IIMA October 2019 Issue 3

Page 1

Page of Contents Introduction


The Energy Market


Key Local Players


Regulation & Policy


The Rise of Electric Vehicles


Waste to Energy Project


ESG Insights


Global Shapers Gaborone Community


Africa Mining Summit Highlights




Introduction | Page 2

Coal Not Going Anyw here The month of September was a special month for the Energy Industry with the World Energy Council hosting the largest gathering of world renowned energy thought leaders in Abu Dabhi to discuss a plethora of topics pertinent to the energy sector. Decarbonization and the development of strategies for net zero carbon emissions was the central theme with an overlaying message of capturing opportunities through creative partnerships. As Botswana gears towards celebrating her 53rd anniversary post independence it is important to assess our own journey in the energy sector with regards to our diversification of the national energy mix and our contribution to the sustainable development goals, primarily SDG 13 climate action. On this special energy edition we have partnered with Global Shapers Gaborone Community, an initiative of the World Economic Forum, made up of passionate youth activists engaged at grassroots level to raise awareness on climate change and offer solutions to combating the risks exposed to the community at large.


$100 $100 $50


Tlou Energy

Source: BSEL





Market Cap (US$)

We will also highlight the local Energy Market on the local Stock Exchange as shown on the above graph.The total market capitalization of the energy sector was $253 Million at the time of reporting. Most of the energy companies listed on the local stock exchange are at the junior exploration phase with the exception of Engen which mainly offers consumer services and products.These junior exploration companies have 212 billion tonnes deposits of coal that is at their disposal and the most significant driver of their business model with a life span of more than 30 years. The million dollar question is how will these junior explorers contribute to the reduction of their carbon footprints and climate change action.

The Energy Market | Page 3

Botswana Energy Sector


0.69% Lindiwe Mafavuneh Founder & CEO LCM Capital & Light Green Energy Botswana Energy Industry post 53 years of independence is at an embryo stage with 100% of oil and gas products imported from other countries and approximately 98% of the national energy mix powered by coal fired thermal plants as the main local electricity generators. Botswana has two main coal fired thermal plants as the main local electricity generators. The Morupule B coal fired thermal plant has a capacity of 600 MWH and Morupule Power A plant has capacity of 132 MWH bringing the total to 732 MWH to supply local demand. The 212 billion tonnes of coal which is more concentrated on the central part of Botswana designated as the special economic zone for the Energy Sector has seen the emergence of home grown energy companies who are eager to take advantage of the abundance of the fossil deposits and close the import gap in the market to offer locally manufactured products and services to meet local and regional demand. Renewable energy contributes less than 5% to the national energy mix. According to the Africa Energy Portal 2016 data the electricity installed capacity in total renewable energy is approximately 2.8 MW.

Market Share on the Local Stock Exchange

Source: BSEL

Renewable energy statistics are not reliable as most rural communities rely heavily on biomass, the burning of wood as an alternative source of energy. As part of the climate action efforts and a way to promote clean energy practices, the United Nations Development Programme together with Botswana Institute for Technology Research and Innovation has set a target to construct 30 biogas digesters to promote the production and utilization of biogas for cooking, electricity and to produce fertilizers in the South Eastern part of Botswana. Renewable energy continues to lag behind coal due to slow policy enactments and adoption that can enable this sector to thrive. The establishment of an energy regulatory authority in 2017 will facilitate policy makers to consider other alternatives to fossil fuels and also regulate the indigenous companies that will be producing oil and gas products to adhere to best practices and international standards. At the time of reporting there is yet to be a 100% green energy company listed on the local stock exchange in contrast to four coal centric energy companies with a market capitalization of US$253 Million. Our prediction for the next five years is that there will be more listings on the local stock exchange and creation of a thousands of jobs emanating from this growing energy sector as more indigenous companies come on board to offer #BWMade products.

Botswana Energy Sector

Key Local Players | Page 4

Crude Oil

Botswana currently hedges crude oil volatility through the National Petroleum Fund since the market does not have local structured products to mitigate these risks. The emergence of local energy explorers will wean the country from imports and shift the energy sector from being a passive price taker to a more proactive player in the energy sector. The local junior explorers have not had a lucky break and continue to experience a downward spiral of loss making compared to other equities on the local stock exchange. The energy stocks continue to trade between P0.80-P1.10 with minimal appreciation to the stock price.


74 72 70 68 60 66 64 62 60



Source: Bloomberg


L June



Crude Oil

According to Bloomberg Commodity Markets Brent Crude Oil prices have fluctuated by 11.64% from March to August 2019. The price of crude oil peaked to $72.80 per barrels per day (B/D) in April and had a steady decline in subsequent months to reach a closing price of US$60.43 B/D due to Saudi Arabia Energy Minister announcement that production capabilities of crude were completely restored and that oil production will resume by end of September 2019 after the strike.The energy minister announced that the facilities will be producing at a rate of 10 million B/D by the end of September and 12 million B/D by November-end. There is a linear relationship between crude prices and the performance of upstream energy players.Therefore, explorers and producers will halt oil production due to the decrease of crude prices.Moreover, lower exploration activities will lead to reduction in the number of contracts for drillers and oilfield service players (Yahoo Finance 2019). Since Botswana imports 100% of crude oil products the fluctuations in crude oil prices always have adverse impact on supply.

