Climate change is the most significant threat to the sustainability of short-term insurers in South Africa, according to Soul Abraham, the chief executive for retail at Old Mutual Insure.
“The sector has already witnessed numerous casualties, with several non-life insurers offering personal and commercial lines of insurance being forced to shut down due to escalating risks,” Abraham said at a conference late last year. Further “casualties”, he warns, “are inevitable” if they don’t get atop climate-change risks.
The situation is getting so bad that global reinsurance firms are reducing the catastrophe reinsurance available to South African insurers. And where reinsurance for extreme weather events is available, it involves hefty premiums.
Climate change isn’t just a threat to non-life insurers, either. A recent independent report by consultancy Krutham, commissioned by the African Climate Foundation, said three key economic sectors – mining, agriculture and tourism – face particular challenges.
The impact of climate change, with South Africa warming at twice the global average, has been substantial, says Krutham. “In the past five years South Africa has recorded 31 natural disasters, resulting in nearly 1,000 deaths, displacing more than 7,000 people and affecting more than 12-million people.”
The mining sector, which contributes 7.3% of GDP and employs 469,000 workers, is vulnerable to water scarcity and flooding. In addition, says Krutham, approximately R264bn in annual mining sales are at risk due to international carbon-reduction commitments.
The comparatively rapid pace of warming and more frequent extreme weather events are also expected to lead to reduced crop yields and increased livestock losses. This has grim implications for employment opportunities in the agricultural sector as well as food security .
More extreme weather events will also have a devastating impact on biodiversity, which will knock the country’s currently robust tourism industry.
All in all, even the staunchest climate-change denier might agree that a continuation – let alone exacerbation – of what we’ve seen in recent years poses a considerable threat to businesses and lives across the country.
Lobbying and lax policy
So, how is it possible that South Africa has one of the most lax climate policies in the world? How is it that a legislative process that began back in 2006 has had a negligible impact on the country’s largest polluters and absolutely no impact on the levels of carbon emissions they pump into the atmosphere?
The rather puzzling answer to that is lobbying. Puzzling, because you’d think that government realises what a devastating impact climate change has on the most vulnerable section of the population: those who can’t afford insurance or housing capable of resisting the worst ravages of extreme weather.
Just Share, a non-profit shareholder activism organisation, has just released a scathing report that sheds some light on how this murky process works. It details the shadowy way in which a handful of polluters, led by petrochemical giant Sasol, is allowed to drive South Africa’s climate policy. And, bizarrely, there seems to be no resistance from companies in the sectors that are already being hit hard by extreme weather conditions.
Indeed, not only is there no sign of these companies pushing back, but the most powerful business association in the country, Business Unity South Africa, has taken it upon itself to lobby hard for the few polluters among its members, seemingly ignoring the interests of its wider membership and the broader population.
And where is the investment community in all of this? In particular where are the institutional investors who are major shareholders in companies vulnerable to the carbon emissions pumped into the atmosphere by the likes of Sasol? Where are they in the campaign for a carbon tax and a more effective climate policy? Why are they not pushing government harder to counter the lobbying strength of the polluters in the hope of some relief from extreme climate weather?
Well, one problem is that these institutional investors also happen to be heavily invested in Sasol. And they apparently take the view that the potential cost to Sasol from an effective carbon tax and climate policy would have a greater impact on their funds’ investment value than the potential benefits to other investments from an effective carbon tax.
Essentially, they are swayed by the fear of the short-term hit to profits that would be suffered by Sasol and are unpersuaded of the longer-term benefits enjoyed by the companies currently most affected by extreme climate events.
In this balancing exercise Sasol can easily point to the fact it would be paying about R10bn-plus in annual carbon tax had it not successfully captured the government’s carbon tax policy. Balance that against Krutham’s estimates that without change, South Africa can look forward to a 5.03% hit to GDP by 2050. Or even with the fact that almost 50% of South African businesses identify climate change as a top risk to their business.
Sasol’s sway
For fund managers, despite making all sorts of grand claims about investing for the long term, the choice is easy – they are focused on quarterly performance figures because that’s what determines the bulk of their remuneration. The prospect of a stranded asset 10 or 15 years down the track is someone else’s problem.
In addition, though it finds itself in a dying industry, Sasol has the sort of muscle that can cow not just governments but large institutional investors who are keen to pick up any insurance or investment-related business from the petrochemical giant.
Remarkably, even Sanlam and Old Mutual – which, as owners of Santam and Insure respectively should be alert to the dangers of extreme climate change – seem unprepared to push back against Sasol. Apart from the brief flurry of resolve evident at the 2023 AGM (which was postponed to January 2024) both of these long-term fund managers (each holds 3%) have a habit of voting overwhelmingly in favour of Sasol’s board resolutions.
As for the powerful Public Investment Corporation (PIC), which with 11.6% is Sasol’s single largest shareholder, there is absolutely no indication it has any concerns about Sasol’s determination to avoid cleaning up its act.
This, despite the fact that the PIC – Africa’s largest fund manager – states it is “committed to delivering positive, sustainable returns to its clients through integrating environmental, social and governance considerations as the fundamental principles of its investment processes”.
So much for Abraham’s plea that we work together to mitigate climate change risk.
Top image: Rawpixel/Currency collages.
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