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December 06, 2012

Institutional Investors Unprepared for Climate Change Impacts in South Africa
    by Robert Kropp

A report from WWF South Africa and SinCo outlines impacts that are expected to be worse in South Africa than elsewhere, and warns that the portfolios of institutional investors are failing to account for climate change and the impacts of an upcoming carbon tax.

SocialFunds.com -- The impacts of climate change in South Africa are expected to be especially pronounced. While global temperatures are on track to increase by four degrees Celsius by 2100—the adaptation to which is uncertain at best, according to a recent report commissioned by the World Bank—the increase in South Africa is expected to be even greater, as much as seven degrees Celsius after 2050.

Compounding matters for South Africa is the fact that the nation remains one of the highest emitters of greenhouse gases in the world, due to its reliance on coal for the production of electricity.

South Africa is already a water-stressed nation, a condition that temperature increases due to climate change will exacerbate. "Demand for water in South Africa is expected to outstrip supply by 2025," according to a recently published report entitled Navigating Muddy Waters: Securing Investment Returns under Carbon and Water Constraints. "In instances of water scarcity, the supply of water to people will be prioritized over supply of water for industry, situating water security as a priority for business since water availability, quality and quantity impact businesses' ability to operate."

The report, produced by WWF South Africa and SinCo, synthesizes the findings of four reports previously released by the authors in collaboration with Trucost, the Carbon Tracker Initiative, and South Africa's Government Employee Pension Fund (GEPF). With the nation poised to introduce a carbon tax in 2013, the report warns, the portfolios of institutional investors are endangered if they do not account for climate change and freshwater risks.

Unfortunately, "there are currently limited opportunities for institutional investors…to invest in renewable energy, making it difficult for the private sector to contribute to higher levels of low carbon electricity generation," the report points out. "The implementation of the carbon tax and the strategies in the National Climate Change Response white paper will be an important litmus test of the role of regulatory mechanisms in catalyzing the development of a low carbon economy with commensurate low carbon financial markets."

The report includes an exhaustive list of recommendations, for companies, investors, regulators, and policymakers, to address the growing crisis of climate change in South Africa. "If unmitigated fossil fuel combustion continues to increase, then all sectors would be affected by physical climate impacts," it states. "Agriculture, property, infrastructure, power generation and insurance will all be hit by the climatic changes that will result from exceeding carbon budgets."

For investors to account for climate change impacts, the government should "implement 50% of electricity supply from renewable resources by about 2035 as an objective of current planning." The current regimen falls far short of this goal, as it "allows emissions from coal-based electricity generation to continue increasing until 2023 while increasing new electricity generation from renewable sources to only 9%."

"Investors need to take these impacts (of the upcoming carbon tax) into account," the report concludes, "particularly since the research findings indicate that institutional investors are mostly not pricing climate change and fresh water risks as a result of policy, technology and environmental impacts when making investment decisions."

"From our analysis of institutional investor attitudes, if a carbon tax price appears in portfolios, it is modeled at very low prices; more for equity than fixed income portfolios," Graham Sinclair, Principal at SinCo and co-author of the synthesis report, said. "This suggests investors are not factoring in the costs, downplaying the industry impacts, not valuing low-carbon business models, or ignoring it."

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