Shumba Energy is an energy development company and producer based in Botswana and listed on the Botswana Stock Exchange Limited (BSEL) and Mauritius Stock Exchange with Botswana majority shareholding.The energy producer released it's 30 June 2019 year end results to shareholders showing a decline in profit before tax of 137% - 140% (US$7.4m – US$7.6m) compared to the prior year loss of around US$2.0m-US$2.2m.This loss was mainly attributable to the disposal of assets worth US$8.0m which was a once-off item that did not reoccur in the current year. However, the huge losses is nothing peculiar to exploration phase of the company as production is yet to resume.

Natural Gas Companies

According to the latest statistics from an energy expert at the just ended Africa Mining Summit, Banks are no longer investing in coal with approximately $1 trillion worth of investment diverted from coal projects. Botswana faces a catch 22 with her 212 billion tones of coal, which is to either follow the green conscious world with regards to decarbonization or incur opportunity costs for not fully harnessing the abundant resource. Tlou Energy promises to offer solutions to the coal dilemma through Coal Bed Methane (CBM) exploration. Tlou Energy is an Australian Securities Exchange, London’s AIM Market and the Botswana Stock Exchange Limited company focused on delivering power in Botswana and the broader Southern African region through the development of CBM projects. The Executive Director of Tlou Energy Mr Gabaake Gabaake told participants at the Africa Mining Summit (AMS 2019) that his company has been granted license by the Ministry of Mineral Resources, Green Technology and Energy Security to establish a 200 MW Gas Power Station. He asserted that CBM is a better alternative with less than 50% carbon emissions. He mentioned three key energy drivers that influence energy generation mix which are; 1. Cost 2. Availability of resource 3. Environmental considerations Coal will be around for the next thirty years according to CEO of Mooiplaats Colliery Mr Louis Loubser. He mentioned that coal still contributes 60% of the global source of energy and the biggest employment creator compared to other alternative sources of energy.

Key Local Players| Page 5


Coal contributes 60% of the global energy source

Another rising Botswana Energy Leader Founder and Group Executive Director Boswa Energy Mr Tumelo Sealetsa recommended hybrid solutions of fossil fuels and renewable energy as a more sustainable way of addressing climate change risks. The cost of solar PV has drastically dropped by 72% for the past 5 years and now selling at $0.10 per kWh which makes economic sense to consider renewable energy as a way to bridge the energy gap and also reduce carbon footprint. Boswa Energy is on a mission to empower Local Citizens to be active participants in the energy sector through a franchise business model and to be a pioneer in offering solar powered gas stations. The enthusiastic energy entrepreneur is poised to change the local energy landscape in the next five years.The upstream and downstream energy industry is yet to reach full participation of local citizens due to the high capital intensity of the business and high risks which most local investors do not want to assume. Local owned junior energy exploration companies continue to seek funding from external sources to reach developmental phase with most local investor playing a passive role and waiting to put their skin in the game when the project is post feasibility and have reached bankability. The high barriers to entry will continue to see more foreign players dominating in this sector or more joint venture with local explorers as a way to access funding from those with the deep pockets. Botswana has 1,000 prospective licenses yet only less than 5 companies operating in the energy or mining exploration space.


Key Local Players| Page 6

Sugarcane feedstock 8,000 Litres Ethanol & 6.5 (MWh) of electricity per ha per year

An area that was not explored by the Energy Speakers at the AMC 2019 was the use of agricultural produce as a feed to generate carbon-free fuel, ethanol. Energy experts in Botswana should digress from focusing only on coal and solar energy but consider the vast of land with indigenous vegetation that could be used to extract biofuel which is more environmentally friendly and a perfect way to de-carbonize. The International Renewable Energy Agency conducted research on Sugarcane Bioenergy Southern Africa: Economic for Sustainable Scale-Up as a way to bolster fuel production in Africa. According to the report sugarcane has been produced in Africa for centuries,but little has been used for biofuel. In seven countries of particular interest in southern Africa(Eswatini, Malawi, Mozambique, South Africa, United Republic of Tanzania, Zambia and Zimbabwe), overhalf a million hectares (Mha) of land were devoted to sugarcane production in 2010, yielding 35 million tonnes (Mt) of sugarcane, an average of 70.6 tonnes per hectare (t/ha) (IRENA, 2019).

