Please ensure Javascript is enabled for purposes of website accessibility Is decarbonisation an opportunity for emerging markets? - Janus Henderson Investors
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Is decarbonisation an opportunity for emerging markets?

10 Nov 2021
63 minute watch

Key takeaways:

  • Emerging markets are facing completely different challenges to developed countries. Many are still struggling with COVID, making it difficult to think about the transition towards a net-zero future. A fundamental issue is the need for much better financing mechanisms for emerging markets to transition to net zero.
  • While a green bond premium can exist over conventional bonds of similar characteristics — providing lower funding costs for issuers of green bonds designed to support specific climate-related or environmental projects — it has only been seen consistently in developed market sovereign green bonds, notably Germany. ­
  • Policy action in relation to fighting and financing climate change is required as a supporting and enabling mechanism, particularly for emerging markets. Governments have a clear role to play in the energy transition and, arguably, should create the required framework and strategy.
  • The energy sector is part of the climate change problem, given the dependency of many emerging markets on fossil fuels, and solution. In Chile, for example, 77% of the greenhouse gas emissions are aligned to the energy sector. However, the sector will help tackle climate change, notably via wind and solar, and bring social and economic opportunities to the country. Looking at emerging economies more broadly, where electricity systems are not well developed, the case for renewables is compelling.
  • Credible energy transition plans are required for moving from the use of high-emitting assets and switching into renewables. In certain geographies some companies are at grid disruption, which means it is cheaper to close high-emitting assets and build renewable assets in place. When divesting from high-emitting assets it is key for corporate management teams to question who they are selling the assets to? How will they run the asset? What’s their corporate governance approach? What are the environmental standards under which they are going to be effectively run?

Leverage: The ratio of a company’s loan capital (debt) to the value of its ordinary shares (equity); it can also be expressed in other ways such as net debt as a multiple of earnings, typically net debt/EBITDA (earnings before interest, tax, depreciation and amortisation). Higher leverage equates to higher debt levels.


Decarbonisation article

Speaker key

PL – Paul LaCoursiere, Head of ESG Investments at Janus Henderson

NS – Dr Nina Seega, Research Director at the Cambridge Institute of Sustainable Leadership (CISL)

KT – Krista Tukiainen, Head of Research, Climate Bonds Initiative (CBI)

FL – Francisco Javier López, Energy Under Secretary, Chile

MC – Mark Cutifani, Chief Executive Officer, Anglo American Plc


PL: All right. Well, welcome, everyone. First wanted to just share a personal observation. This is my first post-pandemic conference where I’m actually in a room with actual people. It’s very nice to see all of you in person rather than these tiny little boxes on Zoom. Now, we have two exceptions to that, which I’ll explain in a moment, but it’s great to be here. So, welcome.

The topic for our panel today, Is decarbonisation an opportunity for emerging markets? And Janus Henderson is very happy to co-host this panel with the Cambridge University Institute for Sustainability. So I’ll start by introducing the panellists and then I’ll do a little bit of context setting before we get into the discussion formally.

So first of all, from our co-hosting organisation, I’d like to welcome Dr Nina Seega, the Director of Research. Thanks very much for being here. And also in the room, we have Ms Krista Tukiainen, the Head of Research at the Climate Bonds Initiative.

And then going over to our online participants, first of all, we have Chile’s Energy Undersecretary, Senor Francisco Javier López. Thank you very much for joining us. And then finally, Mr Mark Cutifani, the CEO of Anglo American. Thanks for being with us, Mark.

Before we kick off the discussion, I just wanted to establish a couple of bookends in terms of the viewpoints that I’ve either read or heard on this topic. And I’ll do, admittedly, a little bit of exaggerating for effect.

But on one end of the spectrum, I’ve read that the simple fact is, solving this problem is going to take a truckload of money. It will impact government debt positions. It will impact corporate earnings. It will impact local societies. It will be inflationary. And describing it in any other way is simply glossing over the problem. So if you’re a pure sceptic, perhaps you can go stand on that end of the spectrum.

The other thing that I’ve heard is that the sustainable finance mechanism creates a circumstance where this should be a win-win-win. We should be able to decarbonise. We should be able to avoid any impacts on the local societies. And we should be able to deliver systematically superior returns to investors.

Now, I’ll share an experience that I had with you a couple of months ago. A partner at a management consulting firm said almost exactly that to me in a meeting. And the first thing that jumped into my mind was, surely this guy is about to try to sell me something. And about 90 seconds later, it was clear that he in fact was about to try to sell me something. So I think the practical, efficient and workable solution lies somewhere in the grey between those two extremes. And that’s what we’re here to dive into today.

In terms of the topics that we’re hoping to address, the first is a discussion around the tools that we have in the toolbox. What solutions do we actually have to work with here? The second is the price tag. Should we thinking about this purely from a cost perspective? Should we be thinking about it from an opportunity perspective? Both? Somewhere in between?

And then finally, the show me the money angle. How do we think about how this should be financed? Who should be involved? Is there regulation that needs to be in place to facilitate that? So that’s what we’re hoping to tackle today. Let’s get stuck in, shall we?

First of all, Dr Seega, could you start by providing some scene setting here? And how should we think about this? And in particular, what makes emerging markets such a unique challenge?

NS: Thank you very much. And thank you very much, all of you, for joining us here for this panel today. I’ll start with a little bit of a statistics and a research piece that was published really a couple of days ago by Cambridge University and Exeter University.

Effectively, across the world, under a net-zero scenario, we’re looking at between $11 and $14 trillion of assets being stranded. That’s half of the world’s fossil fuel assets. And they will become stranded by 2036. So in that scenario, we have no other choice but to look at opportunities for decarbonisation, both in developed and in emerging markets.

And we know that the decarbonisation in developed markets is much easier because it’s easier to invest in Europe because the sovereign ratings are nicer, because there are lovely green projects out there. But actually, the majority of the work that needs to be undertaken has to be undertaken within emerging markets, which is a little bit more difficult.

