ESG, incorporating green energy to increasingly drive business development

15th October 2021

By: Donna Slater

Features Deputy Editor and Chief Photographer

     

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In terms of incorporating environment, social and governance (ESG) conscientiousness into business development models, South Africa, and the financial services sector in particular, has historically, and in recent times, been acknowledged as a global leader, law firm Pinsent Masons transactional services partner Chris Green said this week.

He spoke during a webinar hosted by Creamer Media on behalf of the law firm on corporate power purchase agreements (PPAs) in the age of net zero ambitions and ESG conscientiousness, on October 13.

Advancing ESG was supported by regulations; however, Green said pressure from a variety of stakeholders, including institutional investors and asset managers, as well as public interest groups, had and would continue to play an important role going forward.

From a regulatory perspective, he said development over a period of time have largely been driven by requirements pertaining to institutional investors. “Among other things, insofar as pension funds are concerned, Regulation 28 requires a fund and its board to consider any factor which may materially affect the sustainable long-term performance of an asset, including ESG issues, in making investment decisions.”

Beyond formal regulation and public company imperatives, Green added that various nonprofit and public-benefit organisations were pursuing advocacy and shareholder activism approaches aimed at promoting ESG by exerting influence and pressure on institutional investors.

“We see a steady increase in activists and stakeholders pushing for the tabling and consideration of resolutions pertaining to the disclosure of ESG-related issues at shareholder meetings. That applies equally to private and public companies,” he noted.

As such, Green said, South Africa’s legal framework was constantly evolving as a result of changes that have been made to company and other laws over time.

Nonetheless, he said climate change was likely to be the key focus area from an ESG perspective for the foreseeable future, not only in South Africa, but across the African continent.

“Not only will governments, regulators, investors, funders and public interest groups continue to escalate these imperatives, but shareholder activism in this space is likely to increase significantly.”

ELECTRICITY WHEELING

Change brought about with the amending of Schedule 2 of the Electricity Regulation Act – the lifting of the licensing-exemption threshold for distributed energy projects up to 100 MW – is a factor Pinsent Masons finance and projects legal director Emma Dempster alluded would have a profound effect in terms of a business’ ability to meet climate-change ambitions and green its operations.

This amendment brings with it the possibility that certain distributed energy generators at some point, will have surplus electricity that they may want to wheel to offtakers for a profit.

“Wheeling in South Africa has always been legally permitted . . . [the amended regulations, however,] bring it to the fore with the licence exemption which is why it is important from a regulatory perspective and also for corporates for achieving their net zero ambitions,” she said.

The wheeling of electricity would be positive for the market because it would assist with accelerating corporates' goals of achieving net zero as it would expand portfolio-based generation, said Dempster.

“Instead of having to be restricted to 1 MW of on-site generation, you can now look at procuring energy up to 100 MW through wheeling to multiple [offtakers].”

Meanwhile, the ability to expand its use of renewable energy under the new regulations meant that fast-moving consumer goods company Massmart would be able to more easily meet its ambition of powering its operations with 100% renewable energy by 2035, said Massmart group sustainability VP Alexander Haw.

Massmart embarked on the construction of its first solar plant in 2016 and has been rolling out solar plants continually for the past five years.

“We now have 11 plants at our highest [energy] consuming sites, and we have just recently surpassed 18-million gigawatt-hours of green energy through a combination of PPAs,” he said.

In terms of its commitment to be more environment-friendly, Haw said Massmart was under growing pressure from stakeholders and shareholders to do more from an ESG perspective.

Nonetheless, he said some challenges around the practicalities of wheeling remain unanswered.

“It is potentially less about the size of the plant, but how we feasibly and practically wheel this power. There is a lot that we, as corporates, still do not understand. Are there going to be wheeling tariffs and what are these going to look like? How would we wheel across different grids? Would we be able to put up a plant in the Karoo where there is optimal sunlight and wheel that power to somewhere in Johannesburg?”

Regarding wheeling structures and legalities, Pinsent Masons partner Ronan Lambe said the “devil [would] invariably [be] in the detail” of how businesses facilitate the wheeling in practise.

Other markets have seen the benefits of permitting wheeling structures, he said. “I have been active on corporate PPAs in Europe and Asia for the past five to ten years, and those markets have seen offtakers come in and, using [either] sleeving or wheeling over virtual structures, [they] found a cost-effective way of gaining certainty around electricity pricing.”

Similar to wheeling, electricity sleeving is the concept of an intermediary utility company handling the transfer of money and energy to and from a renewable energy project on behalf of the buyer.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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