80% Reduction in Emissions millionGHG litres (ML) of ethanol were

Yet only 4.1 produced from this sugarcane (FAO,2018; ISO, 2018). Potential sugarcane and energy production is much greater. Sugarcane is a highly productive feedstock for bioenergy due its semi-perennial production cycle,which allows annual harvests and replanting at intervals of five years or more, and its high energy content. With conventional technology widely deployed, it can produce over 8,000 litres (L) of ethanol and 6.5 megawatt-hours (MWh) of electricity per hectare(ha) per year (IRENA, 2019). In Botswana corn is a more viable option for ethanol production compared to sugarcane. However, with a food import bill of P12 Billion there is a societal dilemma of using a staple crop such as maize for ethanol production when food security is still a major concern. Agriculture continues to receive the needed attention and priority from the Government as a way to boost local production and to revitalize the sector to contribute more than 5% to the GDP. I believe in the next 5 years we will see more developments in biofuel production in Botswana as an alternative to diesel and also to cement Botswana as an active energy producer in the region.

Botswana Energy Regulatory Authority

De-risking energy projects requires a robust energy regulatory environment that is less cumbersome and which is enabling for external and internal interests. The emerging local energy companies will stimulate and attract foreign direct investment to develop energy infrastructure which is currently lacking and expensive to procure. International Investors and local institutional and private investors require a stable and predictable regulatory framework that I is transparent and provide clarity and reasonable assurance to investors. On 1 September 2017 Botswana Energy Regulatory Authority (BERA) under the Ministry of Mineral Resources, Energy Security and Green Technology commenced operations with a mandate to regulate the energy sector by ensuring a competitive environment in accordance with International Best Practice.

Regulation & Policy | Page 7

Licensed activities in Renewable Energy include: Generation & co-generation of electricity and heat single buyer of electricity Any installation where single or aggregate capacity exceeds 100KW Operation of a transmission system Operation of a distribution network Exportation or importation of electricity According to the National Development Policy (NDP 11), the Government is looking to increase renewable energy up to 15% by 2030. Citizen Economic Empowerment initiatives should also be integrated in energy policies for socioeconomic transformation and capacity building of local citizens. The 2018 South Africa Mining Charter infographic by Deloitte Insights demonstrate the seamless relationship between regulation and economic transformation.

Regulat ion & Soc ioeconomic Tr ansfor mat ion Interp lay

Regulation & Policy | Page 8

Botswana Oil

Regulation & Policy | Page 9

Botswana Oil Mandate : Ensure security and efficiency supply of petroleum products for Botswana Manage state owned strategic fuel reserve facilities stocks as well as bulk storage and distribution Facilitate participation of citizen emerging companies in the petroleum sector

Source: BOL 2015/16 Annual Report

Africa Minerals Role

While Botswana has commenced work to diversify the energy sector and manufacture local petroleum products, gas and oil, there is an emerging global trend that cannot be ignored by well endowed tier 1 mineral resource countries; the rise of the electric vehicles. Tier 1 countries rich in mineral deposits such as copper, iron ore, nickel, manganese, cobalt and silver which are essential for the manufacturing of electric vehicles and battery storage should strategically position themselves as green technology manufacturing hubs to cater for countries with a high demand for electric vehicles. African leaders have over the years had a rude awakening regarding the extraction of their mineral resources and selling them in their natural form without any value addition.The mineral beneficiation gospel is now well received and endorsed by many African leaders as the key to unlocking real value, birth new industries, spur manufacturing growth and most importantly create the thousands of jobs for the unemployed youth in Africa.

The Rise of Electric Vehicles | Page 10

For Africa to capitalize on its youth dividend, which represent 25% of the entire population, a new mindset is required to swiftly take advantage of emerging trends and be front runners in the global economy. Youth unemployment will not be solved by the old way of thinking and business as usual mentality that is pervasive in many African leaders. Because Africa still has power poverty and perennial power outages, combustion vehicles will be around for the next 30 years. However, that is not an excuse not to participate in the green economy as most of the feed is derived from the continent. "Youth represent 25% of Africa population, with 50% younger than 25 years old. This is the generation that should be at the front lines of the green economy as the future custodians of the


25% continent."

Lindiwe Mafavuneh Founder & CEO LCM Capital

Africa Minerals Role

Th e Rise of Electric Veh icles | Page 11




It is estimated that there will be 125 Million EVs by 2030 according to the Visual Capitalist statistics.This signals a growing appetite for green technology resources for the next coming decades. African economies tend to be late adopters in emerging trends, always the last to join the bandwagon when there is nothing left to salvage and when early adopters have moved on to new discoveries. Visionary leadership will recognize the need to explore and exploit this market which is dominated by United States of America, China and European Union and develop linkages to cater to this growing market. Early this year after the World Economic Forum in Davos, Switzerland, Botswana President Dr Mokgweetsi E.K. Masisi announced bold and visionary commitment to develop and build Botswana's 1st electric vehicle. This elicited a lot of excitement and mixed reviews in a country that is yet to build a home made combustion vehicle or bicycle.

