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Climate risk and your retirement fund’s investments

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In brief:

A case study of Standard Bank’s 2019 AGM and the shareholder resolution requiring Standard Bank to adopt and publicly disclose a policy on its lending to coal-fired power stations and coal mining operations.

 

In April 2019 two Standard Bank minority shareholders, the RAITH Foundation and the South African shareholder activist, Theo Botha, with support from Just Share NPC, tabled Standard Bank’s very first resolution on climate change risk. This was the first climate risk-related shareholder resolution to be tabled in South Africa.

According to an article by Paul Verney, published in May 2019 on Responsible-Investor.com, the resolution was tabled by “shareholders holding less than 0.001% of the company’s issued ordinary share capital”. As reported by Just Share NPC in April, the resolution requested shareholder approval requiring Standard Bank to:

(a) [Resolution 10.1] report to shareholders by the end of November 2019, at reasonable cost and omitting proprietary information, its assessment of the greenhouse gas emissions resulting from its financing portfolio and its exposure to climate change risk in its lending, investing and financing activities including:

(i) the amount and percentage of carbon-related assets relative to total assets, and

(ii) a description of any significant concentrations of credit exposure to carbon-related assets;

and

(b) [Resolution 10.2] adopt and publicly disclose a policy on lending to coal-fired power projects and coal mining activities.

Resolution 10.2 received 55% support of the shareholder votes exercised, according to Verney and Just Share NPC, and therefore became binding on the company. This is the first time that a South African bank – or any listed South African company – has faced a shareholder resolution on a climate-related issue.

Resolution 10.1, which received 38% support of the shareholder votes exercised, did not pass and thus did not become binding on Standard Bank. While Resolution 10.1 was not passed, it had received significant support, with 38% of shareholders voting in favour, indicating strong shareholder demand for improved climate risk-related disclosure from Standard Bank.

While Standard Bank had recommended that its shareholders should not vote in favour of the proposed resolutions, Standard Bank acknowledged the following:

Standard Bank acknowledged that it was well within the rights of its shareholders to table a resolution to be put to vote at the bank’s AGM; and

Standard Bank was cognisant of the fact that, as a company operating in Africa, the bank was well aware of the climate risks and negative impacts of climate change on the continent. The issue was therefore one that required international attention, given its global nature which calls on all countries and stakeholders to play their part; and

Institutional investors, such as pension and retirement funds through their investee companies, play a pivotal role in terms of proactively addressing matters such as greenhouse gas emissions through their lending and financing practices, as relayed in Standard Bank’s Shareholder information and notice of annual general meeting Standard Bank’s argument in motivating its shareholders not to support the proposed shareholder resolutions, was that:

  • The banking sector in particular was a heavily regulated industry, both locally and internationally, and was therefore considered to already have a number of reporting requirements that already addressed and reported on the bank’s lending exposures to the bank’s regulatory authorities.
  • Companies that have operations in South Africa are already required by law [as per the National Greenhouse Gas Emission Reporting Regulation pursuant to the National Environmental Management Act No. 39 of 2004 (Air Quality Act)] to report on their carbon emissions on an annual basis. Therefore, the bank was of the view that the most effective way of coordinating carbon reduction strategies was via already established international and national frameworks.
  • The methodologies required to measure carbon intensity across various portfolios are diverse, and therefore there was no standard methodological approach for such measurement, as shared in its Shareholder information and notice of annual general meeting.
  • Further to this, the bank was also of the view that it “currently has various measures in place to manage environmental, social and governance (ESG) risk in its lending practices, and the details of these measures were set out in the company’s ESG report,” as stated in its Shareholder information and notice of annual general meeting.

Post-AGM publication of Standard Bank’s Coal-Fired Power Finance Policy

On 31 July 2019, Standard Bank announced the release of its Coal-Fired Power Finance Policy. This requirement arose from the obligation imposed on Standard Bank by the 55% of shareholders who voted in favour of this shareholder resolution tabled at its AGM on 30 May 2019. Standard Bank confirmed that its new policy was aligned with the principles and standards for coal-fired power finance contained in the latest OECD Annex VI sector understanding on export credits for coal-fired electricity generation projects, dated January 2019.

The policy applies across the consolidated banking operations of the Standard Bank Group, excluding Liberty. Furthermore, the policy applies to direct finance of new coal-fired electricity generation plants without operational carbon capture and storage or carbon capture and utilisation technology. To be eligible for direct finance, coal-fired power plants must meet maximum emission and plant size parameters that are linked to the level of development of the country in which the coal-powered electricity generation plant is to be constructed.

Other South African banks and climate risk developments

Absa Bank:

Subsequent to the Standard Bank AGM in May 2019, Absa Bank at its own AGM on 4 June 2019 announced that it intends to start the process of allocating significant resources in coming to grips with climate change and the risks that climate change poses to Absa’s financing and lending portfolios, as reported by Warren Thompson for Business Day.

FirstRand Limited:

On 5 August, Just Share NPC and the RAITH Foundation submitted a climate risk resolution to FirstRand Limited. FirstRand’s AGM takes place on 28 November 2019 in Johannesburg. Similar to the Standard Bank resolution, the resolution calls for improved disclosure on FirstRand’s exposure to climate-related risks, and for it to adopt and publicly disclose a policy on lending to fossil fuel-related projects.

In addition to the minimum eligibility requirements, direct finance of new coal-fired power generation in African economies requires enhanced due diligence, the specific details of which are provided in the policy. Lastly, all transactions considered under the policy are required to be reported to Standard Bank’s Head of Group Environmental & Social Risk and Finance for enhanced due diligence. Post-finance monitoring is also required on an ongoing basis.

 

REFERENCES:

Moneyweb 2017, King IV report as far as RI funds are concerned.

Understanding South African Financial Markets (5th Edition), Retirement Funds. Pages 165 -167.

 

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