Heat mounts over South African bank funding for fossil fuels

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

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

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

While cleaning up the mining industry is a huge challenge, the main problem in terms of carbon emissions is that South Africa – through the local parastatal Eskom – generates most of its electricity from coal. The country is also home to the world’s largest single emitter of carbon: the Secunda Coal-to-Liquids Plant, owned by the state-owned energy and chemicals company Sasol.

South Africa’s contribution to climate change is therefore well above its economic weight in the world. Although it is only the fifth largest country in Africa in terms of population, it is by far the biggest polluter on the continent.

We 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 relies on the banks for its integrated resource plan, which includes new coal-fired power plants, albeit with some tweaks. Stopping funding for Eskom, which is already experiencing financial difficulties, would be politically and commercially unsustainable.

But clean energy is increasingly on the agenda of South African banks – lenders who play a significant role in financing fossil fuels across Africa.

The Public Investment Corporation of South Africa is the largest or second largest shareholder of the country’s four largest lenders and companies 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 advice at Rand Merchant Bank, which is part of FirstRand.

As Standard Bank and Absa prepare their policies, FirstRand has pledged this year to achieve net zero, including operational and funded issues, by 2050. Nedbank, the smallest of the big four – long since positioned as a leader in environmental sustainability – committed earlier this year to reduce all exposure to fossil fuel related activities by 2045.

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

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Emma Schuster, just share

Emma Schuster, just share

When it comes to their own commitments, so far banks have tended to make general statements or prioritize initiatives less relevant to South Africa, says Emma Schuster, climate risk analyst at the activist shareholder Just Share.

Africa, including South Africa, has much more physical space than Europe for infrastructure such as wind farms. Coal is not cheaper these days, but it is protected by special interests and influential companies in the energy and natural resources sector, says Schuster. Banks could do a lot more to pressure the government to act more decisively on coal-fired power, she insists, and that’s partly a governance problem.

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

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

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Mike Brown of Nedbank meets South African President Cyril Ramaphosa

Mike Brown of Nedbank meets South African President Cyril Ramaphosa

Mike Brown, managing director of Nedbank, said that while the government’s plans will inevitably change over time, his bank has at the same time designed its own “transition line” to move away from fossil fuels. It is abandoning the financing of thermal coal internationally, before doing so at the national level, and halting the financing of projects for new coal-fired power plants, rather than withdrawing corporate funding for Eskom.

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

The evolution of the energy mix over the next 30 years is one of the determining challengers of our generation

Mike Brown, Nedbank

Largely due to Eskom’s financial difficulties, South Africa suffers from an overwhelming power shortage, suffering from frequent power cuts, while some communities still lack access to electricity. However, Brown says things would be worse without the independent renewable power producer supply program the country launched in 2011.

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

“This has been a huge mitigating factor,” says Brown. “Over the past five or 10 years, if it were not for additional renewable energy added to the grid in South Africa, our electricity challenges would be considerably greater, as Eskom’s own generations using fossil fuels have declined. It is only the increase in renewable energy that has led to an increase in energy, but not enough.

Brown agrees with other people interviewed by Euromoney who say investing in green infrastructure could help South Africa’s economy recover from Covid. “The change in the energy mix over the next 30 years is one of the defining challenges of our generation, but it is also an extraordinarily great opportunity for our country and our company to participate in the financing of this transition,” he said. .

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