The sceptics alluded the many reasons why we can never manufacture an electric vehicle due to past failures and energy infrastructural gaps that are yet to be filled. Those with eagle visions could picture #BWMade electric vehicles in 2050 cruising the streets of Gabs City and many solar powered gas stations all across the country. Innovation and failure are inseparable twins, past failures should never be a reason to not try new things. We should draw lessons from Thomas Edison who was able to light up his electric bulb at the 1,000 attempt. Visionary leadership is the missing puzzle that will catapult Africa to catch up with advanced economies and make innovation the heart of doing business. Botswana leadership recognize the role that her resources play in the green economy, hence the grand celebration of the Khoemacau Copper Silver Project, in H2 this year. On 18 July 2019 Cupric Cayon Capital, the owner of Khoemacau Copper Mines developing the Khoemacau Copper Silver Project, announced the additional US$85 million equity component to its project funding package bringing total available funding to US$650 million. The project funding package will be used for construction of Khoemacau’s 3.6 million tonnes per annum starter project, processing ore from a 91 million tonne resource, at a head grade of 2% copper and 21 g/t silver. First copper concentrate production is expected in the first half of 2021, with annual production averaging 62,000 tonnes of copper and 1.9 million ounces of silver for over 20 years.

Africa Mineral Resources Role

The Rise of Electric Vehicles | Page 12

Source:Cupric Canyon

Khoemacau Copper Silver Project clearly demonstrates how Botswana can be a leading producer and exporter of copper and silver with access to markets with sea ports like Namibia. Africa needs to be on the driving seat and steering the success of the green economy through active participation in the upstream and downstream process. Blockchain is already used in the supply chain of other minerals in Africa to promote transparency and boost investor confidence in African resources. The upside of climate change is the birth of new industries on the continent. We hope with lessons learnt from her past, Africa is now ready to create new green economy wealth and socioeconomic transformation for her citizens.




Public Private Partnerships (PPPs)

If you reside in the vicinity of Glenvalley wastewater treatment plant or happen to drive past the neighbourhood you will be met with a very distinctive whiff coming from the treatment plant. For some the smell is a nuisance and cause of concern. They either choose to suffer in silence and wait for the "Government" to come up with a solution of reducing the toxins to a considerable level. However, if you happen to belong to those with an entrepreneurial flair, many ideas of turning the nuisance and discomfort into a cash cow have already boggled your mind. Renewable energy is slowly making waves in Botswana as the country gears up efforts to meet United Nations Sustainable Development Goals by 2030. The enactment of the Botswana Energy Regulatory Authority in 2017 has also helped accelerate renewable energy efforts in a country that has over the years relied heavily on one source of energy, coal.

Wastewater to Energy Projects | Page 13

With load shedding still a recurring event especially during winter months when demand for electricity is high, Glenvalley wastewater treatment plant could potentially power the whole of Gaborone North Community and neighbouring villages and provide clean water to solve water shortage problems. More than 230 cities worldwide had adopted targets for 100% renewables in at least one sector by the end of 2018. According to the Renewable Cities Global Status Report cities are taking a leading role in advancing renewable energy through their efforts to achieve a wide range of interlinked environmental, economic and social goals. By the end of 2018, more than 230 cities worldwide had adopted targets for 100% renewable energy in at least one sector, and more than 50 cities had set comprehensive renewables targets covering the power, heating and transport sectors (REC-GSR).

Waste to Energy Projects | Page 14

Public Private Partnerships (PPPs)

At the recently held Land and Water Symposium in Gaborone the Ministry of Land Management and Water Sanitation Services reported that the Greater Gaborone area will need 180 million litres of water in the next five years. Current Supply

80 Mega Litres

Current Demand

145 Mega Litres

Through Public Private Partnerships (PPPs) the Government and private investors can form partnerships to invest in high impact water projects that will transform waste water to portable water to close the 65 mega litres gap. The Glenvalley wastewater treatment which is currently undergoing refurbishment has a capacity of 40 mega litres which can be used to supply water to more than 2,000 households in the Gaborone North area and neighbouring villages. The community will also benefit from sufficient supply of electricity through Independent Power Producer programme.

North South Water Carrier Pipeline Greater Gaborone Area According to the Minister of Land Management and Water Sanitation Services, the North South Water Carrier Pipeline (NSWC) can only supply the greater Gaborone area with 80 mega litres resulting in a short fall of 65 mega litres to meet current demand. This short fall exerts pressure on the Ministry and the main utility to look for alternative sources that would alleviate the shortage of water. Ground water provides 60% of water in Botswana compared to resevoir water, river water and other sources. The recycling of waste water to portable water is a viable solution that will solve the water crisis in the greater Gaborone area.

The transactional value of water projects is in the Billion Pula range, therefore domestic capital raising and resource mobilization through institutional investors should be explored to close the infrastructure funding gap in Botswana. Investing capital for impact is high priority as more companies whether public or private are required to include an integrated report in their annual financial statements to show their contribution towards community development and environment stewardship.