And it is more difficult for a number of reasons. We’re looking at smaller projects that are more distributed, that have usually slightly more problematic credit ratings. But there are solutions that are emerging to address those issues. We’ve got multilateral development banks that are working on this issue.

But also, we have things like The Green Guarantee Company that was announced last Tuesday here at the COP, that effectively will work to cover the sovereign risk of investing in emerging markets’ projects with the support from FCDO (The Foreign, Commonwealth & Development Office) as well as insurance companies and insurance brokers.

Also, when we think about that investment, within the European world, the American world, the more developed countries, we talk about transition finance as something that is absolutely inherent and absolutely needed. When we talk to emerging markets, their biggest need is actually adaptation finance. So we need to think about ways. How do we combine those? How do we drive up their adaptation finance while also delivering transition finance?

And I guess last, but absolutely not least, we need to think through bankability of the on-the-ground projects. We need to work with local partnerships to try to improve that, the projects that could be financed, but also to improve the delivery mechanisms for that finance to go into emerging markets.

PL: Okay, thanks very much for that. Next, to Senor López. On Chile’s journey towards clean energy, I’d like you to talk a little bit about the different solutions that you considered, how you thought about the impact that it might have on the local economy. Can you just give us some context on that, please?

FL: Thanks, Paul. I would like to start by thanking Janus Henderson for inviting us to be part of this event in the Investment COP26. These kinds of panel discussions give us the opportunity to share our experience in the energy transition while making a call for private and public institutions across the world to work together in tackling climate change.

The energy sector is part of the problem we are facing today of climate change, as most of the CO2 equivalent emissions came from this sector. In Chile, 77% of the greenhouse gas emissions are aligned to the energy sector. However, it’s this same sector that will help us to tackle climate change and bring both social and economic opportunities.

The energy sector is leading still the decarbonisation plan, as we committed, to reach carbon neutrality by 2050. In April 2020, first, our country increased its ambitions through an updated Nationally Determined Contribution, including an emissions budget for the 2020 to 2030 decade, reaching peak emissions by 2025 and setting an intermediate emissions target for 2030.

To comply with these goals, Chile has set four separate complementary pathways that support the decarbonisation of our economy. Considering to clean our electricity generation capacity by increasing the amount of renewable energy. The withdrawal of coal-fired power plants by 2040.

The promotion of energy efficiency mainly in construction vehicle suppliers and industrial equipment, and to replace fossil fuel with electricity in the transport sector, aiming to have 100% electric vehicle sales of light and medium vehicles by 2035. And last, the development of a green hydrogen industry.

Part of this decarbonisation plan is based in the unique opportunity that Chile has, as we are a country rich in renewable energy as we have one of the best solar installations in the north of Chile and strong winds in the south of our country, leading us to have more than 2,000 gigawatts in renewable electricity production potential as we have mapped the sites where it’s competitive to develop renewable energy.

To understand the magnitude of our renewable potential, this is equal to more than 80 times the current start capacity of Chile. The renewable energy will enable us to decarbonise key elements through electromobility and green hydrogen, as up to 27% of the required emissions reductions, to become carbon neutral by 2050, can be expected to derive from the use of green hydrogen in various sectors, and 17% of the emissions reductions are expected to be reached by the promotion of electromobility.

Our goal of achieving carbon neutrality by 2050 is a challenge, given the need to decouple our economic growth from the energy consumption and reduce our dependency on imported fuels. However, achieving this goal will imply positive economic effects, expressed in net benefits of 31.7 billion by 2050. The investment opportunities account for almost 50 billion, while the sales in OEMs (original equipment manufacturers) at more than $80 billion.

These investments, with economic benefits for each investor, are not only constrained to Chile, as we will see across the globe. According to the World Energy Outlook 2021, developed by the International Energy Agency (IEA), an international catalyst is needed to boost clean energy investment, and getting the world on track for net zero emissions by 2050 requires clean energy transition-related investment to accelerate from current levels to around 4 trillion (USD) annually by 2030.

PL: Okay, thanks very much for sharing that. Next up, to Mr Cutifani. I want to ask you a similar question, but obviously from an asset operator’s perspective. You have decided to focus on fleet decarbonisation. How did you think about modelling that? And how did you think about prioritising that relative to the other options that you may have considered?

MC: Okay. Thank you very much for the opportunity, and obviously the question. I guess fleet decarbonisation was one of the key elements. And if I can give maybe one minute on what led us there, that might help put it in scope. Firstly, we started working on our FutureSmart Mining strategy, which was about improving our competitive position back in 2013/2014.

What we identified is we needed to reduce our energy consumption by around 30% to really improve our competitive position. We looked at productivity as a whole range of things. But as energy as part of our improving strategy, it was about reducing footprints, increasing the intensity of our production and reducing energy consumption by changing the way we mined and processed ore.

Because the industry has been doing it the same way for 100 years. The equipment has just got bigger. We said, we’ve just got to get a lot smarter. So the first step, how do we reduce our energy consumption by 30%? And we’re about half the way along that journey to improve our operating cost. That was the first point.

The second point. We felt that renewables provided a much better and lower cost base, longer term. So we set about trying to build renewable partnerships. So today, our renewable energy input across our global operations is 36% of our main energy supply through renewables. And by 2023, we’ll have 56% of our input energy provided through renewable sources, mainly in South America.

But we’ve also got a longer-term strategy in South Africa, by 2030, to be on full renewable supply through wind, through water and through some innovation technologies where we use the water underground as a battery, essentially using renewable energy, the solar and the wind power, in off-peak periods. We pump the water up and then we let it run back down. And so it’s effectively a water battery.

Now, given we’ve got old, deep underground mines that are full of water, a great opportunity to be innovative and use what we’ve got, a resource that costs money to maintain, as something that creates real value.

