Africa is a very small contributor to CO2 emissions – Riscura CEO
Excluding certain industries shrinks the investment universe – BIFM
‘We are still dependent on coal’
MDCB backs Minergy
At a recent panel discussion, Thato Ungwang, an investment expert apprised an audience of investment stakeholders on the primary impact of ESG investing when managing pension assets. Ungwang is the Portfolio Manager – Local Equities at the Botswana Insurance Fund Management (BIFM), the country’s largest asset manager.
Primarily, he said the ESG factors and impact will come in at a securities selection point of view. “This is where we are making decisions on individual securities investing,” Ungwang said when responding to a question posed by the moderator of a discussion on ‘Practical considerations of ESG in managing pension assets’. “It’s important to look at all of the risks of a particular investment.” These are financial risks relating to the fundamentals of the company, profitability margins, etc. But Ungwang was quick to point out “non-financial risks”. “These are ESG factors that we incorporate and ensure we are accounting for fully. We have seen that they can have an impact on investment returns.”
There is some scope to incorporate ESG at an asset allocation level, Ungwang continued. “We’ve seen this in a more global context. If you look at some of the Scandinavian Sovereign Wealth Funds and pensions, they have made asset allocation decisions that take into account different ESG factors and they have de emphasised and emphasised certain types of investments looking at the ESG factors,” Ungwang said. “They excluded some types of investments mostly within the extractive industries, we’ve also seen them include within their asset allocations alternatives and renewables types of investments.”
West cuts coal
Against this background, a key issue that generated attention was how the West was channeling less capital towards non-friendly ESG investments such as coal mining. The Economist reported this year, that “more than 200 mainly Western financiers have announced policies restricting investments in coal mining or coal-fired power plants”.
“Lenders representing fully two-fifths of global banking assets have signed up to the Net-Zero Banking Alliance, which pledges to align portfolios with achieving net-zero emissions by 2050,” The Economist wrote. United Nations also reported that its Secretary-General, António Guterres, called for G20 leading economies to “dismantle coal infrastructure, with a full phase-out by 2030 for OECD countries and 2040 for all others”. Guterres was speaking at the Sixth Austrian World Summit on the climate crisis.
Botswana Government invests in coal
But from a Botswana perspective, Loago Bokolwe CEO of Riscura urged the country to be mindful of where it is and take sustainable steps; “meaning we know that coal is not good for the environment but Africa is a very small contributor to CO2 emissions,” Bokolwe said during the same discussion. So instead of staying away from investing in companies going into coal mining, it’s an issue of “what steps are such organisations taking toward developing renewable energy”.
Minerals Development Company Botswana (MDCB), which owns stakes in mining companies on behalf of the government, is the main funder of Minergy Limited, a coal miner listed on the Botswana Stock Exchange (BSE). In March, MDCB and Minergy signed a term sheet for funding. The funding was to repay the arrears of a contractor. “The funding will allow Minergy to initially continue operations in a reduced sales environment with the associated reduced-cost initiatives implemented to stabilise the business ahead of ramping up to pre-shutdown levels,” Minergy said in the statement. The government also has a direct interest through Morupule Coal which has commissioned its open-cast operations and beneficiation plant.
Balancing act
While it was surprising when Europe moved backward in terms of the objectives from a coal emissions perspective, Bokolwe said Botswana needs to be cognisant of the realities on the ground. If Botswana was to make a hard decision of not investing in coal or diesel, essentially he feels the country would not have electricity. “We need to be flexible in that if we buy a Botswana bond to fund a BPC project, how are we offsetting the net carbon emissions there? What process are we putting as allocation of capital?”
Botswana Oil estimates that Botswana has abundant coal resources estimated at over 200 billion tonnes. For Bolokwe it is a question of “Do we leave it unutilised?” he quizzed. In effect, he feels it would be irresponsible if the answer is in the affirmative. “It is to say going forward, net for net how do we progressively increase exposure to more renewables?” Even if solar panels are built he said the “sun doesn’t shine at night so we still need coal to create energy”.
Impact of ESG on diversification
The consensus is that when certain types of investments are excluded this shrinks the investment universe. “This speaks to then the different types of investments you can put in your portfolio from a diversification point of view,” Ungwang said noting some trade-offs in the way that it has been historically done. “What we are seeing instead of exclusion is an integration of ESG factors into the investment process. We see investment managers invest in different types of companies and work with them to encourage ESG factors and improve ESG scores.”
With billions of pula of pension funds being repatriated in line with the new PFR2, Bokolwe is seeing an opportunity through the ESG framework to look at sustainable development goals as a country and target “our capital towards fulfilling those objectives”.
Botswana is arguably still behind in terms of industrialisation. “To the extent that some of these factors – the stringency of the ESG guidelines – may inhibit your ability to select assets within the country,” Kopano Bolokwe, the Head of Product Development at the BSE said during the discussions. “We are still dependent on coal,” he also emphasised adding the approach “we need to take in terms of taking these factors into account is that which is transitionary”.
In its guidelines, BSE encourages companies to report issues that are material to them. “If you are an SME for example, you don’t have the technical capacity, money and time to embed ESG practices into your business,” Bolokwe said. “That means automatically you would be excluded when an asset is being selected.” But there are issues which are pertinent, primarily governance that he said they could focus on that present material issues.
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