How ESG Affects Equity Valuation & Risk Performance

ESG Insigh ts | Page 15

Many researchers have studied the relationship between companies with strong environmental, social and governance (ESG) characteristics and corporate financial performance. A major challenge has been to show that positive correlations—when produced— provide explanations for the behavior. As the classic phrase used by statisticians says, “correlation does not imply causation. ”Instead of conducting a pure correlation-based analysis, we focus on understanding how ESG characteristics have led to financially significant effects. This way,we avoid the risk of datamining and we can differentiate between correlation and causality. We examined how ESG information embedded within companies is transmitted to the equity market. Borrowing the language of central banks describing how monetary policy can affect asset prices and economic conditions, we created three“transmission channels”within a standard discounted cash flow (DCF) model. We call these the cash-flow channel, the idiosyncratic risk channel and the valuation channel. The former two channels are transmitted through corporations’ idiosyncratic risk profiles, whereas the latter channel is linked to companies’ systematic risk profiles. These three transmission channels are based on the following rationales: Cash-Flow Channel: High ESG-rated companies are more competitive and can generate abnormal returns, leading to higher profitability and dividend payments. Idiosyncratic Risk Channel: High ESG-rated companies are better at managing company-specific business and operational risks and therefore have a lower probability of suffering incidents that can impact their share price. Consequently,their stock prices display lower idiosyncratic tail risks. Valuation Channel: High ESG-rated companies tend to have lower exposure to systematic risk factors. Therefore, their expected cost of capital is lower, leading to higher valuations in a DCF model framework.

We tested each of these transmission channels using MSCI ESG Ratings data and financial variables. For the two idiosyncratic transmission channels, high ESG-rated companies tended to show higher profitability, higher dividend yield and lower idiosyncratic tail risks. We also found that high ESG-rated companies tended to show less systematic volatility, lower values for beta and higher valuations, which verifies the valuation channel. Finally, we provide empirical evidence for a causal relationship between ESG and financial performance by looking at the extent to which changes in ESG Ratings predicted changes in financial variables. We found that the ESG Rating change may be a useful financial indicator in its own right, which we call ESG momentum. Introduction ESG investing is a very broad field with many different investment approaches addressing various investment objectives. At a top level, we can break down ESG investing into three main areas that each have their own investment objective: 1. ESG integration: where the key objective is to improve the risk-return characteristics of a portfolio. 2. Values-based investing: where the investor seeks to align his portfolio with his norms and beliefs. 3. Impact investing: where investors want to use their capital to trigger change for social or environmental purposes, e.g. to accelerate the decarbonization of the economy. This paper focuses on the first investment objective— ESG as a means to achieve financial objectives in portfolio management. In recent years, many researchers from both academia and the asset management industry have analyzed the relationship between the ESG profile of companies and their financial risk and performance characteristics. In fact, research has been so plentiful that several meta studies 1 have summarized the results of over 1,000 research reports and found that the correlation between ESG characteristics and financial performance was inconclusive:

ES G & Equity Valuation The existing literature found positive,negative and nonexistent correlations between ESG and financial performance,although the majority of researchers found a positive correlation.The reasons for these inconclusive results likely stem from the different underlying ESG data used and the varying methodologies applied, especially in how far they control for common factor exposures. However, even researchers finding a positive correlation between ESG and financial performance often fail to explain the economic mechanism that led to better performance, as they typically focused on historical data analysis. Harvey et al.(2016) highlight that this type of purely data-focused research entails the risk of”correlation mining,” i.e. over fitting a financial model to a specific data set to observe correlations that will not prevail when tested out of sample. To address these issues, this research paper takes a different approach. Instead of simply looking for correlations between ESG characteristics and financial performance in historical data, we: Analyze the transmission channels from ESG to financial performance and develop a fundamental understanding of how ESG characteristics affect corporations’ valuations and risk profiles. Verify these transmission mechanisms using empirical analysis. The advantages of this type of approach are threefold; It mitigates the risk of correlation mining between ESG data and financial performance data. We use MSCI’s Barra Global Equity Model for all financial and risk data. Model data has not been fitted in any way to the underlying ESG dataset. It reduces the risk of finding correlations that are caused by unintentional exposures to common factors. It better differentiates between correlation and causality by studying transmission channels. The existing literature found positive,negative and nonexistent correlations between ESG and financial performance,although the majority of researchers found a positive correlation.

