The climate megatrends demand responsible investing

By Teboho Makhabane, Head of ESG and Impact at Sanlam Investments

The escalating global temperatures threaten to disproportionately impact the world’s most vulnerable populations, highlighting the urgent need for action on climate change.

In February, South Africa experienced scorching temperatures that were more than just rocketing statistics. These extreme conditions served as a stark reminder of the pressing need to tackle climate change, highlighting the discomfort and health risks at stake.

Since 2016, KwaZulu-Natal (KZN) has experienced multiple flooding incidents, with recorded floods occurring in July 2016, May 2017, October 2017, March 2019, April 2019, November 2019, November 2020, April 2023, June 2023, and now in January 2024. These recurring events are unfolding before our eyes, reshaping our environment and impacting lives and livelihoods. We are on the brink of surpassing the critical 1.5 degrees Celsius temperature increase above pre-industrial levels, highlighting the urgency for concerted action.

The social cost of climate inaction

In its Big Book of Sustainable Investing, one of Sanlam Investments’ key sustainability partners, Robeco, makes it clear that to achieve the Paris Agreement goal of restricting global warming to 1.5 degrees at the end of this century, the planet must be carbon neutral by 2050. Already, climate impact is disrupting nature and affecting the quality of life of three billion of the globe’s most vulnerable people across Africa, Asia and small island states.

As the climate heats up, crop failures become more common. Over a billion people face increased flood risks and their access to fresh water is diminishing. The poorest communities in developing countries – the ones with the least involvement in catalysing climate change – will continue to be hit the hardest. Yet, the richest 10% of the world population causes about 40% of global emissions. Climate is a social issue; its impact is felt differently – and not always equitably.

The climate megatrend

Halving global emissions from 2010 levels by 2030 is crucial to limiting warming to 1.5 degrees Celsius. However, emissions rose by 12% in the last decade alone, pushing the world towards a 2.4-2.7 degrees Celsius increase. The core of this crisis lies in our deep-rooted reliance on fossil fuels for every facet of our lives, from transportation to housing.

Addressing this requires not only awareness but a concerted, systemic shift. Robeco highlights that accessible, low-cost solutions exist across sectors capable of halving emissions by 2030. Achieving this, at a cost of merely 2-4% of global GDP by 2050, is a feasible investment for our planet’s future. However, the transition’s complexity and scale mean that delaying action only compounds the challenge.

This monumental task demands immediate, strategic action to ensure a manageable transition and procrastination only exacerbates the difficulty of our necessary evolution away from fossil fuels.

The idea that people living in Africa bear minimal responsibility for global emissions and should therefore remain on the sidelines of climate change discussions is flawed. Our direct experiences with natural disasters highlight the urgent need for engagement. We are not just observers; we are directly impacted by climate change. This reality requires our active participation in the conversation, advocating for solutions that address our unique vulnerabilities and contribute to global resilience.

An active approach to a just energy transition

Sanlam Investments advocates for an active ownership and engagement, working with corporates to drive sustainability best-practice and positive change. A just energy transition remains a top priority, recognising the role investment managers must play to facilitate the actualisation of climate-compatible and climate-resilient growth.

The financial sector still hasn’t fully factored in climate transition risks due to uncertainties related to net-zero transition. Without clear policies in place, investors adopt a ‘wait and see’ strategy, accumulating financial risks in the process, which pose material risks to investment portfolios.

Future investment performance will increasingly rely on future-looking data where scenario analysis becomes important. We must consider what the financial impact of the worst-case climate scenario would be and ensure we have the in-house expertise to use this data meaningfully.

The net-zero transition brings big challenges and massive opportunities, due to the magnitude of the investment required. Now is the moment for global asset managers to get ahead and back the carbon winners of tomorrow. Now is the moment for investors to exercise their responsibility to use their funds to change the future.

The role of sustainable investment

The Intergovernmental Panel on Climate Change (IPCC), which is part of the United Nations, estimates climate investment is about US$600 billion per annum. It needs to increase up to six-fold to grow to requisite needs. Investment in coal and oil currently is about US$800 billion each year. A shift over the next five years is imperative – and inevitable. Sanlam Investments is leading the charge in sustainable investing. We aim to invest with confidence in a future we need.

Disclaimer

Sanlam Investments consists of the following authorised Financial Services Providers: Sanlam Investment Management (Pty) Ltd (“SIM”), Sanlam Multi Manager International (Pty) Ltd (“SMMI”), Satrix Managers (RF) (Pty) Ltd, Graviton Wealth Management (Pty) Ltd (“GWM”), Graviton Financial Partners (Pty) Ltd (“GFP”), Satrix Investments (Pty) Ltd, Amplify Investment Partners (Pty) Ltd (“Amplify”), Sanlam Africa Real Estate Advisor Pty Ltd (“SAREA”), Simeka Wealth (Pty) Ltd and Absa Alternative Asset Management (Pty) Ltd (“AAM”); and has the following approved Management Companies under the Collective Investment Schemes Control Act: Sanlam Collective Investments (RF) (Pty) Ltd (“SCI”), Satrix Managers (RF) (Pty) Ltd (“Satrix”) and Absa Fund Managers (RF) (Pty) Ltd. Sanlam is a full member of ASISA. Please note that past performances are not necessarily an accurate determination of future performances, and that the value of investments/collective investment units/unit trusts may go down as well as up.

The information in this article does not constitute financial advice. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.