So, getting all of our energy sources by 2030 onto renewable supply means we’ve then got diesel-operated equipment, mobile equipment. We said, okay, hydrogen appears to us to be the best option to then decarbonise our production fleets. And so the hydrogen part of the strategy is the piece around our production fleets, which represents about 20% of our carbon gas make.

And we’ve gone through the research work and we’ve come up with a hydrogen battery hybrid that allows us to maintain flexibility in the way we operate the mines. So we don’t have to put them on these big trolley wire assists or have to use what they call supercapacitors. We can maintain complete flexibility in the mine using the hydrogen battery hybrid, and we can use the renewables to actually set the power up. And so that’s the journey we’re on.

We’re about to put the first 290 ton hydrogen battery truck into a pit in early next year in South Africa, but we’ve also promised our Chilean partners that they will also see the same truck during the course of the next two years. So we want to move South America, Chile in particular, and South Africa down that road so that in the period 24 to 34, we’ll have totally replaced all of our trucks with hydrogen battery hybrids being powered off our primary renewable energy sources.

PL: Okay. Again, thanks very much for sharing that. And then Ms Tukiainen, from a financing perspective, what sorts of issuance trends are you seeing? And also, can you provide us some colour on effectiveness?

KT: Yes, absolutely. Thank you also, from Climate Bonds’ behalf, to Janus Henderson and the rest of the crew for having us here today. To those of you who may not know, we are a not-for-profit organisation working to mobilise the debt capital markets for climate solutions, and do that by governing the market via standards, but also collecting data on them. So I should hopefully have something to say about those statistics.

Maybe to start with, to Dr Seega’s comments and yours, Paul, on the boatload of capital that’s required to materialise this transition, we already have a small boat, I think, about $2.5 trillion-worth of outstanding volume in green, social, sustainability, etc., all the thematic bonds. About 20% of that is emerging markets capital, which is great news. And that share is growing consistently over time.

The largest, I want to commend the government of Chile here specifically, because they’re the largest GSS or Green Social Sustainability bond issuer outside of China. And we’ve used them as a case study of successful entry into the international capital markets, issuing in both hard currency as well as local currency under this programme.

So I’d say as maybe a summary, and then we can get into some of the details, that really the fixed income space already has good definitions and potentially quite good governance mechanisms around how to ensure that these projects that are being financed, which were mentioned here from Anglo American’s perspective as well, are actually delivering the kind of impact that they need to have. So it’s the overwhelming era of positivity I would like to convey to the panel and the audience today.

PL: Okay. Again, thanks for sharing that. Moving into the next phase of the discussion, obviously many of us are in financial services and we’ll talk a lot about capital markets. But before we get there, Senor López, I wanted to ask you a question about government policy.

And this is something that I personally feel is quite important. A concern that I have, or I could go further than that to say a genuine fear that I have, is that while the increased focus on the role that the capital markets can play is very constructive and it was absolutely needed, compared to the level of focus we were seeing about five years ago, my fear is that that focus risks becoming somewhat myopic and we start to convince ourselves that capital markets can be the only solution to the problem.

And I’d argue that if we don’t see coordinated government policy that capital markets can then help facilitate, we’re going to struggle. I really don’t want to find ourselves in the scenario where we’re all congratulating ourselves because we’ve done a lot in the capital markets, and meanwhile, our ankles continue to get increasingly wet because we haven’t actually solved the underlying issue.

And so, Senor López, what I wanted to ask was if you could share your opinion on, from a government policy perspective, what’s your view on what the best solutions are. Is it a tax programme? Is it a subsidy programme? How do you think about the full spectrum of tools that we have on the government policy side?

FL: Thanks, Paul. The government has a clear role to play in the energy transition as they should create the required framework in relation to the sustainable development of projects while its devising business innovations to develop and implement the new technologies required and forging the international collaboration to attain our climate goals.

In that, the Alliance Chile has set policies and plans and have created under public and private collaboration and under different participation mechanisms for all stakeholders as social society, academia and enterprises. For instance, we developed a coal phase-out plan, enabling the recombination of our electricity grid into a more renewable one.

This plan presents a business challenge for the energy sector because this technology supplies about 40% of our generation mix. By the end of this year, we will have retired almost 30% of the coal capacity we had in 2019, and by 2025, we will have decommissioned 65% of the coal capacity that we had in 2019. This is one example.

Another example of the role of the government is because, recently, we launched the National Electromobility Strategy, the objective of which was to outline the actions that Chile must take in the short and in the medium term to accelerate the transition to zero emissions and achieve carbon neutrality by 2050, with goals by 2035, for example, that 100% of the light and medium sales will be zero emissions. The same with the new public transportation. And we are permanently working to the establishment of efficiency standards, another area.

A third example is green hydrogen, because green hydrogen will play an important role in creating a net-zero emissions economy, complementing the replacement of fossil fuels where electricity is not as competitive or efficient. And Chile, as I mentioned, is one of the countries best suited to produce this fuel.

We worked to establish a strategy and set the goals for the next year, and prepared all the business scenarios and prepared the country to exploit the full potential of this clean energy carrier we have in our country, with goals, for example, of having 5 gigawatts electrolysis capacity under development and in construction by 2025, being among the top three leading exporters of green hydrogen for 2030.

And in that sense, we are deploying a green hydrogen strategy to position the country as a source of clean energy carrying, and having relations. We’ve, for example, signed an MOU (memorandum of understanding) with Singapore and another one with the Port of Rotterdam. We signed actually a couple more last week. And we are establishing worktables with the purpose of exploring the unmet rise of green hydrogen.

And I should say that taking that kind of change requires the capital market ….. would be impossible to reach our climate goals. Nevertheless, I will say that it’s more optimistic than fearful, the capital market participation in the energy transition, that is the private sector, which mainly drives the investment required in the energy transition. And these investments are continuously increasing.

