Sleepy railways and a just transition

There is something arresting about the sound and vibrations of a big, oncoming train.

Your best bet to experience the sensation is in Mpumalanga. Its railways see consistent locomotive freight traffic. Their load? Mostly the pitch-black coal usurped by our powerplants.

Roughly 5% of Mpumalanga’s workforce, including the drivers of those trains, is dependent on the coal industry, either directly or indirectly. Each of those employed in the sector is shown to support three dependents.

It is, therefore, understandable that South Africa’s touted transition to renewable energy, seemingly at the expense of coal, is creating angst.

The train is coming down the track

Because South Africa is the most unequal country in the world, any action that threatens employment, particularly the unskilled kind that barely keeps poverty at bay, will naturally evoke a strong political and social reaction.

A 2019 estimate put the number of people employed by the SA coal industry at 200,000, equivalent to 1% of the formal workforce. If each of them supports three dependents, shuttering coals mines today would push nearly a million people into hardship, an unacceptable outcome.

However, whether we choose to close them or not may be a moot point – global market forces will make the decision for us:

• Coal contributed 30% to the global energy mix in 2017. According to Bloomberg New Energy Finance (NEF), that number will drop to 5% by 2050.
• 87% of SA’s electricity comes from coal-fired power stations that are responsible for 40% of SA carbon emissions for which we rank as the 13th worst emitter in the world.

In other words, our coal industry faces both demand headwinds (30% of our mined coal is exported), as well as the risk of becoming an economic pariah in a global economy that wants to do business with countries using clean energy.

The idea of a ‘just transition’ – which South Africa has pioneered – is essentially a roadmap to mitigate those risks while protecting the people who depend on the coal industry for their livelihoods.

The light at tunnels-end

The South African COP26 delegation left the 2021 Glasgow conference well-pleased: they had secured $8,5bn worth of concessionary funding – a critical lever for a just transition – from developed countries to invest into renewable energy development.

How does that support help us protect those employed by the coal sector, as well as reduce overall unemployment?

1. Any money the government can save on the development of renewable energy infrastructure can be spent on upskilling coal-facing employees for the clean energy economy.
2. For every ten jobs created in renewables, 5 to 10 are created in manufacturing supply chains, with more in services, transport and logistics.
3. Existing coal-fired power stations can be converted to run on natural gas or hydrogen, reducing the need to relocate local workers to faraway wind or solar farms.

The caveat here, and it’s a big one, is that roughly 70% of the jobs created by renewable energy development will require highly skilled workers (> grade 12). The projects are also front-loaded in terms of job creation with most opportunities found in the construction phase (~60%) and fewer in the longer-term operation and maintenance (O&M) stage.

Still, given the gargantuan magnitude of the required renewable energy builds to come, the transition could and should be a catalyst for higher employment in South Africa.

Investment consequences

There is perhaps nothing more important for South Africa’s future than the reduction in our stark unemployment and inequality.

Further deterioration on those fronts would lead to instability that deters investment and stymies growth, creating a vicious circle that begets more unemployment and eventually civil unrest. Such an outcome would likely diminish the long-term return potential of the financial and real assets domiciled in our country.

In the short-to-medium term, investors should look to tilt their portfolios towards companies and sectors that are positioning themselves to be part of or aligned with the transition to cleaner energy, and away from those denying its inevitability.

To be sure, such decisions will mostly be made in the grey: many coal mining companies also unearth the commodities of clean energy like cobalt, copper, lithium, aluminium and manganese.

The black and white approach – where companies are excluded outright from your investment universe because of their negative impact on the environment – is fraught with problems in our shallow market. For one thing it can cause risky portfolio concentration. For another, it cuts the lines of dialogue.

Two-way communication

Any transition is difficult because it involves change; people tend to rail against threats to the status quo for two primary reasons:

1. They can’t see themselves as relevant or valuable in the future it portends
2. It undermines their sense of self and control

For a just transition to take place in South Africa, buy-in from all stakeholders, both public and private, is paramount. The investment management industry has a critical role to play in that regard.

As institutional shareholders, we must engage with company management to assess their exposures to the clean energy transition and, where necessary, encourage and drive initiatives to protect vulnerable employees and communities.

In summary, we must see the just transition opportunity as the framework which brings together climate change action, sustainable development and inclusive growth.

The Mpumalanga railways will get a bit quieter in years to come. That’ll be a good thing only if the train conductors can be found working in renewables. Sadly though, a solar panel will never go clickety-clack.