Amid growing uncertainty about the rising cost and scarcity of water, infrastructure gaps and the potential of water-shedding, water and other environmental, social and governance (ESG) risks are increasingly looming large on the radar of ratings agencies.
South Africa stands at the cusp of another downgrade, with electricity woes strengthening the possibility of a ‘junk status’ future, and the country’s water troubles could make it worse.
South Africa’s investment community is waiting on ratings agency Moody’s review in March; however, many believe that a ratings downgrade is unavoidable after the agency cut its outlook for South Africa’s Baa3 foreign- and local-currency assessments to negative in November.
It is South Africa’s last investment-grade credit rating after the downgrades by S&P Global Ratings and Fitch in 2017.
As at December 2019, S&P’s credit rating for South Africa stood at BB with a negative outlook, while Fitch held the country’s rating at BB+ with a negative outlook.
“One of the greatest determinants in whether we are downgraded by Moody’s is the electricity crisis, and especially the load-shedding that is expected,” says Talbot economist Mike Smith.
“We would venture that water will be the next focal point in that realm,” he adds, noting that water challenges will start to flank electricity challenges in deterring foreign and local investment in South Africa.
“On the global stage, the focus is very much on climate risks. It is also starting to trend towards ESG considerations and factors.”
A recent Sustainalytics report noted that a range of ESG issues, from natural resource management to public health and business ethics, could affect sovereign credit because “how a country manages such factors can influence its revenues, foreign investments, the likelihood of it defaulting on its debt payments and the volatility in the price of its bonds”
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“Increasingly, investments are informed by the sustainability of companies, climate risk and the ESG standings of sovereign nations. That is a determining factor for much of the credit risk assessments [outcomes],” Smith explains.
Moody’s includes ESG factors intrinsically in its credit risk assessments, noting that market participants are increasingly looking to environmental sustainability when making investment decisions.
S&P also holds ESG components as primary considerations.
Even major banks are pulling out of coal deals.
“[South Africa is] simply not prepared for this type of scrutiny.”
South Africa’s overall ESG risk rating is higher than that of six other countries that Moody’s rates as Baa3, including Portugal, Italy, the Bahamas, Hungary, Romania and Russia, the Sustainalytics report highlights.
“South Africa underperforms our sample median on five of the nine indicators of natural and produced capital, including carbon intensity, energy intensity, water stress, habitat protection and natural disasters,” it continues.
“As South Africa’s energy- and water-intensive industries, such as mining and agriculture, are particularly exposed to climate risks, we anticipate carbon, energy and water issues to play an increasingly important role in assessing the country’s creditworthiness.”
Fossil Fuels
Much of South Africa’s climate risk stems from the country’s reliance on fossil fuels, especially coal.
“Although South Africa has set targets to increase renewable-energy use to 33% of the energy mix by 2030, to date, coal accounts for 80% of the country’s energy output, and it remains among the top 20 emitters of carbon globally,” Sustainalytics points out.
Further, Smith reports that Eskom alone accounts for between 2% and 3% of total water consumption.
“That does not take into account the coal mining industry’s consumption of a significant amount of water.
“Our current energy challenges will seem small by comparison and, unless we take drastic measures to conserve water sources, water insecurity will become the biggest environmental and economic challenge facing our country.”
However, the world is waking up to the fact that climate change, water and the environment are key risks facing our economies going forward, says Talbot new business director Helen Hulett, adding that there has been significant maturity in the climate change discussions, which, a decade ago, was a taboo topic.
Businesses need to start taking control of their environmental and social impacts.