PL: Okay. Again, thanks for that. Dr Seega, I want to bounce that over to you for comment, but I’d also like to double down on the question just slightly. Most economists that I speak to have a fairly clear viewpoint that a carbon tax is by far the most efficient solution to this problem. And they often express frustration that we haven’t gotten there yet. So first question, what do you think the most effective tool might be? But the sub-question is, why haven’t we made more progress on something as simple as a carbon tax?

NS: There are three questions in there. There is the policy environment, then there’s the best tool, and then there’s the carbon tax one. I think, first, on the policy environment, obviously policy matters, otherwise we wouldn’t be sitting all here today. We’d be directing capital money. So, we need NDCs (nationally determined contributions). We need much more ambitious NDCs, because they will set out the transition plans.

But policy is an enabling mechanism. Policy is not the frontrunner in many cases. And I think I’ll give you an example that I have slightly shamelessly stole from Janet Pope from Lloyds (Banking Group), from our conversation we had with the CISL with her on Friday. She was talking about the transition in the automotive sector.

And when she was speaking with her bankers, pre-introduction of the phase out of petrol cars, all of the conversation was around, but what are the residual values of all these electric vehicles? What do we do about that? Post the 2035 deadline, overnight, the conversation is, but what about the residual values of all of those petrol cars? What do we do about those?

So, we desperately need policy as a supporting mechanism, as an enabling mechanism. We need financial regulation for the financial institutions. Financial regulation is a key mover. And for that, we need the central banks and we need all of this to come into the supervisory mechanisms across the world.

But also, I think for me, it’s less about finding a perfect policy instrument to move all of us, but utilising every single policy instrument that we have on our book, utilising every type of incentive that we can put into it. We can talk about carbon tax. We can talk about carbon border adjustments that the EU are putting in. We can talk about internal carbon pricing, where you’re actually looking at what those projects will bring over the next n number of years.

You can talk about enabling the blended finance approach, better delivery mechanisms of all of that money into the emerging markets, and key collaborations, effectively, across the space. So I think it’s a combination of things rather than standing out for the one hero that will save us all.

PL: All right, thank you. Next to Mr Cutifani. I wanted to talk a little bit about the decision that you’ve made to take thermal coal assets in South Africa, spin them out and list them in the local public market. I think it’s an interesting case because there are two ways you could look at that. There’s a potentially cynical view. And the other viewpoint is that you’ve made the decision to allow the corporate governance model in the local markets to manage the transition themselves.

And there’s no one closer to the trade-offs between power generation, employment, etc. than the people actually living in South Africa. So could you talk through how you’ve thought about that, how you got there, and potentially what reaction you’ve seen from global investors or also local investors?

MC: Firstly, when we talk about truckloads of money, I would like to make one point, that on our journey in terms of renewables to date and, we forecast, when we hit our 56% input by 2023, we’ll have already paid back all of the changes in the investments we’ve made to get to that 56%. So from our point of view, economic, a competitive position, right place to be.

In South Africa, we see a well-justified economic case to move ourselves into the same position because of the economics, the reliability, the unit operating costs of the system that we’re putting to the government. So from our case, it’s an economic case, without taking carbon credits into account.

Now, it helps us in our business case if carbon is priced. But from our point of view, if we can get there quick enough and be quick enough on your feet and understand how you can connect all the dots in your own situation, then I think there’s a very strong economic case.

And certainly, in emerging markets, where the electricity systems probably aren’t as well developed, the case for renewables, I think, could be quite compelling. I think it’s a really important point to make. We started this journey back in 2016 and it’s worked out really well for us.

And when you’ve got governments, as the Chile government, who’s trying to be constructive and supportive, then there are a whole range of other ways governments can help you. And, for example, the South African government, with its 100-megawatt private power station policy change, that’s a big shift for us in South Africa.

So, I think there are lots of ways things can be shifted and it doesn’t have to be carbon. So, I agree with that comment about it’s a whole range of policy points that can be really important. But I think companies have to get off their bums too and look for the right solutions. We have to be part of the solution.

In that context, I would’ve preferred to have kept our thermal coal assets for a few years longer. Not a big part of our portfolio. Less than 4% of our EBITDA (earnings before interest, taxes, depreciation, and amortization), so not big. We had assets that we could run to depletion probably to mid-2035. However, we also had some very big shareholders who said, look, guys, we can’t invest in you while you’re in coal, and therefore, we’re going to have to divest. So the reality was, for 3% of our portfolio, we were going to lose some of the biggest investors in the world because they just weren’t allowed to invest in fossil fuels.

Now, if investors have said, look, you’re only allowed to invest in people that are going to be responsible in terms of the energy transition, it probably would have made all the difference. So the choice was about not a big scale in terms of our asset base, and shorter life assets anyway, so we would’ve probably divested within five years in any case, which is part of our natural portfolio turnover, but when you’ve got some of your major shareholders saying we can’t hold your shares, it became an easy call.

On the day we divested, our share value went up 1.5 billion for a set of assets worth somewhere between 500 million to 1 billion. And since they have been listed, Thungela shares are up almost 200%. So it’s been a win-win from both sides. And as I said, there was a disincentive or a dyssynergy in our case in holding the assets.

Now, what we did was quite different as well. We demerged the assets, so the fact we went up in price tells you something about the shareholding. We had cash offers for the business, but we weren’t comfortable with those offers because the people making the offers were going to leverage their debt. And we didn’t like the idea of the assets going into a business with lots of debt because then the environmental obligations may be compromised. And so we demerged and we left the business net cash.

We also had a very good team that we trusted, that understood the values and the environmental strategies we put forward, and there was a plan for operation and closure that had been locked down as part of that strategy. We consulted with the government, with the local communities, with the employees. And for us, we think it was a just transition.

Was it the best outcome? I think it was the second-best outcome because I think with our own balance sheet and capacity, we could’ve taken the business forward in a more measured and assured way for a broader suite of stakeholders. But I think we came up with the next best option in making sure that all of our stakeholders were comfortable with the way that we demerged the assets.

