Research papers, expert modelling and scientific insight out of the 2022 COP27 climate change conference in Egypt point to one seemingly inescapable reality: humankind has missed the boat on effectively reducing greenhouse gas emissions to mitigate the impact of climate change.
Let that sink in.
Even if we all agree on the science and the remedy (which looks unlikely, given the entrenched political stances), and even if governments don’t put a foot wrong in future, global temperatures are poised to burst through the critical 1.5% barrier, mushrooming to the tune of between 2% and 5% by 2100, according to some models (see Image 1).
What does this actually mean?
According to Ca’ Foscari University of Venice and RFF-CMCC European Institute on Economics and the Environment, the impact of climate change on the availability of labour and on productivity could cost South Africa up to 11% of GDP per capita by end-2100. This could spell both good news and bad news for social issues. For instance, in the case of gender inequality, wages may be driven up due to a reduced availability of low-skilled workers, thereby narrowing the gender pay gap. However, climate change could also make it harder for women – particularly rural women – to undertake outside work, because of their greater vulnerability to thermal stress.
These social impacts alone should underline the fundamental importance of mitigating policies and recognising that we are not only talking about economies shrinking or industries being impacted. Climate impacts come with a range of disparate geographical and demographic impacts, such as the potential gender impact highlighted above.
Of course, there will be economic implications. Regrettably, however, when one goes digging for insights into the sectoral impact of climate change on the South African economy it becomes evident that almost no work has been done. Where research exists, it approaches the conundrum from the perspective of temperature changes alone and does not consider other important impacts such as precipitation patterns. An exception is a remarkable piece of work by Nicholas Ngepah, Charles Djemo and Charles Saba from the University of Johannesburg.
Taking a 2030 and 2050 horizon Ngepah, Djemo and Saba adopt a novel outlook that considers the impact of leaving things alone or driving effective mitigation. The authors incorporate precipitation alongside temperature change and, as a way of considering industrial impacts, look at regional impacts, including provinces and municipalities, alongside industrial impact. This combination makes for a powerful – if chilling – piece of research.
To quote directly from the paper: “Various sector-specific studies around the world and in South Africa suggest climate change has significant effects on agriculture, ocean fisheries, access to fresh water, migration, tourism and other factors. However, there is less emphasis on climate change’s direct link to economic growth, especially productivity. Ultimately, temperature changes can affect human capital through health, crime and conflict. Extreme events can also erode physical infrastructure, all of which affect economic activities directly or indirectly.”
The following comment is worth highlighting: “Most of South Africa’s productive sectors have significant exposure to climate risks.”
Certainly, as the findings indicate (see Table 1), agriculture, forestry and fishing collectively make up less than 3% of value add for the South African economy. But beyond these direct impacts are a host of other considerations, ranging from the implications for inequality and gender, as well as perverse and less obvious effects, such as labour shortages and the earning power of rural women. Within considerations around labour and productivity lie notable risks for sectors that add significant value to our national economy, notably manufacturing and services.
The Solow Model of economic growth posits that there are three drivers of structural economic growth: labour force participation, productivity and population growth. Each of these components is likely to be harmed as a result of second-order impacts of climate change. Considering the South African situation in greater detail:
- Labour force participation
South Africa has shrinking labour force participation because of its workforce structure, which is declining by about 0.5% each year. - Productivity
Ngepah et al suggest that the negative impact of climate change on productivity in South Africa could be as much as 10%. - Population growth
South Africa’s population growth is around 1.2%, just behind the Organisation for Economic Co-operation and Development's (OECD’s) projected GDP growth rate of 1.8% and 1.3% for 2022 and 2023, respectively. This means the economy is already growing too slowly to support the number of new entrants – even before GDP takes that potential 11% hit from climate change.
Put these all together and we are already staring down the prospect of a less productive economy, with higher exclusion and more pronounced inequality in a country already regarded as being the most unequal in the world with among the highest unemployment rate globally.
Measuring the financial toll
Moving from GDP impacts to on-the-ground losses, Ngepah et al offer a national-level overview, then a provincial breakdown and, finally, a municipal and, as noted, an industrial sector focus.
