructure projects.

Asset managers are more concerned with the green economy. The United Nations Environment Programme describes the green economy as ‘growth in employment and income driven by public and private investment into economic activities, infrastructure and assets that allow reduced carbon emissions and pollution; enhanced energy and resource efficiency; and prevention of the loss of biodiversity and ecosystem services’. The global green economy debate is currently centred around mitigating the impact of climate change by reducing carbon emissions. The goal is to limit the average annual global temperature rise to less than 1.5 °C by 2100.

The central theme at the 2021 United Nations Climate Change Conference, also called COP26, was for countries to achieve net-zero carbon emissions by transitioning from carbon-intensive economies into low carbon economies. This requires moving from coal and gas to renewable energy such as hydroelectric, solar and wind. Asset managers and other capital allocators will play a significant role in steering capital toward the green economy. However, they will have to do so within the socioeconomic construct of the countries and markets in which they operate.

The concept of net zero and the transition away from coal and oil presents unique challenges to emerging markets and South Africa in particular. There are concerns, for example, that developed markets that have already pocketed the financial dividend of high emissions industrial activity are now expecting emerging economies to forego these benefits. This issue will be partly addressed through financial compensation and incentives. However, it will also require a relaxation of the zero-tolerance approach to fossil fuel projects in much of Europe.

The developed economies will have to support the net-zero transition in emerging economies like South Africa. We have an example of this type of commitment in the US$8.5-billion pledged to our country at COP26 recently. However, in the South African context, the asset management industry will have to steer this and other ‘green economy’ funding into projects with the most significant impact, with due consideration for systemic issues such as inequality, poverty and unemployment. South Africa’s transition to a net-zero or green economy needs to take the socioeconomic situation into context, and that is why we speak about a just transition.

The country will struggle to follow the likes of Germany and France by simply ‘flipping the switch’ on its coal-fired power plants. The just transition will require extending the life of many ailing coal-fired plants while ramping up the construction of renewables. Asset managers and capital allocators have a responsibility, in line with the policy framework set by the government, to ensure that South Africa’s just transition is being debated, discussed and implemented. We will have to allocate capital where we see the best possible outcomes from both an environment and social perspective.

Goal seven of the United Nations’ 17 Sustainable Development Goals (SDGs) calls for countries to ‘ensure access to affordable, reliable, sustainable and modern energy for all’. And this means the mammoth task of transitioning the country from coal-fired to sustainable power while simultaneously increasing its total electricity generating capacity. This offers a compelling backdrop for a discussion on the types and level of investment required to enable a just transition to a green economy.

The South African Renewable Energy Independent Power Producer Procurement Programme (REIPPPP) has been around for more than a decade. Bid windows one through four resulted in 6400MW of ‘clean’ installed capacity at just over R200-billion. Bid windows five and six are currently underway to secure 5000MW of installed capacity over the next two years. Further bid windows will follow as SA needs to install around 5000MW per year for at least seven or eight years. We are talking about capital investments of R100billion or thereabouts per annum into gas, solar, wind and other renewable alternatives. Investments in distribution infrastructure are also desperately needed.

South Africa’s national infrastructure plan is a good starting point for domestic capital allocators on their journey to green economy outcomes.”

Gas makes an interesting appearance in the latest bid windows as an important contributor to South Africa’s energy future and just transition. The Minister of Energy and Resources Gwede Mantashe views investments into gas as non-negotiable despite these being out of favour in the net-zero context. Gas is seen as a cleaner alternative to coals, but only just.

Another major bugbear is that allocators of capital find it incredibly difficult to determine what constitutes a green investment. A wind farm generating 500MW of electricity ticks all the boxes, but what about the 150kms of electricity transmission infrastructure needed to get this clean energy to the nearest town? Internationally, work is progressing on a green finance taxonomy that helps asset managers and project owners to understand what sort of investments constitute a green investment. To transition to a green economy, we will need consensus around what can be classified as green.

South Africa’s national infrastructure plan is a good starting point for domestic capital allocators on their journey to green economy outcomes. It sets out concrete steps and timelines for energy, transport, ICT and water investments that align with the ambitious goals in the national development plan. However, finding the investment for these plans requires an exemplary working relationship between the government and the private sector and may demand a bolder approach by the regulators. For example, why put a 100MW cap on independent power producers? A better ‘play’ is allowing the private sector to build projects as large as they can source funding.

Sanlam Investments is proud to be actively involved in the transition from a high carbon-intensive economy to a greener economy and will continue to lead in this area. We do, however, advocate for a just transition that weighs the social impact of each investment decision in addressing inequality, poverty and unemployment.