And the government was happy that it was to a listed entity, so the public accountability remained very clear and open to all of the stakeholders. So we’ve been through that journey. The feedback both ways has been very positive. But I still think it was the second-best outcome.

KT: Can I remark on…

PL: Yes.

KT: A few things that Mr Cutifani said. Firstly, I think you did the right thing at the right time, given the announcement on the Just Energy Transition mechanism that was just announced this week, or last week, I should say, backed by the UK government and others for South Africa’s $8.5 billion to retire coal assets. So, well done, also in relation to your own net-zero targets, including Scope 3 emissions to zero by 2040. So, good luck with that. That’s great.

But I think that speaks to a couple of points around market and policy-based mechanisms that can work in tandem in terms of identifying credible investments that can deliver the kind of impact that we need to decarbonise, especially in emerging markets.

One of these, and we’ve had a number of workshops, also as part of this event, is for companies to signpost to clear net-zero strategies and also make sure that they’re credible in the sense that they cover Scopes 1 through 3, depending on what kind of industry you’re in. Investors are smart. They know how to look for these things.

And then the other thing which is also something that the South African government, among other countries, is working on at the moment is a taxonomy, so a classification system to help signpost and identify eligible assets and projects, at the very smallest levels as well, which is a comment that Dr Seega made earlier.

I think this is going to be really key because that kind of classification mechanism, provided that we can harmonise them to a degree that doesn’t involve or doesn’t induce additional complexity to an already scattered marketplace, can be quite useful, to make sure that capital flows where it needs to go, because that can be used by any financial market player, including the regulators.

And we’ve seen this now this week, the first harmonisation effort between the EU and China, the Common Ground Taxonomy, a really landmark development in making sure that capital can flow from the developed nations to China, which for all intense and purposes is very much still a frontier economy, and elsewhere in the world as well. So I just wanted to make that comment first.

NS: And can I comment really briefly. It’s also a really good example of engagement, because effectively, you have a demonstration of the power of investors to move corporates to transition the assets. Can I ask a cheeky question?

PL: That’s why we’re here.

NS: Fantastic. Okay. So my cheeky question. When you were thinking through the scenarios for disposing of those assets, was there a thought process to actually close them down?

MC: No, and I’ll tell you why. The government made it very clear that we were the stewards of their assets, that they weren’t our assets, it was the nation of South Africa’s assets, and they would need that coal to generate income, support communities and/or keep the local power stations running. So they said, if you choose not to develop the lease or operate the lease, we’ll take over the leases and operate them.

So that was always a very early part of the conversation, given the South African reliance on coal. Now, that probably transition changes that circumstance. But at that point in time, that was very clear. It was not our decision to make to shut the assets down. We would have the hand the resources back to the country.

NS: It’s a really interesting case. Because we did a piece of work on environmental scenario analysis in South Africa. And South Africa is an absolutely amazing and a key geography, where you have fantastic transition needs, you have huge Just Transition issues, you have effectively a monopoly on fossil fuel power in the country, but you also have the situation that even if the rest of the world hits a two-degree warming, South Africa will hit four in some of its places. So the stakes cannot be higher. So it’s a really interesting discussion to be having here.

PL: I have actually got…

MC: And by the way, they were very supportive of the approach we were taking, and they’ve been fantastic on our renewable strategy for the country, the wind power, solar and the whole country’s strategy. So they’re looking for solutions, but also very protective of the current economic base. So it’s a tough transition for them. Sorry, I didn’t mean to cut across.

PL: No, of course. I was just going to say you might want to buckle your seat belts. I think we might be on this topic for a little bit longer, so I’ve got a couple of follow-up questions that I wanted to ask. Dr Seega, you were talking about shutting down or the engagement pressure to divest.

And a lot of the conversations that I’ve had since arriving here have been focused on the initial reaction from a lot of investors around supporting climate change transition, which is that you just shouldn’t own any of this stuff. They don’t want the asset managers holding positions necessarily in the carbon-intensive industries.

But I’ve also heard the counterpoint made several times that if we’re to succeed in facilitating a transition and we want to be in a scenario where the lights don’t go off, you could make a pretty compelling case that energy companies will need more investment in the future than they’ve had before. So how do you square that circle?

NS: It’s a really interesting one. Because, on the one hand, if you look at the IEA net-zero scenario, we definitely shouldn’t be opening any new stuff in terms of coal and fossil fuels. We should be thinking of transitioning out of coal as soon as possible. And I guess the big question for me…

So divestment has an amazing signalling power. The question for me with divestment is who are you divesting the assets to? Are you thinking through the shutdown of the assets? We’ve seen the ADB (Asian Development Bank) announcement on the fossil fuel assets and how they’re going to buy them, they’re going to expedite the loan repayments, and then they’re going to shut them down. That’s one way to approach it.

Or are you divesting the assets into players? Which is what the conversation was here, is who owns them, how they run it, what’s the corporate governance, can you see… What are the environmental standards under which they are going to be effectively run?

The other question I have actually in this situation is we’ve spoken about the asset stranding and there seems to be, to me, an absent conversation about asset retirement obligations. So even in this conversation that we’re talking about the numbers for asset stranding, we’re not really taking into account the costs for retiring those assets. So that will introduce additional financial pressure on the system.

I think what we’re looking at again is concentrated action on putting in credible transition plans and moving out of those assets as soon as we possibly can, and switching them out to more renewable ones. We also have a situation in certain geographies where we are at grid disruption, which means it is cheaper to close these assets down and put together and build up a renewable asset in its place than to continue running it. So this conversation about it being fundamentally uneconomical to run some of this stuff is also a serious conversation to be had.

PL: Okay, thanks. And then finally, taking it back to the crux of the initial framing, Senor López, I was just curious for your reaction on… So you have a conglomerate company that’s considering taking carbon-intensive assets and turning them over to the corporate governance mechanism in the local economy. What’s your view on that? Do you see that as a good avenue, or one that has challenges?