ESG Insigh ts | Page 16 Why ESG Matters? To develop a fundamental understanding of how ESG characteristics affect corporations’ financial profiles, we rely on existing corporate finance models in establishing the transmission channels of ESG to the financial world. El Ghoul et al. (2011) and Gregory et al. (2014) show that a DCF model framework(which describes a company’s value as the sum of future cash flows, discounted at the cost of capital) can be used to break down the influence of a corporation’s ESG profile on equity valuations, including cash flows, risk and cost of capital. The authors argue that it is important to differentiate between the systematic and idiosyncratic risk of equities. Gregory et al. (2014) explain that systematic risk is macroeconomic in nature and describes the general market risk all companies are exposed to, e.g. the risk of shocks in commodity prices, interest rates or inflation rates. Systematic risk also includes industry-wide issues such as regulatory changes, technological developments and stranded assets.In contrast, firm-specific risk is particular to a company. The distinction between systematic and firmspecific risk is highly important for analyzing the impact of ESG characteristics on corporate valuation, because investors can typically diversify away firm-specific risk. Therefore, it is solely the systematic risk component that determines shareholders’ required rate of return as compensation for the risk to which they are exposed. Consequently, within a DCF model, systematic risk is typically captured through the cost of capital (i.e. the denominator in the DCF model), whereas firm-specific risk is linked to the numerator of the DCF model, i.e. future cash flows.We follow this approach and use a standard DCF model as a starting point of our analysis. However, instead of simply analyzing the impact of ESG characteristics through the discounted cash flow model, we take the investor’s perspective and break down the influence of ESG characteristics on corporations into three transmission channels: the cash-flow channel, the idiosyncratic risk channel and the valuation channel.

ES G & Equity Valuation

ESG Insigh ts | Page 17

Idiosyncratic Transmission Channels In this section, we analyze the company-specific impact of ESG on risk and performance.The firm-specific risk profile of companies is transmitted through the numerator (future cash flows) in the DCF model framework and can be broken into two separate channels: The transmission of ESG into future opportunities and therefore into profitability on the one hand, and the transmission to firm-specific downside risk protection on the other.

Gregory et al. (2015) explain the economic rationale of the cash-flow channel: 1.Companies with a strong ESG profile are more competitive than their peers. For instance, this competitive advantage can be due to the more efficient use of resources, better human capital development or better innovation management. In addition to this, high ESG-rated companies are typically better at developing long-term business plans and long-term incentive plans for senior management. 2.High ESG-rated companies use their competitive advantage to generate abnormal returns, which ultimately leads to higher profitability. 3. Higher profitability results in higher dividends. The competitive advantage of high ESG-rated companies cannot be readily observed. Therefore, our empirical analysis focuses on the second and third steps of the cashflow channel, i.e. higher profitability and higher dividends. Higher Profitability and Dividends We found data supporting the assertion that high ESGrated companies (Q5) were more profitable and paid higher dividends, especially when compared to bottom quintile (Q1) companies, as can be seen in Exhibits 1 and 2.

High-dividend yields play an essential role in our analysis, because sustainability investors typically have a long-time investment horizon 4. Gupta et al. (2016) analyzed the importance of dividends for long-term performance. Exhibit 3 illustrates their breakdown of the total return for the MSCI ACWI Index into stock price increases, dividends and dividend growth, over different time periods. The performance contribution of dividends to portfolio returns was increasingly important as time horizons lengthened.

ES G & Equity Valuation Therefore, the apparent tilt of high ESG-rated strategies, such as the ESG Universal Index towards high dividendpaying companies may have helped enhance medium to long-term improvement of risk-adjusted returns. The economic rationale for this transmission channel is explained in Godfrey etal. (2009), Jo and Na (2012) and Oikonomou et al. (2012). It is summarized as follows: 1.Companies with strong ESG characteristics typically have above-average risk control and compliance standards across the company and within their supply chain management. 2.Due to better risk control standards, high ESG-rated companies suffer less frequently from severe incidents, such as fraud, embezzlement, corruption or litigation cases (cf. Hong and Kacperczyk [2009]) that can seriously impact the value of the company and therefore the company’s stock price. Hoepner et al.(2013) call this an “insurance-like protection of firm value against negative events. 3.Less frequent risk incidents ultimately lead to less stockspecific downside or tail risk in the company’s stock price. The authors also support this transmission channel by empirical analysis. For instance, Hoepner et al. (2013) observe that high ESG-rated companies showed statistically significant lower downside risk measures, such as volatility, lower partial moments and worst-case loss.

ESG Insights | Page 18 Systematic Risk Transmission Channel We now analyze how companies’ ESG profile impacts their exposure to systematic risk and how this impact may ultimately lead to financially significant effects. In a DCF model framework, the systematic risk exposure affects the denominator of the DCF model. Valuation channel Eccles (2011), El Ghoul et al. (2011) and Gregory et al. (2014) argue that a strong ESG profile leads to higher valuations through the following transmission process:

Their economic rationale is as follows: 1.Companies with a strong ESG profile are less vulnerable to systematic market shocks and therefore show lower systematic risk. For instance, energy or commodity-efficient companies are less vulnerable to changes in energy or commodity prices than less efficient companies and therefore their share price tends to show less systematic market risk with respect to these risk factors. 2. In a CAPM model framework (cf. Ruefli 1999), the beta of a company has two important functions: first, beta measures the systematic risk exposure of companies(i.e. lower beta means less systematic risk) and second, it translates the equity risk premium into the required rate of return for the individual company.Therefore, lower systematic risk means a company’s equity has a lower value for beta and therefore investors require a lower rate of return. Ultimately, this translates into a lower cost of capital for a company. This argument can be extended to multi-factor models, where the systematic risk exposure of a company is measured by several factor loadings instead of one beta. 3. Finally, a lower cost of capital leads directly to the last step of the transmission mechanism: in a DCF model framework, a company with lower cost of capital would have a higher valuation.

