With Environmental, Social and Governance (ESG) reaching the mainstream in the past few years, there is a growing concern that there is a lot of focus on the “E” and “S” part of the equation while the “G” is being left behind, especially in geo-political discussions on climate change and the economics of transitioning to net zero.
The response to the recent COP26 conference is a perfect case in point. The excitement was palpable… Billions of dollars were going to flow into SA and other emerging markets, developed countries were going to provide funding for the much promised just transition.
At COP26, $350m (about R5,352,846bn) of new financial pledges were made towards the Adaptation Fund to help vulnerable people in developing countries increase resilience to the worsening impacts of climate change.
The problem with this is that while the COP26 conference was long on rhetoric, it was very short on detail and we cannot lose sight of the fact that as far back as 2009, there was a commitment to contribute $100bn per year into clean energy transitions – something which has failed to materialise. So, the question is why should emerging economies believe that this time is different?
The failure to meet international commitments for over a decade is another reminder of weaknesses with global governance (G). An important part of the transitioning to net zero will be improving domestic, regional and global governance. Lack of accountability, what one could call a Supranational authority to hold all countries accountable is a terminal flaw in the climate policy discussions. Will the much celebrated $8bn climate finance deal for SA meet the same fate? Even if the funds do flow, will the funds be accompanied by transparency and rigour (the G!), to give the South African public comfort, that the deal serves its best interest?
Focusing on the G, what are the questions that needs to be answered, and why do they matter? 1. What portion of the funding will be grant versus concessional finance?
Grant and concessional finance have vastly different impacts on the country. Grant funding requires no repayment, while concessional finance is a form of a loan in which the provided funding would need to be repaid later, with the benefit that the interest rate is lower than the traditional risk/return profile.
The proportion of grant versus concessional financing is critical as it establishes how much additional debt is envisaged to be placed on the South African balance sheet – either directly or indirectly through government guaranteed loans to SOEs such as Eskom.
The South African fiscus and balance sheet are already hugely constrained by a growing debt burden, which has and continues to be worsened by state-owned entities, including Eskom. While concessional loans decrease interest costs, they still contribute to the overall debt burden. In Eskom’s case, the utility’s R450bn debt burden already includes a R56bn World Bank concessional loan and more than R45bn of various loans from the African Development Bank.
These have not reduced the overall impact on Eskom’s balance sheet and arguably have contributed to debt sustainability issues given the currency mismatches. Eskom borrowed dollar loans, yet almost all its revenues is in rands. The advantages from “lower cost of borrowing in 2010/11” have been offset by the rand depreciation over the same period. The rand value has almost halved in nominal terms since the loans were finalised.
Who will receive the financing?
Who receives the financing is equally important. Is the financing envisaged for state-owned entities such as Eskom, private sector businesses such as Exxaro or governmental departments such as the department of environmental affairs or water and sanitation? How much funding will they receive and what projects and initiatives will the funding support? These answers are vital to ensure the promised financing truly assists SA in its transition and to reduce spillages from whatever funding that might eventually be mobilised.
What impact will the financing have?
When all is said and done, how might the financing make SA a better place, and did it deliver on its promise to enable a just transition? Without this crucial detail, we, the public, will never know if we got duped by unkept promises from the Global North.
The plea to South African authorities is three-fold:
- please learn from the experience of state capture and address key governance failures;
- please drive governance and transparency in the just energy transition finance negotiations; and
- please make this information available to the South African public. To enable improved governance, government capacity can be augmented, and arguably supplemented by private sector capability to maximise outcomes for the South African economy and people. With Africanacity, Absa is ready to help.
• Barends is head of sustainable finance at Absa Corporate and Investment Banking and Siwisa is head of public policy at the same division
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