FL: As I mentioned, for Chile, to implement the carbon neutrality agenda is not important or good for our economy for environmental considerations but also for economic considerations. Chile has the agenda, …… net benefits for over $31.4 billion by 2050.

And in commenting on the first part of the question, during the last year, the energy sector in Chile managed to maintain its leadership in terms of investment intensity through 2020 and 2021 according to the different reportings, Chile, and also because it was shown by the Climatescope Bloomberg report, recognising Chile as the most attractive country for investment in renewable energy, with an inflow of over $14 billion investment in renewable projects.

And there are several policy tools that we are implementing to support the energy transition while highlighting some of them, the short and medium term targets driving our actions and commitment by investors, developers, regulators and social society.

I think the government has a clear role in the regulation in terms of developing clear and stable and current regulations, markets and safety issues to reduce uncertainty and accelerate the projects, and also to be part of the value chain development in enabling the development of a manufacturing service to capture increased shares of market value domestically.

PL: Okay. Thanks for that. I’m going to resist my temptation to ask another follow-up question, because at some point, we might need to order pizza. So let’s move on to the next topic. Ms Tukiainen, I want to talk about some of the debt financing that we can attach to the transition, and specifically, the topic of greenwashing. I think a concern that some investors have is that most companies can find some corner of their capex problem that would qualify for some of the labelling frameworks.

KT: Yes.

PL: And so you might be in a circumstance where you’re providing less expensive financing to a business model that is not transitioning. And then it opens of the question of whether an investor is appropriately being compensated for a risk profile that isn’t actually changing. So where do you think we are on that in terms of maturity?

KT: It’s a very good number of questions again. Maybe I’ll take the pricing point first. There is such a thing as a greenium or a green premium, so a lower cost of funding for an issuer of a green bond. But we’ve only seen it consistently really in developed market sovereign green bonds, most notably Germany, which has shown consistently the largest discount in their green bonds. So it’s a thing.

But I think it’s also very much related to the overall credibility of the transition strategy of the issuer, in this case, a sovereign country. I really like the Chilean framework also because the Hacienda (Finance) Ministry has put in place a transition financing plan, for lack of a better term. I’m not sure what the exact phrasing is in Spanish.

So I think there’s a lot of investors already out there who know to look for that stuff. But we need more work in terms of bringing that thinking together as a really accessible framework for the financier side, and the buy side especially, to say, what does good look like in the context of transitioning?

We’ve evolved. We, as CBI, have definitely always, for the past ten years of doing this work, been of the view that anybody can and should issue a green bond if they have the assets required. That’s the way to get this market moving and to signpost that there are existing green investments. And the bond market itself is a refinancing mechanism most of all, so we can talk about additionality all day long in the context of individual green bonds.

But the interesting thing now is companies like Anglo American in potentially problematic industries or at least hard, technically, and expensive-to-abate sectors, are getting to that point where they’re thinking about, okay, how do I bring my Scope 3 emissions to zero? So in some, there’s lots of good work being done on this already by the Transition Pathway Initiative, ACT, a number of others, CISL, us, I’d like to think.

But the next step is to agree on some kind of, and isn’t it the holy grail, harmonised framework for everything. But we’re taking steps in that direction also in the form of disclosure, the ISSB (international Sustainability Standards Board) announcement from this week, and so on. So we can get there. It can result in cheaper cost of capital. But we need to look at the entities as whole entities, and the plans in the context of where we need to get to in the IEA framework and the IPCC framework.

PL: Okay, thanks. And then I would like to get, Mr Cutifani, your thoughts on that. You’ve got, last time I checked, approximately $10.2 billion outstanding in unsecured debt. Have you ever thought about labelled bonds as an avenue to support your capex?

MC: Yes. So Stephen, our CFO and the team are looking at a whole range of options in terms of what we can play into. And what’s really interested us is the amount of interest now, with people coming to us, talking about our process redesign of the business which is dropping our unit operating costs. The water battery concept, we’ve got people wanting to fund that because it’s a green energy application.

The hydrogen trucks, we call it New Gen, again, a different range of investors. We’ve got, and I won’t mention them by name, but a large pension fund in South Africa, and you can probably guess from that description who it is, that said, look, we don’t have enough infrastructure investments, particularly of this type, in the country, available to us. If we can support you on the renewables strategy, the wind farms on the West Coast or the East Coast, or the solar energy or the battery, put us down, because we can’t fulfil our mandates.

And so green investment or national investment in infrastructure necessary to build the economy, people are coming to us every day now saying, look, we can give you this deal or that deal. So yes, absolutely, there are a whole range of financial instruments and arrangements now that are being brought to us to support us in these pieces.

And for us, this was all about competitive positioning and improving our business and getting towards carbon neutrality as quick as we could. It just makes lots of business sense. And putting those investment tools in place, we think, will continually improve our business as well. So yes, we’re right in the middle of those conversations.

PL: Okay. Thanks for that. Dr Seega, this potentially circles back to earlier in the discussion, but there is a viewpoint that in order to make this a success, the developed markets are effectively going to have to turn up with a giant chequebook and write a big cheque to avoid a circumstance where the impacts on GDP for emerging markets are just too large for them to carry. Do you think that this is an accurate description of the situation?

NS: Potentially. I think there are… Okay. So how do I describe it in the best way possible? I think we have a fundamental issue where we need to think through much better financing mechanisms for emerging markets to transition. They’re facing completely different challenges.

And we’re facing challenges as well. Europe faces adaptation challenges. Maybe not to the same extent, but we’ve already seen the events, the extreme events coming into Germany. We’ve seen extreme events happening in Canada. So I think, yes, we’re going to have to finance emerging markets to a much bigger extent than what we have done previously.

The other point, and we actually haven’t spoken about it at all, here in Europe, we are slowly but surely, with lots of hiccups, moving towards a post-COVID scenario. So we’re coming out of that. We’re talking about recovery. In Africa, they’re not post-COVID. They’re mid-COVID.

