Iain, could you introduce us to Old Mutual Limited? What is its role as an investor in Africa?
Old Mutual Limited is a financial services group operating primarily across sub-Saharan Africa. We have our roots in Life insurance but have diversified the services we offer across short-term insurance, banking, asset management, and long-term savings. We are the biggest non-bank investor in sustainable infrastructure across the African continent, with our projects including solar, wind, hydro, and others. Additionally, we invest in logistics infrastructure as well as student housing and schooling. But the majority of our assets are climate related.
Underinvestment in the green transformation is a well-known issue, as the right incentives must be in place. Why is investing in sustainable infrastructure in Africa financially sensible for you?
To begin with, although they are long-term (25-to-50-year horizon), our projects are viable economically. A contributing factor incentivizing us is that the statutory capital rules to which insurers across the globe hold favor our kinds of investments. Secondly, due to the deficit of energy infrastructure in Africa, there is a great opportunity to ramp it up significantly using only climate-friendly means. Solar is a very viable option, largely across the whole of sub-Saharan Africa.
Globally speaking, green financing is projected to grow to $ 152 billion by 2050 from the present $ 20 billion.
This growth is skewed in favor of countries that have an energy infrastructure deficit. People often talk about these developments in negative terms, but I think that this is quite compelling, business-wise. Economically, the risk-return tradeoffs do seem to make sense.
In the context of financing, one should also bear in mind the major political discussion concerning the history of the relationship between the global South and the global North. Who should pay? Where should financing come from to support the ambitions of developing economies, while simultaneously not harming the environment? How do you define a just transition from carbon-heavy energy infrastructure to clean infrastructure in economies that do not even have the means to develop any kind of infrastructure as such? Although not unique to Africa, this debate is particularly acute for some African countries.
What would you highlight as the biggest challenges for sustainability investments in Africa?
If the world does not manage to get emissions down to the 1,5-degree target, some sub-Saharan countries will be disproportionately affected (such as Nigeria). So, building up adaptation infrastructure is key and remains a significant challenge.
Another recent debate among economists revolves around the issue of what is going to happen from a migration perspective. Due to flooding risks, it is argued that domestic migration, especially towards less flood-prone areas, will be greater than cross-border migration. For instance, in Niger, you see people urbanizing faster because the rural economy has become non-viable even at current temperature levels. Although nationalism seems to be the global trend, if you look at the demographics, you see dependency ratios skyrocketing in most of the developed world. Additionally, you have a young growing demographic coming from the developing world, particularly in sub-Saharan Africa. There is a strong likelihood that there will be big incentives in developed economies in the coming 20 years to encourage the migration of younger people with skills into their economies. This is an underexplored and inadequately debated view concerning the 20-year horizon dynamics of demographic movements triggered by climate change.
What about the challenges related to policymaking? Would you like to see more regulatory support?
Although Africa is a heterogenous continent, broadly speaking, clarity is needed from policy makers concerning the framework for public-private participation and joint-infrastructure projects. The ability to commission clean energy projects on a commercially sensible basis and to feed that energy into a grid infrastructure are critical enablers. The capacity of the national grid and its reach are necessary investments at the utility level, nationally speaking. For instance, the optimal situation of a solar energy site does not correspond to traditional optimal locations for carbon-based infrastructure, so the grid is not adequately dispersed across space.
Clarity on the rules of the game around being able to feed into the grid, that is, on how that is priced, how the tariffs work, and clarity about the mechanisms of public-private participation: these are the three main enablers I would highlight. Additionally, a framework is needed to think about the trade-offs between job creation and jobs at risk, given the prospect of long-term total decarbonization. This is critical from the perspective of national policymaking.
What message would you send to those that will be attending the COP 28 in Dubai concerning Old Mutual’s contribution to the green transition?
It is incumbent on all of us to take the net-zero targets seriously. I am not always sure that is sufficiently prioritized. Just look at how Europe back-pedaled on its commitments in the face of a crisis triggered by the Ukraine War.
As a company, we will continue to play a positive role in providing financing for new sources of green energy. Currently we have about 146 billion rand invested in the green economy. We have recently integrated ESG decision-making into our investment process, and we have developed a roadmap, to phase out thermal coal in our propriety investment holdings, as part of the transition. We have done work on understanding the carbon intensity of the assets we hold, be they debt or equity instruments.
What we still have to do more of is to influence the underlying counterparties (investees) to improve their carbon footprint over time. We engage on all of those issues at a company board level, at a regulatory level, and a stakeholder level, and address them through investor pressure, to try to enable the change we would like to see. Ultimately, we are a financial services company, we do not have an inherently carbon-intensive business. But we do have an ability to influence the ecosystem of carbon intensive industries to provoke the shift. This is essentially the role we see ourselves playing.
