Ninety One prioritises company engagement over divestment in net zero drive

Many of the world’s big institutional investors are now engaged in a race to decarbonise their operations and investment portfolios in an effort to bring about change and help achieve net zero in the coming decades.

Yet, on the investment side, there is a risk developing that investors adopt a “buy developed, sell developing” mentality as they seek to purge their exposure to high polluting countries, many of which are emerging markets.

Divestments are often necessary, but engagement with companies is equally important if a transition to a low-carbon world is to be achieved.

This is the mentality of emerging market asset manager, Ninety One, which says it is more inclined to try and work with the companies it invests in to make needed adjustments, than sell-out without engagement.

“Divestment is a last resort,” says Annika Brouwer, sustainability specialist at the firm. “Only if the company in question is unresponsive to engagement and if this is perceived as a real risk to us as shareholders will we consider divesting in a portfolio company. Engagement is the tool for change, not divestment,” she says.

In September 2018, Ninety One formally pledged its support for the Task Force on Climate-related Financial Disclosures (TCFD). Just a few years later in 2021, the firm joined the Net Zero Asset Managers Initiative, committing to net zero by 2050.

But while Ninety One has made a pledge not to invest in any new coal or oil projects, those already in their portfolio would need to fundamentally change if they were going to meet the asset manager’s lofty new promises.

Indeed, with assets under management of £132 billion ($151 billion) – and growing – and with projects across the globe, sifting through which assets to tackle first was a huge challenge in itself.

Ninety One’s strategy hinges on identifying the highest emitters within its portfolio, using an equation of company scope 1, 2 and 3 emissions (direct emissions, indirect emissions, and indirect value chain emissions respectively) multiplied by Ninety One’s shareholding.

It found that there were around 23 companies that contributed to 50% of Ninety One’s financed emissions. “The strategy is simple: go to where the carbon is, engage those companies on better climate outcomes, and help drive change where it is most needed,” says Brouwer.

“These companies and projects are our initial priority. It is where they can potentially make the biggest impact,” she says.

Throughout her career, Brouwer has advised governments and corporates across the globe on how they can better meet sustainability targets. Given her background, and connections in the field, Brouwer was brought into Ninety One implement their net zero strategy, specifically working with investment teams to assess the transition potential of high emitting companies in the portfolio.

South Africa’s beleaguered electricity utility, Eskom, has been a recent focus for Ninety One. Eskom relies heavily on coal for electricity production, but as a result is responsible for around 40% of South Africa’s total emissions.

At the same time, aging infrastructure and maintenance issues cause regular bouts of load shedding. People across the country can expect some sort of power blackout daily, hampering business and everyday life. Transforming Eskom may be key to both lowering emissions and potentially boosting South Africa’s ailing economy.

As a holder of Eskom debt, Ninety One used its influence to catalyse change. “We took a multipronged approach, engaging with the treasury, environment and energy ministers, and even the president to ensure that the policies and the commitments that the country is making supports that of Eskom,” says Brouwer.

Engagement with Eskom and South African government translated into the multistakeholder Just Energy Transition Partnership (JETP) announced at COP26, where France, Germany, UK, US and EU announced long-term engagement with South Africa to support its decarbonisation efforts. Initial financial commitment to the project was $8.5 billion.

“We helped drive the initiative forward,” explains Brouwer. “The commitment will hopefully spur more public and private commitments to South Africa’s decarbonisation drive.”

It is a strategy that Brouwer and her team have replicated across the board. “We engage companies from a strategic perspective so that may involve engaging with investor relations, ESG team or sustainability teams, using our vote as a board member or shareholder in a company and engaging with policy makers. At the government level, we will speak with policy makers, ministers, and other organisations to spark change,” she says.

 “We have a responsibility to drive emissions down and will do this in any legitimate way possible,” says Brouwer. “Where we can have influence, we will use it.”

Brouwer’s measured approach to change – one that focuses on adaptation and influence to realise their net zero goals – is reflected in the company’s sustainable investment drive across Africa.

The Emerging Africa Investment Fund (EAIF), managed by Ninety One and part of the Private Infrastructure Development Group (PIDG) brings together private, public and development capital to support infrastructure development in nine sectors, including energy generation, transmission and supply, gas transport storage and supply and mining.

So far, PIDG has mobilised $37.6 billion since 2002 across the continent, creating over 251,000 long-term jobs. EAIF’s power generation portfolio is made up of up of over 60% renewable infrastructure projects.

EAIF is still able to do select investments in gas fired power stations or for instance in LPG cooking gas installations– but only after thorough cost-benefit analysis, explains Martijn Proos, director, EAIF. Income per capita, affordability, whether it will be in line with the Nationally Determined Contribution (NDCs) and myriad other factors are considered before committing to new gas projects in the continent.

This is what lead to the recent development of the $652.3m gas-fired power plant in Temane, Mozambique. The IFC, the Dutch bank FMO and the EAIF provided a combined $253.5m of funding to the project.

“Gas will still have a role to play for some time in order to provide stable base load power on the continent, but the fund’s core focus is to stimulate the implementation of new renewable technology – and how we can promote this – can catalyse change and bring renewable energy projects off the ground,” says Proos.

Just towards the end of last year, EAIF provided $19 million to Central Electrica de Tetereane SA (CET), the owner and operator of a new 19MW solar electricity plant in the Niassa province of Mozambique – the first utility-scale solar project in Mozambique to include battery storage. The plant will boost solar output during the peak times, will contribute to grid stability, displace thermal generation, all while avoiding any carbon emissions.

“These are the types of projects we are immensely proud and excited by,” says Proos. “If we promote these initiatives, it will also mean that more of these types of projects get commissioned, the price points come down, and they become much more competitive versus gas projects for instance,” he says. “It’s win-win.”