Trucost News / 13 Jan 2012

Top 40 companies in South Africa exposed to carbon risks

Dirty Feet: Portfolio Carbon describes the exposure to carbon costs of the 40 largest listed companies on the Johannesburg Securities Exchange (FTSE/JSE Top 40 Index).

SinCo – the sustainable investment consultants – commissioned environmental research firm Trucost to analyze greenhouse gas (GHG) emissions from the FTSE/JSE Top 40 and to measure the carbon footprints of 10 of the largest South African equity funds to assess potential financial risk under legislation to introduce carbon pricing in countries including South Africa (S.A.) within the next three years.

Dirty Feet: Portfolio Carbon describes the exposure to carbon costs of the 40 largest listed companies on the Johannesburg Securities Exchange (FTSE/JSE Top 40 Index), as well as among major pooled equity investment funds (known as “unit trusts”) investing in South Africa. It poses 10 critical questions investors and companies must answer in 2012.

Dirty Feet presents evidence-based research that helps investors put numbers to scenarios in the post-COP17 world,” said Graham Sinclair Principal at SinCo. “A key question for investors is: are there opportunities for investment approaches in climate finance or mitigation and adaptation strategies at country or company levels? We see opportunities to invest in low-carbon technologies and business models not factored into valuations.”

Externalities can be internalised by charging firms for the damages caused by their pollution, and by making them more accountable for emissions. By putting a price on carbon, government policies will give companies a financial incentive to generate and use energy more efficiently and develop low-carbon business models and supply chains. Investors need to understand which companies stand to gain from regulations and market-based instruments such as taxes on carbon dioxide emissions, and which will lose out.

Findings show that while carbon costs will initially have a limited impact overall, carbon risks could be material for some companies and investors. The companies directly emitted almost 109 million tonnes of GHG emissions, measured in carbon dioxide equivalents (Mt CO2e) globally, which equates to 20% of South Africa’s carbon emissions in 2010. If the companies were to pay the carbon tax rate of R75 (US$8.97) per tonne of CO2e for direct operational emissions globally, carbon costs could amount to almost US$974 million. This would equate to 0.2% of revenue or 1% of earnings before interest, taxation, depreciation or amortization (EBITDA) on average across all 40 companies.

Earnings could also be exposed to carbon costs in the Oil & Gas, Basic Resources, Retail, Industrial Goods & Services and Food & Beverage sectors. Profit risk from carbon costs can vary widely for companies within sectors, with Sasol Ltd and Harmony Gold Mining Co. Ltd among companies most exposed. Some companies are more exposed to indirect carbon costs passed on by suppliers than to direct costs from operational emissions. There are strong financial incentives for investors, including pension funds and asset managers, to ensure that large capitalization companies actively consider carbon risk as a material factor.

“Our research shows that the transition to a low-carbon economy will create winners and losers,” said Lauren Smart, director at Trucost. “Companies that act now to cut greenhouse gas emissions from their operations and supply chains will be less exposed to rising carbon and energy costs than slower-to-respond, carbon-intensive competitors. Investors can identify risk and opportunity by integrating carbon metrics into their financial analysis.”

The new Pension Funds Act Regulation 28 effective from 1 January 2012 also implies retirement fund investment policies need to factor in environmental, social and governance (ESG) factors,” added Graham Sinclair, Principal of SinCo, “and the Dirty Feet: Portfolio Carbon report lists 10 critical questions investors should be asking in 2012.”

“Studies of this nature provide insights into exposure a South African portfolio may have to issues such as carbon tax and/or energy price increases,” said Jon Duncan, ESG analyst for OMIGSA’s Equity Research boutique.

South Africa is a significant market for sustainable investment: the IFC-SinCo study (July, 2011) estimated US$125 billion of investment integrates ESG factors in sub-Saharan Africa. At the same time, ESG-branded investment products represent less than 1% of assets under management (AUM) or US$5.5 billion. But the carbon pricing of scenarios is absent from the major unit trusts, creating risks to investors.


  • The carbon footprints of equity funds analyzed ranged from 387 tonnes of carbon per US$m revenue for the Nedgroup Investments Rainmaker Fund to 1,151 tonnes of carbon/US$m for the Allan Gray – Stable Fund.
  • Eight of the funds analyzed invested in stocks that were more carbon-intensive on average than Index sector peers.
  • Trucost created a carbon optimized version of the FTSE/JSE Top 40 Index with a 7% smaller carbon footprint. Carbon risk could be reduced further by re-weighting the JSE All-Share Index, as it has a larger universe of constituents within sectors.
  • Investors expect ESG issues to have an impact over the next 10 years. Climate-related risks, ranging from water scarcity/sanitation to emissions of greenhouse gases, will impact investment performance over the next 3-10 years.


  • The JSE40 companies accounted for 207 Mt CO2e in 2010. Almost half of these emissions were from electricity purchases and other direct (first-tier) suppliers, such as travel and logistics providers.
  • The Basic Resources, Oil & Gas, Food & Beverage, Industrial Goods & Services and Telecommunications accounted for 97% of total emissions.
  • At a higher future carbon price of R200 (US$23.91), direct carbon costs could amount to more than US$2.5 billion globally. This could equate to 0.5% of revenue on average across all 40 companies, or 2.7% of earnings.
  • Average exposure to direct carbon costs varies by sector. In the top five sectors, carbon costs at US$8.97/tonne (R75) would equate to between 0.06% of EBITDA on average in the Telecommunications sector and 14% of EBITDA for the Oil & Gas sector.


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