The South African Green Finance Taxonomy 1st Edition (SA GFT 1st Edition) is the country’s first green taxonomy. This is a classification system that outlines a minimum set of standards that have to be met for a project, asset, sector or activity to be classified as environmentally friendly or green.

The very real possibility of a rise of 1.5 ^oC in the Earth’s surface temperature by 2050 will have severe implications for all life on the planet. Therefore, businesses and investors will increasingly seek clarity on which assets are contributing toward a positive change. More broadly, investors are seeking greater comfort that the funds and portfolios they are investing in are managed in a way which considers stakeholder value which not only considers the shareholder, but the environment and society as well.

Find out more about Old Mutual Wealth’s ESG rating for South African unit trusts, designed to help individual investors choose funds that align with their priorities.

How climate change is addressed in investments

1. Risk reduction or Capital at risk
Capital at risk management refers to the process whereby investors consider the effects of climate change and the risks they pose to their investments and plan accordingly. Risks could be, for example, an increase in carbon tax or the cost of changes to infrastructure or processes required to operate in changing climate conditions.

A practical example of managing this risk would be to plan for the additional cost of new truck tyres and building wider roads at mines situated in areas that would likely face increasing risk of floods because of global warming. Through considering such a likely scenario, an investor may factor in such costs when determining whether or not to invest in the mining operator and how they engage with that operator.

2. Opportunity-seeking
In layman’s terms, opportunity-seeking can be seen as the opposite of planning for capital at risk; it refers to actively looking for opportunities to align with and support businesses that contribute to a sustainable economy.

For investors, this usually means looking for:
• Best of breed investments: These investments are better prepared for climate change and may even contribute to the green economy ahead of peers by sector or geography. Their appeal for investors lies in having the best underlying operations and activities that promote and deliver on environmental objectives.
• The next winners: Companies which currently are not aligned with the green economy but have put plans in place to reposition themselves to become ‘greener’ are called the next winners. As such, their plans to become a more responsible business will be included in the expected profitability and resultant valuation of the investment.

Finding a solution to greenwashing and other challenges faced by responsible investors

A large challenge in respect of responsible investment is that there isn’t agreement on a definition or classification. This has led to greenwashing, where the views of the investor and the investee differ on what is considered “green”. It therefore became imperative to create a single agreed system to help identify what is considered a green investment.

The European Union (EU) Green Taxonomy was published in June 2020 to help classify environmentally friendly investments. Since then, there has been increased pressure to classify investments and portfolios according to this taxonomy throughout the EU. In addition, the mandatory Sustainable Finance Disclosure Regulation (SFDR) came into effect in 2021 to increase transparency of all EU investment products and is largely aligned to the EU Green taxonomy.

The SA GFT 1st Edition has been created in line with this global best practice without losing sight of our national priorities. It is currently in its first phase which establishes a governance structure and set of principles for green and climate-finance activities. It aims to, among others:

• create clarity and certainty when selecting green investments
• reduce costs of green labelling activities
• unlock investment opportunities
• align different stakeholders such as policymakers, government, financial market participants, regulators and asset owners with regard to the classification of a green investment

Unlike the EU taxonomy reporting through SFDR, which is compulsory, South Africa’s taxonomy is voluntary.

Benefits of a green taxonomy for investors

For a project or activity to be considered Taxonomic aligned, each project or activity will have to comply with all the requirements as set out in the GFT 1^st Edition. .

It will benefit investors, the broader investment industry and individual companies in the following ways:

• Investors will have an adequate, comparative disclosure on green activities and therefore able to determine a starting point and track their progress over time. This allows them to make informed decisions with regard to investments' alignment to the green economy.
• The broader investment industry – asset owners, asset managers, companies and government – will be able to have constructive climate change conversations using the same criteria.
• Individual companies will be able to construct detailed planning to be able to transition to more environmentally friendly operations.

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