Date: 15 Nov 2004
South African asset managers should use their collective power to demand disclosure on how to manage risk posed by climate change, says Frater Asset Management, a forward-looking fund manager on the issue of shareholder activism.
Last week, the R4-billion fund upped the ante on governance and disclosure when it said that it would publish all its proxy voting decisions at company annual general meetings (AGMs) on its website.
Now its analyst Amanda Dinan, who specialises in social and environmental risk, has called on institutional investors to recognise climate change, or global warming, as an economic rather than merely an environmental issue.
Dinan argues that at global and local level, environmental change has the potential to destroy shareholder value. She notes a recent insurance company brief that says companies are “lulled into a false sense of security by a history of mild weather conditions” and do not consider the effect “that weather volatility might have on revenue streams”.
Dinan suggests that companies should now be compelled to make disclosure on matters relating to climate change, such as carbon emissions. She says the issue is not currently receiving priority attention because of South Africa’s pressing social and economic development agenda, a lack of emissions targets and regulatory framework, low but improving levels of commutations from the government, and a general lack of investor interest.
She notes that stockbroker reports on Sasol hardly mention carbon dioxide emissions. Yet the petrochemicals giant has significant emissions in global terms and has been working on a strategy for years.
The practice of scrutinising companies’ green policies is already widespread in the United States and Europe. These include the Carbon Disclosure Project, a collaboration of 95 institutional investors worldwide that engages the FT 500 companies on climate change. There is also the Institutional Investor Network on Climate Risk, which represents members with more than $400-billion in assets.
Some leading European banks, including Deutsche and UBS Warburg, have released quantitative analysis on the subject. One such report estimated that in July 2003 the market value at risk for the world’s equity markets was between $192-billion and $916- billion.
Climate change is also one of the fastest growing areas of shareholder activism, with 30 shareholder resolutions tabled at AGMs across the US by August this year.
South Africa’s contribution to, and threats arising from, global warming are far more serious than investors realise, Dinan suggests. She cites research predicting a 4,5°C rise in temperature in the country’s interior and a drop in rainfall in most regions by up to 25% by 2050, linked to carbon emissions by mining, an energy-intensive industrial sector and coal use in electricity production.
In 1990 South Africa is estimated to have contributed 1,2% to global warming. As a developing country, South Africa is spared the strict emission controls of the global treaty on climate change, the Kyoto Protocol.
However, Dinan points out that because the emission levels of developing countries catch up with those of their developed counterparts, they will inevitably be subject to restrictions
The immediate risk lies in a higher frequency of floods, water shortages, restrictions and, therefore, higher prices.
But there is a hidden risk. As countries raise their levels of awareness, South African exports could be subject to penalties, because the country’s production processes entail higher emissions. Sony, for example, takes climate change management into consideration in sourcing supplies.
In 2003 the Carbon Disclosure Project found BHP Billiton to be the only responding company to factor the cost of emissions into investment decisions, through the use of carbon “shadow” prices.Other risks, Dinan says, include heat-related health stress for employees and damage to economic infrastructure. The upside of increased awareness is increased demand for South Africa’s aluminium, platinum and high-performance steel.
