Among the change that the COVID-19 pandemic has brought, lies another threat to lives and livelihoods – a changing climate. Each of the last four decades has been successfully warmer than the one before it. Since the mid-1880s, human activities are estimated to have driven the average global temperature to rise by approximately 1.2 degrees Celsius. In recognition of this, 195 countries adopted the Paris Agreement in December 2015 at the 21st Conference of the Parties (COP21). This landmark agreement sought to drive the global response to the threat of climate change by “holding the increase in the global average temperature to well below 2 degrees Celsius above pre-industrial levels (between 1850-1900) and pursuing efforts to limit the temperature increase to 1.5 degrees Celsius above pre-industrial levels” (IPCC, 2021). This goal has now been re-confirmed by all the parties to COP26 in Glasgow.
In order to achieve no more than a 1.5 degree temperature increase, global net anthropogenic CO2 emissions need to decline by 45% by 2030 from 2010 levels. In the case of a 2 degree Celsius limitation of global warming, CO2 emissions are required to decline by 25% by 2030 with the goal of reaching net-zero around 2070.
South Africa has set out to achieve these long-term temperature goals through the Nationally Determined Contribution (NDC). This has seen a commitment of keeping national greenhouse gas emissions in line with an upper level of 510 Mt CO2-eq for the first defined time frame in the NDC (2021-2025); and an upper level of 440 Mt CO2-eq during the second time frame (2026-2030). These figures are a 17% and 28% improvement on 2015 NDC report, respectively. The decarbonisation of the South African economy will in the 2020s focus primarily on the electricity sector; in the 2030s a continued decarbonisation of the sector alongside the transition of the transport sector towards low emission vehicles. The 2040s and beyond will target the hard-to-mitigate sectors. The key challenge during the first phase of the NDC will be the transition in the energy sector as South Africa’s economy and energy system is one of the most coal-dependent in the world consisting of a large range of high-carbon infrastructure.
It is this rapidly evolving context that companies in South Africa and globally need to operate within and navigate through. At Africa International Advisors we see the impact being felt by companies through the following five different mega-forces or channels:
Each of these mega-forces on their own would have a significant impact on business. However, when combined these forces hold the potential to change the business environment dramatically and rapidly.
To complicates matters, while the science of climate change may become clearer much else is far from certain. For instance:
Increasingly investors are demanding that companies consider these developments in their strategic planning and disclose the risks of climate change. In 2017 the Task Force on Climate-related Financial Disclosure (TCFD) published recommendations for companies to disclose their risks and opportunities related to climate change. These recommendations required companies to:
The TCFD further recommended that companies make use of scenario analysis to determine the risks and opportunities to their strategy and manage these.
A key challenge facing companies in Southern Africa is that while many of the challenges faced by this country are unique, there is a lack of scenarios and resources that can help them quantify the risks and opportunities particular to the sub-region.
Africa International Advisors therefore developed a unique set of energy scenarios, specifically tailored for Southern Africa. These scenarios position four plausible futures for the energy in the region. These very different futures are based on different outlooks for, not only for the pace and scale of transition to net zero but also the level of regional integration.
The four potential energy scenarios for our future are illustrated below:
Each of these scenarios are not only plausible but provide very different outlooks for renewable energy, batteries, gas and coal. They also hold very different implications for the types of actions companies need to take to reach their own climate mitigation goals or what opportunities may enjoy or risks that they may face as a result of climate change and the energy transition.
At AIA – we believe that our scenarios can greatly assist companies that wish to understand the implication of the energy transition for their organisation and its strategy. This can assist not just in facilitating reporting in terms of TCFD but also drive better strategic decision making.