Teboho Makhabane | The climate megatrend and what it means for investors

As I write this, I am reminded that the scorching heat South Africa faced this February and historic high temperatures felt around the country, are not just statistics. The discomfort and dire health impact are stark reminders of the pressing urgency that surrounds us. In 2023, South Africa felt the full brunt of climate change, underscored by the devastating floods in KwaZulu-Natal and erratic weather patterns sweeping across the nation.

No longer a distant threat, these changes are unfolding before our eyes, transforming our environment, and impacting lives and livelihoods. With temperatures climbing and the spectre of El Niño looming, promising to intensify these conditions, we’re inching closer to surpassing the critical 1.5 degrees Celsius temperature increase per year that has been forecast. This is not just about the numbers on a thermometer; it is about the homes swept away, the fields left parched, and the economic instability that follows in the wake of these relentless climatic shifts.

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.

The effects of climate change are not felt evenly across the globe, with African countries and their most vulnerable communities bearing a disproportionate brunt of the consequences. These regions – often least responsible for the carbon emissions driving climate change – are on the frontline, facing heightened risks from extreme weather events, food and water shortages, and economic instability. Myriad crops across the world will fail. Over a billion people will face flood risks. Many will no longer have easy access to fresh water. And the poorest communities in developing countries – the ones with the least involvement in catalysing climate change – will continue to be hit the hardest. The richest 10% of the world population cause about 40% of global emissions. Climate is a social issue; its impact is felt differently – and not always equitably.

The Climate Megatrend

By 2030, halving global emissions from 2010 levels is crucial to limit warming to 1.5 degrees Celsius. Yet, we’re veering off course, with emissions rising by 12% in the last decade alone, pushing us towards a 2.4-2.7 degrees Celsius increase. The core of this crisis is our deep-rooted reliance on fossil fuels – a dependency entwined with every facet of our lives, from transportation to housing, making it seem insurmountable to overcome. 

Addressing this requires not just 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 delay only compounds the challenge. It’s a monumental task that necessitates immediate, strategic action to ensure a manageable transition, acknowledging that every moment lost makes the path to sustainability steeper and the goal of 1.5 degrees Celsius increasingly elusive. The time to plan, act, and accelerate our efforts is now; procrastination only exacerbates the difficulty of our necessary evolution away from fossil fuels.

An active approach to a just energy transition

Sanlam Investments emphasises an approach of active ownership and engagement, whereby we work with corporates to drive sustainability best-practice and positive change. A just energy transition remains one of our main priorities and we acknowledge the role investment managers must play to facilitate the actualisation of climate-compatible and climate-resilient growth.

Right now, the financial sector isn’t adequately pricing in the climate transition risk, due to the uncertainty around the net-zero transition. Without clear policies in place, investors are adopting a ‘wait and see’ strategy, stalling any real reallocation of capital. Meanwhile, the financial risks accumulate, posing material risks to investment portfolios.

Going forward, 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 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 Living Planet example

We are committed to making a real, sustainable difference to the economies in which we operate. We approach our investments with two north-stars – to produce attractive risk-adjusted returns for investors, and to achieve additionality by galvanising funds to foster maximal sustainability outcomes. This is done within a robust governance framework that builds trust with investors and investee companies, while aligning with the UN’s Sustainable Development Goals (SDGs). We’ve seen first-hand how better-for-the-planet can mean better performance over the long-term.

For example, our Living Planet Fund, which Sanlam Investment Multi-Manager manages on behalf of the World Wide Fund for Nature (WWF), tackles climate threats while restoring wildlife and natural habitats. It’s a multi-asset, high-equity fund which, at the end of June 2023, delivered an annual return of 10.21% over the past 5 years, compared with the category average of 7.49%, over the same period. Additionally, this fund has a ‘portfolio’ carbon footprint that is 46% lower than the benchmark; we’re aiming to get this to 50%.

The Living Planet Fund’s consistently strong outperformance shows how we can achieve a dual mandate of providing superior investment returns, while protecting our planet. Much of this depends on strategic partnerships, grounded in a shared vision to change the world.

*Teboho Makhabane is Head of ESG and Impact at Sanlam Investments.