ES G & Equity Valuation ESG and Stock Performance As previously discussed, the jury is still out as to whether good ESG characteristics have led to higher stock returns. In the following, we run a 10-year backtest with monthly rebalancing of the five ESG quintile portfolios. These five sub-portfolios are equally-weighted and–for the sake of simplicity– are not neutralized with respect to other factor exposures. Since regional differences have affected the contribution of ESG characteristics to financial performance, we have split the simulation into two regions: US equities and MSCI World ex-US equities. Exhibits 18 and 19 show the performance of the five ESG quintile sub-portfolios for these two regions over time.

ESG Insights | Page 19 In both regions, the highest ESG-rated companies’ quintile (Q5) performed slightly better over the 10-year backtesting period than the other quintiles. In Europe, the two lowest ESG quintiles (Q1 and Q2) provided the weakest performance; therefore, the performance advantage of higher ESG-rated companies is visible across the entire universe. In contrast to Europe, there was little difference in performance in the US for the different ESG quintiles; there was no statistically significant performance difference between quintiles Q1 to Q4. Overall, higher ESG-rated companies mildly outperformed those with lower ratings. Conclusion By creating transmission channels, we have shown how ESG has affected the valuation and performance of companies, both through their systematic risk profile(lower costs of capital and higher valuations) and their idiosyncratic risk profile(higher profitability and lower exposures to tail risk). Thus, the transmission from ESG characteristics to financial value is a multi-channel process, as opposed to factor investing where the transmission mechanism is typically simpler and one dimensional. In addition, ESG ratings were lower in intensity than traditional factors, such as momentum or low volatility (i.e. the financial impact per unit of time for ESG ratings is relatively low), but typically lasted for several years. Classical factors such as momentum typically have lasted for a few months only, making them suitable for factor investing but not necessarily as long-term policy benchmarks. Authors Guido Giese:Executive Director, Equity Applied Research, MSCI Linda-Eling Lee:Managing Director, Global Head of ESG Research, MSCI Dimitris Melas :Managing Director, Global Head of Core Equity Research, MSCI Zoltan Nagy:Vice President, Equity Applied Research, MSCI Laura Nishikawa: Executive Director, Director of ESG Research, MSCI

SDG 13 Climate Action

Global Shapers Botswana Community| Page 20

Creating Resilient Communities Through Climate Action – Th e Global Shapers Community Gaborone Hub The World needs to accelerate in improving a climate resilient society with efforts of fighting climate change, as its impacts do not wait for our efforts any longer. It is time to bring new civilization with environment friendly practices that endorse sustainability such as clean energy technologies and infrastructures that bring about innovative solutions to the global economy. The government of Botswana is one of the states that has endorsed the adoption of the Paris Agreement on climate change and the adoption of the Sustainable Development Goals (SDGs). This is a commitment made by different member states to take action in constructing an inclusive and prosperous economy by implementing policies that promote sustainable energy and social innovations with efforts of reducing carbon emissions that continue to pollute the environment among other factors. Through collaborations and partnerships Botswana has pledged to work closely with the UNDP to advance the country’s National Development Plan 11 (NDP 11) efforts in promoting environmental friendly practices by focusing on vision 2036 country pillars.

Part of the pillars is promoting a sustainable environment by designing policies and programs that feed into the latter,implementing and data monitoring and evaluation of the implemented programs to track success. Implementation of policies and programmes that endorse the Agreement and the SDGs cannot be achieved by the government and the United Nations only. Through a collective approach civil societies are urged to take part in co-creating projects and platforms that help promote sustainable environment and infrastructures to achieve a resilient society. The Global Shapers Community–an initiative of the World Economic Forum, is made up of a group of young activists with a mandate to solve the world’s cross cutting issues through dialogue and implementing projects from the grassroots is one of the Organizations that has taken a pledge in fighting climate change.

“We are a diverse group of young people with ambition to disrupt and impact our communities in a positive way. As countries celebrate their progress we shall be proud to be among civil societies that have contributed positively to a sustainable Botswana. “ Louisa April Global Shapers Community Curator

SDG 13 Climate Action

Part of the Hubs strategic goal is to serve a purpose through interacting with local communities,providing insight on matters of the sustainable environment using different experts in the field and most importantly creating a positive impact in the community. The Hub has launched projects on renewable energy resources and awareness campaigns on environmental issues. Late 2018, the hub partnered with Day Bright, an enterprise set up to promote sustainable energy thorough the provision of solar lamps to rural communities with limited to no access to power connectivity. This was also an effort by the two in making a transition to an environmentally sustainable future by transforming local communities fundamentally. More than 200 solar lights were donated to Tloaneng, a small village located between Gabane and Mankgodi in the Kweneng District and Kgope. Prior the donation, residents of the two villages had no access to power connectivity therefore they used paraffin lamps and candle light which was a bit costly for them.

