The most interesting moment during my recent interview with the CEO of Arcelor Mittal was when I asked her about the potential R600m a year carbon tax liability the steel maker faces. She immediately folded her arms, gave a rehearsed response and shot me a look that said let’s move on. Quickly. Unfortunately, we were near the end of the time allowed for the CNBC Africa interview so it wasn’t possible to dig deeper. But the obvious conclusion from the body language is Carbon Taxes are very much on her agenda. And surely at other big industrial corporations as well. Which means it should also be for investors. Yet very little attention is being paid to the potential liability of the country’s major polluters. In this insightful blog, Chris Loker unpacks contemporary thinking around renewable energy and explains why it is such a critical new variable for investors to work into their spreadsheets. – AH
By Chris Loker*
“The trend is your friend” in finance and the money-men seem to have noticed the trend of climate change.
Locally, UBS, Deutsche Bank, Goldman Sachs and Nedbank are targeting alternative energy and discussing the consequences of a carbon asset bubble. The overwhelming majority of scientists say the earth is warming, humans have caused it and the consequences may be catastrophic if it continues.
As President Obama said recently, this is no time for a meeting of the Flat Earth Society. May 2013 was the 339th consecutive month of above average global temperatures and we have already breached the 400 parts per million (ppm) carbon limit we were warned about.
This must shift the focus in capital markets from short term gains toward long term consequences. And, I believe, give rise to the mother of all asset bubbles for carbon producing industries.
The Carbon Tracker Initiative estimates that between 50-80% of known coal/oil/fossil fuels should be left unused to prevent temperature rises over 2 degrees Celsius, which the International Panel on Climate Change suggests is prudent. The impact this would have on business valuations is enormous, even before another UNEP sponsored report’s assertion that NONE of the top 20 industrial regions/sectors would be profitable if environmental costs were accounted for. The report puts the unpriced natural capital cost at $7.3 trillion pa, a staggering 10% of global GDP. The biggest culprit is coal power production.
These challenges represent a massive opportunity if the flow of money can be altered.
Traditionally, investment houses allocate capital based solely on returns. They do not account for the positive or negative externalities created by businesses employing this capital.
In the last few decades, therefore, many financial institutions have tended to focus mainly exclusively on the demands of shareholders. To the detriment of others such as local communities, employees and the environment. Often projects with negative social and/or environmental impacts have received capital, while projects offering measurable benefits to society have not been allocated much-needed capital.
Chasing yield is often detrimental to shareholders in the long run anyway. Even though the local banking industry dodged the sub-prime bullet, it is no stranger to asset bubbles. It happily funded microlending, dotcom, Contracts for Difference, unsecured lending and other fashionable attractions with negative consequences.
This has been happening at the same time that social enterprises targeting sustainability outcomes as well as profit are battling to raise capital due to their perceived higher risk. But ‘Sustainability’ has now evolved from a social movement into a market opportunity. This has happened through the growth of new market options which are healthier, cleaner and more efficient.
South Africa correctly trumpets R50bn invested in the first round of the Independent Power Producer programme to deliver 20% of electricity from alternative sources by 2030. But this needs to be compared with R300bn being spent on coal fired power plants. And California where all new power generation will come from renewables this year. Or Germany where 50% of power is delivered by renewables. Perhaps we are thinking too small?
So what is the true cost of carbon producing power? And what happens when the carbon tax is introduced in 2015?
Jason Drew, one of rising breed of local ‘ecopreneurs’, talks often of Africa’s potential to leapfrog the developed world by
investing in future-proof technology rather than trying to ‘catch up’. In the same way that the continent skipped landline telephony and went straight to mobile, we have an opportunity to take a leadership position with farsightedness, and at the same time, “repair the future”. President Obama reinforced this notion for the continent during his recent visit. After all, solar energy alone hitting earth in a year is 20 000 times more than what the whole of humanity consumes annually. And South Africa is the third-best solar location in the world with one of the highest and most stable solar radiations.
Investors are rushing to Africa, lured by new markets and consumers, resources, growth and infrastructure opportunities. We’re at an inflection point. Will we choose coal, mining, arms, oil, nuclear, chemicals, casinos and consumptive manufacturing. Or organic farming, renewables, entrepreneurs, energy efficiency, water and affordable housing?
We are on the cusp of a post-carbon revolution that could be as big as the fossil-fueled Industrial Revolution. With our underdeveloped infrastructure there would be significant advantage to investing in job-intensive, clean technology that enhances food and water security as well as advancing health benefits.
In the future, water, food, conservation and renewable energy could be worth more than diamonds, gold and coal.
* Chris Loker is a financial services strategy consultant and founder of a sustainable finance company. Follow him on twitter at @waterfinancial