We cannot expect a huge amount of resources and finance to go to addressing these problems without addressing the issue of vaccine equity. If you look at the FT’s statistics, the developed countries have done more vaccine boosters than the least developed nations have done first and second doses.

If you are still struggling with COVID, and in a largely informal economy that is based on people being out there and showing up to work, and you haven’t started solving those problems, it is fundamentally very challenging to think about transition towards a net-zero future. So yes, we will have to pay more, but also, we will have to work on other mechanisms to enable emerging markets to get into this conversation in a much more structural way.

KT: Can I comment on that? I couldn’t agree more on all fronts. One interesting case study… And I’m starting to probably sound like a broken record with these bonds, but whatever.

NS: It’s your job.

KT: It’s my job. It says on the tin, so you knew what you signed up for.

PL: Yes. As a former fixed income guy, I’m right there with you.

KT: Thank you. An SDG (sustainable development goals) bond, a maiden one from the Republic of Benin in Africa, cornerstone investors, a number of… Well, the World Bank through the IFC (International Finance Corporation), but they also worked with UNEP FI (United Nations Environment Programme Finance Initiative) and a couple of other entities, to make sure that, A, they knew what they were doing in terms of actually being able to identify eligible assets, projects, activities, expenditures to package up into that bond.

But also, that it’s legitimate in the eyes of the international investment community to be able to access the international capital markets. And they issued in hard currency for this reason. It went down like a dream. So that’s one example of what we can actually practically do right now.

And then also the, I think its Green Investment Fund, which is US-led but has the UK, Japan and a number of other developed nations, announced a new fund which is going to be bond financed as well, just this week, to leverage the higher credit ratings, which Dr Seega mentioned at the very beginning, of developed nations to provide, I think an initial $500 million USD equivalent of financing to the least developed countries to develop renewable energy infrastructure, and then that could go up to 50 billion in total.

And we talk about the 100 billion figure. That’s half of that. And I mentioned the 2.5 trillion in the beginning. This is very much fixable, but it does require a lot of collaboration in terms of the right institutions coming together, and then setting out those definitions. And that’s obviously the hard part because we, well, most of us here, I’m sure, agree on the climate science. But in terms of eligibility of assets and activities, especially the gas argument as a transition fuel, is very contentious.

But I think we can get there. This Common Ground Taxonomy point shows that it can be done, even with a very top-down economy like China. They’ve now found that common ground with the EU. So I think that’s a really positive signal that can be then leveraged in other places as well.

PL: Okay. Thanks for that. So I wanted to ask a question to any of the panellists that feels inspired to answer it. And I’m going to be a bit naughty here. So this is a question that I didn’t tell them I was going to ask in advance. So everyone’s eyes pop open. But I’m going for the first, kneejerk reaction.

So I think in speaking with traditional credit and equity analysts that are analysing issuers in these markets and in developed markets, and you’re having this conversation about supporting the transition, a roadblock that you often run into is they very much want to think about it from an NPV (net present value) perspective.

And if a company is allocating additional capital or proceeds into technological changes initially, in the first two years or in the interim, that makes earnings’ ratios look like they suffer. And you have to be patient and wait till you get to the other side of that. Although, Mr Cutifani, you did talk about one scenario where that wasn’t the case, and that’s not lost on me.

What do you think needs to happen to frame that traditional analysis differently, to turn the story into a positive NPV story so that the average equity analyst out there thinking about this would start to say, you know what, it’s an NPV improvement if companies start to prioritise investment in this space now?

KT: I can start.

PL: And we’ve got…

KT: Sorry, Mr Cutifani. The asset manager side needs to get serious about their net zero commitments and start pricing this into their NPV calculations. Aberdeen did a workshop in this space yesterday based on some of the scenarios from IPCC (Intergovernmental Panel on Climate Change) but also this really great organisation called The Inevitable Policy Response, to say, this is how much your equity portfolio is going to suffer if you don’t do anything about the very sizable traditional energy exposure that you have. So that’s one way of going about it.

PL: So instead of thinking about the baseline valuations that we have today…

KT: Yes.

PL: It’s thinking about it versus that type of scenario.

KT: Yes.

PL: Okay.

KT: I would, personally. And take me as a radical if you want, but I think that’s part of fiduciary duty. And we need the financial market regulators to frame it in a way that it’s actually that. But you could do that today as well.

PL: Okay. And Mr Cutifani, you had your hand up.

MC: Yes, and I’m going to be very careful in terms of the way I frame this. But if I’d have listened to some of our shareholders and the markets in my first two years, we wouldn’t have recovered and driven the business to be the top performer over the last eight years. As a Chief Executive, you have to look beyond the next one or two years and really make decisions about what’s going to drive the company towards long-term success.

And when we did our purpose, to Re-imagine mining to improve people’s lives, we took 18 months, with 100,000 people, debating those seven words. In fact, we started with a lot more. We got it down to seven words, and everybody believes that. And today, when I talk about renewables, yes, we’ve made money on what we’ve done so far, but there are a few investments that we look forward at. That is the renewable strategy for South Africa, our hydrogen trucks.

We certainly can see a return for the renewable strategy in South Africa, but at the moment, our hydrogen truck transformation is probably about 1 billion to the negative in terms of NPV. And that’s not going to stop us. And the reason is we think it’s the right thing to do. It actually helps create a broader infrastructure network that will allow us to connect with our communities in a very different way. And this is really important in emerging markets in particular. It provides Eskom with a solution to a problem they haven’t been able to solve for 30 years.

So we think, by 2030, net-net, it’ll be a very good investment. And the next 18 months is about working solutions to get us from that $1 billion negative to better than NPV positive. But it might take three or four years to get that return. Now that’s what I get paid to do and I don’t mind saying that here’s where we’ve got a bit of a gap but we’re going to fix it. But it’s going to take us a couple of years. We’re going to work with partners.