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By promoting the use of solar lamps in the two rural areas, residents can now use direct sunlight to charge the system, and can now save money as the solar lamps were more affordable and user friendly as opposed to their old practice of using non-renewable energy resources. As part of supporting the country’s policy framework on climate climate change, Global Shapers has endeavoured a Hub policy through their 2018-2023 strategic plan which strives to raise awareness issues on climate action. The hub partnered with young environmental activists (Pato Kelesite of Love is Art, Lerato Modiega- Yarona FM Radio host and Malcom Ex- activisit) in launching a clean-up campaign in the city of Gaborone. This was to sensitize the public on the importance of keeping a clean sustainable cities and why zero waste matters. Often times people throw away litter in all forms from sweet wraps, plastic wraps, cans, bottles, and cigarettes buds just to name a few.

SDG 13 Climate Action

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Often times people throw away litter in all forms from sweet wraps, plastic wraps, cans, bottles, and cigarettes buds just to name a few. Even though these might sound so little, they cause harm to the environment.If the world could count the number of cigarette buds disposed in the public areas, we would all be amazed. The project was a success as it attracted high reach on social media and was also covered on print media. The hub is to build up into the first campaign and organize monthly cleanup campaigns to challenge people’s perceptions on waste disposal. September 2019 all nations will meet at the UN General Assembly for a summit that will track progress on the SDGs since their adoption. The Global Shapers Community Gaborone Hub is proud to have contributed significantly in advancing the goals.

“We are a diverse group of young people with ambition to disrupt and impact our communities in a positive way. As countries celebrate their progress we shall be proud to be among civil societies that have contributed positively to a sustainable Botswana. " Louisa April Global Shapers Community Curator Prepared by: Busang D. Maruping, Head of Communications and PR Global Shapers Gaborone Hub E-mail: globalshapersgc@gmail.com

Africa Mining Summit 2019

Morupule Coal Mine Business Development Manager Mr Matthews Bagopi chaired the energy generation mix of the future with panelists; Mr Louis Lubser CEO of Mooiplaats Colliery, Boswa Energy Executive Director Mr Tumelo Sealetsa, and Tlou Energy Executive Director Mr Gabaake Gabaake .

Mining 4.0 & the Future of Work-LCM Capital CEO Ms Lindiwe Mafavuneh exploring a microdrone at the AMS 2019 Stalls.

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#AMS2019 Conference had great representation from 14 African Countries including Mining & Mineral Resources Ministers and representation from the African Union.

Day 2 of #AMS2019 covered de-risking Junior Exploration Investments through Blockchain Solutions via Initial Coin Offering , Sovereign Funds and Incubators.

Future Energy Trends

Lindiwe Mafavuneh Founder & CEO LCM Capital Research & Analytics Unit

The embroynic nature of Botswana Energy Industry presents infinite opportunities for local entrepreneurs, international investors and local institutional investors to seize and create real value for their shareholders. Botswana imports 100% of their fuel and petroleum products from neighbouring countries and the national energy mix base load is predominately coal. The 212 billlion tonnes of coal will see the emergence of 100% citizen owned companies or majority locally owned companies who will step up to the plate to close the import bill and offer #BWMade petroleum products and independent power producers will sell electricity resulting in competitive prices for the end users. With climate change at the top of everyone's risk register, pressure will be exerted and felt by countries who have always leaned towards fossil fuel as the lifeblood of generating energy. Botswana is under pressure to find alternative ways to de-carbonize and be better environmental custodians for future generations.

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Biofuel will in the coming years take center stage as a zero carbon alternative that is sustainable and easy to scale compared to coal exploration. We predict that Million Pula funding will be pledged towards bio-fuel and energy research to assess viability and bankability using indigenous feedstock that is abundant throughout the country. Corn remains a viable feedstock that has been proven in other markets like Brazil, USA and China, however, for Botswana it is a far fetched dream as the country is still suffering from lack of sufficient local corn production. Botswana food import bill is at a staggering P12 billion, therefore it will take more than 5 years to close the gap with local production.

The flip side of climate change and climate action is the birth of new industries that well resourced countries can leverage on. Although Botswana is yet to develop a strong renewable energy market despite the abundance sunshine, the rise of the electric vehicles and year on year sales growth as shown on the 2018 global sales above and the high demand for copper and silver will incentivize the policy makers and business leaders to hop on the green economy train. The green economy holds the key to boosting manufacturing and directly creating thousands of jobs for unemployed youth across the country.


Phone : (267) 77629055 e-mail:enquieries@lcmcapital.co.bw