Eino Emvula
BY NOW IT should be common knowledge that climate change is real.
Unfortunately, the impact of climate change – which ranges from prolonged droughts to heatwaves and sporadic rainfall patterns – is not proportionate to a nation’s contribution to greenhouse gas (GHG) emissions.
While it is projected that 50% or more of future GHG emissions will come from emerging and developing countries, it has been scientifically reported that Africa accounts for only roughly 4% of the global GHG to date.
Namibia’s contribution is negligible. Yet it is developing countries, like Namibia, which bear the brunt of the negative effects of climate change.
Through the Paris Agreement (a legally binding international treaty on climate change) and various Congress of the Parties (COP) events, including the recently held COP27 in Sharm El Sheik in Egypt, global leaders and scientists have committed to reducing GHG emissions and thereby limit global warming to below two degrees Celsius, but preferably to below 1,5 degrees Celsius by 2050.
This presents both challenges and opportunities.
In the case of Namibia, while the climate-related challenges such as prolonged droughts cannot be underplayed, there are significant opportunities which Namibians should grasp.
One such opportunity is the energy mix for the future and Namibia’s drive to contribute to this through the green hydrogen (GH2) industry, for which a strategy was launched on the eve of COP27.
However, based on the publicly available information, the development of the GH2 industry requires a huge amount of capital.
By way of example, the Hyphen Hydrogen Energy project is reported to cost around US$13 billion. In other words, one project will cost around N$220 billion at current exchange rates.
By comparison, Namibian asset owners and capital allocators control N$370,6 billion on a combined basis as at the end of December 2021.
CONTROLLERS OF ASSETS
One observation is that pension funds and long-term insurers account for 75% of the industry’s assets.
Furthermore, more than 50% of the total assets are invested in Namibia, with more than 50% of such assets invested in Namibia allocated to money market instruments – or simply put, held in cash. What are the alternatives?
We believe these asset owners who control the bulk of assets can play a meaningful role in Namibia’s energy transition.
Managing other people’s money comes with huge responsibility, which includes due care and seeking the best risk-adjusted return over the long term.
Typically, pension funds and long-term insurers have long-term investment horizons. On a selective basis, if done prudently and with due care, there is an opportunity for asset owners and allocators to invest in complex projects such as GH2.
It must be pointed out that, depending on the risk appetite of each investor, investment in such projects is typically done once the projects have been de-risked and cashflow is in sight.
In the Namibian context, where there have been limited investable assets, such investments would not only be right for reasons highlighted above, but would likely yield similar or better returns.
WHEN IMPACT MEETS RETURNS
We believe the process of decarbonisation in emerging markets is a growing and investable opportunity for private sector capital.
There are two areas to finance where the convergence of investable opportunity and impact exists.
Firstly, the solution providers which will build the new infrastructure and technologies needed to power the net zero economy, and the enabling industries of which the output is needed for decarbonisation, such as renewable energy, battery storage, and copper producers, and lithium miners.
Namibia possesses some of these opportunities that are worth considering.
These include renewable energy, copper mines and the emergence of lithium exploration projects, which would hopefully turn into operating mines in the not-too-distant future.
Financing the investment in these two broad areas would not only have an impact, but would also offer investors an appropriate return.
To avoid equity dilution, we believe many companies will tap debt markets, providing a scale opportunity for investors at attractive yields. By reallocating a portion of their existing fixed income portfolios at better or equivalent yields, investors can capture the positive externality of decarbonisation by supporting the transition in emerging markets without sacrificing returns.
For Namibian investors this can be efficiently achieved by allocating capital to funds with transition finance mandates.