But our company has been around for 104 years. And the reason we’ve been around for 104 years is we’ve not gone the short road. We go the long road. And I think we’ve proven that we’ll commit to some tough things. And generally, our shareholders have been pretty supportive and we’ve delivered an 18% return to shareholders, year-on-year, for the last eight years. It’s because we haven’t taken the short road. We’ve taken what we see is the right road. And we’re going to keep, I hope, taking those right decisions.

So if you’re going to be a partner to the community, you’ve actually got to be a partner. And so that’s how we’ve put it forward. And we see a couple of gaps in what we’re doing, but we can see ways of closing them off. But it’s going to take us a little bit of time, and we’re prepared to make that commitment. Because communities trust us, governments. We’re working with the South African government. You’ve got to be part of the solution. And I think that’s how you build long-term partnerships.

The Chile government, we’re working together with the Chile government on hydrogen, they’ve been fantastic. The work we’ve done on COVID in South Africa, we’ve got 60% of our people and their local communities vaccinated against a country average of 30%. You’ve got to be there, you’ve got to be a partner and you’ve got to think longer term, I think, to make these things work. And there are solutions out there.

PL: Okay. Dr Seega, it looks like you want to make one comment. And then I just have one thing.

NS: I’ll try to make it really short.

PL: We’ve got one more thing to go through with a very short period of time. So please go ahead, sorry.

NS: No. So I’ll try to make it very short. I think there is a fundamental differential between the way the climate science community thinks about the world and the future and the way the financial and economic community thinks about the world and the future. I spent half of my career in investment banking and risk. I lived through the financial crisis in investment banking. And the argument I heard then was, but VAR, but value at risk, and the things that we’re seeing is nothing in relation.

So we think, as an economic community, that the world will continue in a linear fashion, that the future will closely mimic what we’ve gotten so far. The climate science community thinks about a disruptive transition and talks about disruptive transition a lot more. So where is that NPV going to go under a quick and not very painless disruptive transition?

PL: Okay. Thank you. Well done. So just to bring us back to where, well, three of us are sitting, I wanted to ask each of you in turn, and I think we’re technically out of time but let’s just push through with this and get this final point, in order to have confidence that we can achieve success in the topic that we’re talking about, what would you like to see happen over the remaining time at this COP? And let’s start with you, Ms Tukiainen.

KT: It’s not going to happen at this COP. I’d like to see a global taxonomy. That’s what we need. Really, we need to agree on the definitions because that’s, in my view, something that can unlock all parts of the financial system quite quickly, if I’m being optimistic. So the next COP, maybe.

PL: A global taxonomy next COP. Okay, thank you. Mr Cutifani, you next. What do you think we need to see?

MC: Look, I’m encouraged by what I’ve heard. We’ve shifted from the why to the how. And I think that’s a big step. So congratulations to everybody involved. It is a big step. So for me, it’s what does the how look like? It’s the partnerships. And you’ve heard everybody talk about this or this piece, the financing piece or businesses.

How do we make those partnerships real? And so how do we bring those conversations together and really put shape to the how? And I agree, it’s probably the next meeting when we put those plans out there for discussion and scrutiny. And hopefully, we’ll be talking about successes that we’ve achieved already. So I think it’s all about the how now, and how we do it together. It’s about partnerships.

PL: Okay, thank you. Senor López, what’s your view?

FL: Thank you. I agree. And courage is very important in the next stage, also understanding the importance that the discussion is having now, will have in the next year, and set high goals, high goals for all the countries. And the goals must be in order or related with the importance or the part of the must-do in order to sit and to comply with all the different scores that we are trying.

And finally, coordination and alliance between all the different participators of the goals and all the different countries in the world in order to have different ways of incentivising financing, have to collaborate and have the courage to set all the goals that we need to set in this COP.

PL: Okay, thank you. And finally, Dr Seega.

NS: I want much more ambitious NDCs to be signed and I want implementation to start on 15th November. I’ll give you guys a weekend, and then… I know, I’m kind like that. But then I think I really want the how and the implementation to start now.

PL: Okay. On that note, thank you very much to all four panellists and also thank you to all of you for joining us today. We’re over time, so we should probably close it there

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. References made to individual securities do not constitute a recommendation to buy, sell or hold any security, investment strategy or market sector, and should not be assumed to be profitable. Janus Henderson Investors, its affiliated advisor, or its employees, may have a position in the securities mentioned.


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Marketing Communication.






10 Nov 2021
63 minute watch

Key takeaways:

  • Emerging markets are facing completely different challenges to developed countries. Many are still struggling with COVID, making it difficult to think about the transition towards a net-zero future. A fundamental issue is the need for much better financing mechanisms for emerging markets to transition to net zero.
  • While a green bond premium can exist over conventional bonds of similar characteristics — providing lower funding costs for issuers of green bonds designed to support specific climate-related or environmental projects — it has only been seen consistently in developed market sovereign green bonds, notably Germany. ­
  • Policy action in relation to fighting and financing climate change is required as a supporting and enabling mechanism, particularly for emerging markets. Governments have a clear role to play in the energy transition and, arguably, should create the required framework and strategy.
  • The energy sector is part of the climate change problem, given the dependency of many emerging markets on fossil fuels, and solution. In Chile, for example, 77% of the greenhouse gas emissions are aligned to the energy sector. However, the sector will help tackle climate change, notably via wind and solar, and bring social and economic opportunities to the country. Looking at emerging economies more broadly, where electricity systems are not well developed, the case for renewables is compelling.
  • Credible energy transition plans are required for moving from the use of high-emitting assets and switching into renewables. In certain geographies some companies are at grid disruption, which means it is cheaper to close high-emitting assets and build renewable assets in place. When divesting from high-emitting assets it is key for corporate management teams to question who they are selling the assets to? How will they run the asset? What’s their corporate governance approach? What are the environmental standards under which they are going to be effectively run?