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ESG

Heat rises on South African banks’ fossil fuel funding

South African banks’ sustainable finance challenges reflect the nation’s difficult but vital transition away from coal.

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Cooling towers at South African petrochemical company Sasol’s synthetic fuel plant in Secunda. Photo: Reuters

Empty reservoirs and water shortages in Cape Town show how vulnerable South Africa is to climate change. The country is an outsized contributor to this global crisis, with a notoriously dirty economy, funded inevitably by the four dominant local banks Absa, FirstRand, Nedbank and Standard Bank.

While cleaning up the mining industry is an enormous challenge, the main problem in terms of carbon emissions is that South Africa – through local parastatal Eskom – generates most of its electricity from coal. The country is also home to the largest single-point carbon emitter in the world: the Secunda coal-to-liquids plant, owned by national energy and chemicals company Sasol.

South Africa’s contribution to climate change is consequently way above its economic weight in the world. Although it is only Africa’s fifth-biggest country by population, it is the continent’s biggest polluter by far.

We’ve pushed hard to get traction
Nigel Beck, Rand Merchant Bank
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South African banks are an integral part of this situation. The government is reliant on the banks for its Integrated Resource Plan, which includes new coal-fired power plants, albeit with some tweaks. Stopping funding to Eskom, which is already struggling financially, would be politically and commercially unviable.

But clean energy is climbing up the agenda of South Africa’s banks – lenders that play a big part of the financing of fossil fuels across Africa.

South Africa’s Public Investment Corporation is the biggest or second-biggest shareholder in all four of the country’s top lenders, and in firms such as Sasol. Yet international institutional investors are challenging South African banks on the carbon intensity of their portfolios, according to Nigel Beck, head of sustainable finance and ESG advisory at Rand Merchant Bank, part of FirstRand.

While Standard Bank and Absa are preparing their policies, FirstRand this year committed to reach net zero, including operational and financed emissions, by 2050. Nedbank, the smallest of the big four – which has long positioned itself as a leader in environmental sustainability – committed earlier this year to cut all exposure to activities related to fossil fuels by 2045.

South African investment banks are a step or two behind Europe in sustainable finance, but they are trying to catch up as local investors and corporate clients – even in mining – become more familiar with these products. “We’ve had to go to the clients and explain what it is and what they need to do,” says Beck. “We’ve pushed hard to get traction.”

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Emma Schuster, Just Share

When it comes to their own commitments, up to now there has been a tendency for banks to make broad statements, or to prioritize initiatives that are less relevant to South Africa, says Emma Schuster, climate risk analyst at shareholder activist Just Share.

Africa, including South Africa, has much more physical space than Europe for infrastructure such as wind farms. Coal is not cheaper nowadays, but it is protected by vested interests and influential businesses in the energy and natural-resources sector, Schuster explains. Banks could do much more to pressure the government to move more decisively on coal power, she insists, and it is partly a governance problem.

Standard Bank, for example, is South Africa’s biggest fossil fuel financier. More than three quarters of its board members have links to polluting industries, according to Washington and London-based investigative journalism website DeSmog.

South African banks face further climate-related financial risks in the rest of Africa when they finance oil and gas projects there, which can take a decade or more to develop, Schuster points out. By the time these are operational, customers outside Africa may have weaned themselves off fossil fuels.

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Nedbank’s Mike Brown meets South African president Cyril Ramaphosa

Mike Brown, chief executive of Nedbank, says that while the government’s plans will inevitably evolve over time, his bank has in parallel devised its own “glide path” away from fossil fuels. It is exiting financing of thermal coal internationally, before it does so domestically, and stopping project financing of new coal-fired power plants, rather than withdrawing corporate financing for Eskom.

Brown’s view is that the reduction in gas financing should be slower than for coal. “We are certainly prepared to finance gas as part of that transition, even though it’s still a fossil fuel,” he says. “If it’s transitioning away from a fossil fuel that’s worse, that’s a net positive result.”

The change in energy mix over the next 30 years is one of the defining challengers of our generation
Mike Brown, Nedbank

Largely because of Eskom’s financial struggles, South Africa has a crippling shortage of power, suffering frequent blackouts, while some communities still lack access to any electricity. However, Brown says things would be worse had it not been for the renewable energy independent power producer procurement programme the country launched in 2011.

While Eskom’s mega-projects for new coal-fired power stations have been plagued by corruption scandals, renewable energy public-private partnerships have moved the country’s power infrastructure gradually away from Eskom’s monopoly control.

“It’s been a massive mitigating factor,” says Brown. “Over the last five or 10 years, if it was not for the additional renewable energy added to the grid in South Africa, our electricity challenges would be materially larger, as Eskom’s own generations by fossil fuels has declined. It’s only been the increase in renewables that has led to an increase in energy, albeit not enough.”

Brown agrees with others interviewed by Euromoney who say investment in green infrastructure could help South Africa’s economy recover, post-Covid. “The change in energy mix over the next 30 years is one of the defining challengers of our generation, but it’s also an extraordinarily large opportunity for both our country and our business to be part of the financing of that transition,” he says.

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