A fundamental of sustainability still holds

I have found myself thinking on this more lately, given the disruptive world we have been experiencing over the last 2 years and continue to experience. Key disruptors of course being the Covid 19 pandemic, which hopefully most of the world is emerging from and the Ukraine – Russia war currently taking place. Such events have been instrumental in two follow-on crises, inflationary pressures seen globally and energy security with soaring fuel costs.

The United Kingdom hit a 40 year high for inflation in May 2022 of 9.1%, while the United States hit the same 40 year high of 9.1% in June 2022. While there are still many uncertainties regarding global inflation, there may be indications that it has peaked. In South Africa inflation will likely increase from 6.5% in May to around 7.2% mid-year due to sharp increases in food and fuel prices.

The Ukraine – Russia war has resulted in major disruption in the oil, gas and food markets, with brent crude climbing to above USD100 a barrel and natural gas above USD8 per MMBtu around mid-year 2022. Energy and food security have become the immediate short-term challenge for many countries.

These crises are serious and need to be managed. However, there is an additional downside to such crises, they tend to drive short-term thinking and decision making while leaders grapple with these outsized challenges of today. While difficult decisions need to be made to manage such crises, the environmental and social challenges facing us globally and especially in more vulnerable countries on the African continent remain, and worsen. These environmental and social risks cannot be ignored or put on hold. An already herculean job is just getting more difficult.

So what is this key ‘fundamental’ of sustainability? It is very common in the first lecture of an environmental resource economics course, for students to be presented with a graphic depicting a set of systems. The planetary system as the ultimate all encompassing system, the social system as a second level subsystem and the economic system as a third level subsystem. Some variations depict the biodiversity, social, political and economic subsystems as equal and on the same hierarchical level, but within the all encompassing planetary system. The concept trying to be driven home is that the planetary system is the ultimate boundary for sustaining life on Earth. A follow-on concept is that the subsystems, such as the economic system, is subject to the overarching planetary system, i.e. in order to have a healthy economy ultimately one needs a healthy planet to live and work on. This is relatively obvious.

What is not always depicted in such graphics is that while social, economic and political systems are subject to the overarching planetary system, they can certainly affect and alter the planetary system. The field of Social-Ecological Systems explores how systems affect each other and may fall into different states after a period of disruption. The dinosaurs did not survive the shift in planetary state 65 million years ago. Venus has a planetary system, it just happens to be extremely unfavorable for life as we know it. Venus’ surface is hot, 393°C, enough to melt lead and even hotter than Mercury. The atmosphere is acidic and thick, with clouds containing concentrated sulfuric acid strong enough to dissolve most metals used to make spacecraft. The atmosphere is nearly as thick as liquid water due to an atmospheric pressure 93 times that of Earth. Interestingly, the latest evidence now shows that Venus once had enough water to form oceans, therefore being cooler and less acidic. Scientists are trying to understand why Venus got so hot and lost its oceans, why its climate changed. Venus may be the deadliest planet in our solar system, but it isn’t the deadliest we know of. Proxima b provides for some interesting reading. Our planet is miraculous in its system state to sustain life.

What we are witnessing are the social and economic systems negatively impacting our planetary system, driving climatic change, while political systems seem unable to fully tackle the problem. While current crises today require difficult decisions and focused effort to solve them, we equally cannot lose focus that our social, economic and political systems must operate in a manner that promote the overall health of the planet. This fundamental of sustainability, that the planet has boundaries and limits of its current favourable state for life, will not change.

What does this mean for us as investors? We need to invest thoughtfully from a social and biodiversity perspective while dealing with pressures of today, but also take advantage of a changing opportunity set. We need to ask ourselves each day if we are part of the solution, and are we acting fast enough? If we are not directly investing in social impact, we need to leverage the social benefit of our investments as much as possible, such as community development, to improve social resilience. While protecting biodiversity and habitats, we need to unlock the financial models allowing investment into biodiversity as an asset class. Clearly, we need to continue to invest in climate action. Old Mutual Alternative Investments (OMAI) continues to focus on climate change, provision of decent work, diversity and governance. While the macro-economic headwinds over the last 2 years have not made deal flow and execution easy, I am very encouraged by the positive impact OMAI has been able to achieve over such testing times. This is a testament of all our colleagues’ perseverance.

OMAI’s education funds, SEIIFSA and EduFund had matric pass rates of 92% and 100% respectively, compared to South Africa’s national pass rate of 76.4%. Community development programs undertaken in the IDEAS infrastructure fund, supporting projects such as early childhood education, welfare and healthcare have spent R501.87 million in socioeconomic development, and supported small businesses through R182.9 million spend in enterprise development to date. The HIFSA fund has created and transferred 19,425 affordable homes since inception, 1,296 of the current portfolio are EDGE certified (green buildings). We must continue to invest thoughtfully into our social systems.

OMAI through African Infrastructure Investment Managers’ investments into renewable power, has generated 11,948 GWh of clean energy, powering an average of 1.2 million middle income households per annum with clean energy and offsetting more than 12.5 million tons CO2 equivalent since 2019. We must continue to invest in climate action and drive the energy transition.

While there is still much work to do, OMAI continues working to position itself as part of the solution. Given the fundamental sustainability needs of our planetary system, more than ever we need to keep our focus on the long-term time horizon and successfully steward our client’s capital entrusted to us.

Dean Alborough

Head of ESG

1 https://www.rateinflation.com/

2 Metric Million British Thermal Unit

3 Lunar and Planetary Institute. 2019 (sources include Basilevsky and Head (2003). Reports on Progress in Physics, Vol. 66. and Bertaux et al. (2007). Nature, Vol. 450).

4 Schools and Education Investment Impact Fund South Africa

5 Housing Impact Fund South Africa