Business in a changing climate

Impacts introduce new pressures and risks

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Climate change is here, and it is already impacting on business in South Africa. These impacts are set to intensify as the climate, as well as social and regulatory pressures introduce new risks to the commercial landscape.

Taxation

The Carbon Tax Act came into effect on 1 June 2019. In the first phase of its rollout, those businesses that own and control direct sources of greenhouse gas (GHG) emissions are liable for the tax. A low carbon price (of between R6 and R48 per tonne) and various allowances mean that the financial burden is initially relatively moderate for most operators until the end of phase 1 in December 2022. The Act does envisage a broadening of scope, and eventually all of the emissions in an enterprise’s value chain will be accounted for and taxed.

Fuel prices are affected and the tax is expected to contribute to around 9 cents a litre, which of course has ripple effects throughout the economy.

Regulation and legal compliance

South Africa’s Climate Change Bill was published for comment in June 2018 and is currently the subject of consultation. It was allegedly to be presented to cabinet by June of this year. While much of it provides for an administrative and strategic framework for all three tiers of government, we can see certain prescribed mechanisms that will impact on business.

The state is obliged to establish a binding GHG Emissions Reduction Trajectory. Sectoral Emissions Targets will be set and Sectoral Emissions Reduction Plans will be implemented by those departments under which various sectors fall. A Carbon Budget will also be set for all “all persons.” In this way businesses are going to be compelled to address emissions throughout their value chains or face penalties.

In a number of High Court actions, the National Environmental Management Act is increasingly being used to intensify the need to take climate change considerations into account when performing impact assessments. Government is being taken to task for not adequately addressing climate impacts when approving climate unfriendly activities. This kind of scrutiny and challenge is likely to increase as civil society increases the pressure in an organised and focussed manner.

Shareholders and investments

In May 2019, Standard Bank shareholders (with a 55% majority) voted favourably on a resolution that compels the bank to adopt and publicly disclose a policy on lending to coal-fired power projects and coal mining operations. A second part to the climate-related resolution (defeated by a 62% majority) would have required the bank to report to shareholders its assessment of the GHG emissions resulting from its financing portfolio and its exposure to climate change risk.

Activism in this sphere is increasing and a number of institutional investors voted for the climate friendly initiatives.

Pension fund trustees are being lobbied and trained to scrutinise climate unfriendly investments and make investment choices accordingly. Globally we are seeing giant investors such as Norway’s Government Pension Fund and the UK’s National Trust divesting from fossil fuel investments, and local investors and asset managers are likely to be increasingly pressured to follow suit.

Reputational risk

Globally consumers, business partners and investors are becoming more knowledgeable about climate change risk and are expecting businesses to be addressing the issue. A 2017 report by the Shelton Group revealed that consumers who stopped buying a company’s products based on environmental reputation jumped from 11% to 33% in a 12-month period.

Unilever and IBM are two examples of companies that have been lauded for proactively addressing and communicating carbon reduction measures. On the other hand, we see the local example of Sasol (SA’s second largest emitter after Eskom) drawing ever increasing negative publicity in the press for its contribution to GHG emissions.

People risk

Earlier on this year, over 8000 Amazon employees banded together and demanded that the company formulate a climate change strategy. This was ultimately rejected by the company, but the dynamic sets the tone for strained industrial relation going forward.

Physical risk

Physically, climate change manifests as extreme weather, water shortages, food supply disruptions and seafront damage. Durban has seen intense flooding and damage from oceanic storm surge in the past few years.

Both of these phenomena have been linked to climate change. Cape Town’s near disaster with water shortages last year is also climate change related, and the broader business community sustained considerable financial losses as consumption had to be severely curbed. These risks need to be understood and managed, not only directly for a business itself, but for all roleplayers in its value chain.

All of these physical effects are widely understood to create conditions for social unrest and increased financial burden

The future

Risk management has gained a whole new dimension with climate change becoming a reality, and businesses are well advised to address this sooner rather than later.

Brandon Abdinor is an attorney, mediator and climate risk management consultant based in Johannesburg

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