The main sectors they identify as having the highest percentage losses as a result of a combination of reduced rainfall and higher temperatures are electricity, gas, forestry, fishing and agriculture. Keeping in mind that these are very small sectors, the losses in these sectors could range between 7% and 13% if nothing is done, or 6%-10% if mitigation efforts are put in place. The manufacturing sector will likely lose 2%, while the services and mining sectors are expected to contract by even more – although, in some instances, mining may actually benefit as a result of early mitigation actions together with being located in water-plentiful regions. The authors, who recommend collaboration between mining groups and the Department of Mineral Resources and Energy in order to affect a meaningful industry-wide response, note, “The typical response to climate change among mining companies should be one that enhances energy efficiency, secures water sources and restructures portfolios to exit commodities (most notably coal) that negatively impact the environment.”
At a provincial level, the likes of Limpopo – with its high exposure to agriculture, forestry, fishing, electricity and gas – would be the most damaged. Similarly, Mpumalanga will feel the effects of economic losses in agriculture, forestry, fishery, electricity and gas. According to Ngepah et al, the “greatest negative impact is in the forestry subsectors in the Blouberg and Ephraim Mogale municipalities in Limpopo, with 50% and 48% losses” for the best-case, mitigation scenario. This would signal economic collapse.
Conversely, some municipalities should experience positive effects from the climate change impact, largely due to water and mining. As Ngepah et al explain: “In KwaZulu-Natal, Mfolozi has the highest gains in the water sector, followed by Ulundi, Mtubatuba and Hlabisa. A number of municipalities in Limpopo are also projected to experience positive effects in the water sector, namely, Ephraim Mogale and Mutale. In Mpumalanga, the most significant positive effects are all in the mining sector for Mskahlgwa, Albert Luthuli, Thembisile, Dr JS Moroka, Thaba Chweu, Mkhondo, Lekwa and Bushbuckridge.”
What does this mean for internal migration? What does it mean for water scarcity in cities such as Johannesburg, where rising acid water levels and failing treatment plants are already putting aquifers in danger of contamination? And what does it say about our readiness to face these threats?
Vulnerability vs readiness
How the South African economy copes in the face of climate change challenges depends on our adaptation readiness.
It’s both obvious and unfortunate that the countries that are most at risk from climate change are the poorest. The Notre Dame Global Adaptation Initiative (ND-GAIN) Country Index is an opensource framework that shows a country’s current vulnerability to climate disruptions. It also looks at how ready countries are to protect and defend themselves in the face of these challenges. Using 45 core indicators, the index ranks 182 countries on vulnerability and 184 on readiness. According to ND-GAIN, 17 of the 25 most vulnerable countries are in Africa. This includes the likes of Chad, Central African Republic, Guinea-Bissau, Eritrea, the Democratic Republic of Congo, Sudan and Niger.
In an October 2022 alert from ND-GAIN, following the devastating flooding in KwaZulu-Natal in April 2022, South Africa is now ranked the 100th-most vulnerable country out of 182. This puts South Africa firmly in amber territory and on the vulnerable side of the spectrum.
Some of our neighbours are even more vulnerable. Mozambique ranks at 156, Botswana 116, Namibia 120, Zimbabwe 158, Zambia 140 and Malawi 157. By these metrics, not only is South Africa vulnerable, but it’s in an even more at-risk neighbourhood. That poses some very specific considerations for South Africa around the migration of people, but also the readiness of the region to survive the inevitable onslaught. While a country like Japan is also particularly vulnerable, it ranks extremely highly in terms of readiness. South Africa and her neighbours do not. In fact, at a readiness ranking of 112, South Africa is woefully underprepared to deal with this threat. Similarly, Malawi is at 160, Zimbabwe 187, Botswana 86, Zambia 143 and Namibia 109.
ND-GAIN is not alone in sounding this call. Another important piece of work comes from David Eckstein, Vera Künzel and Laura Schäfer. Their Global Climate Risk Index measures the damage being inflicted on countries by climate change. The ten most affected countries in 2019 included three of South Africa’s immediate neighbours: Mozambique, Zimbabwe and Malawi (see Table 2). While over a ten-year period the assessment for the region is less damning – with the exception of Mozambique – this does not change the fact that we are incredibly vulnerable and notably unprepared as a region.
Back to the betting table
Considering the sectoral projections, issues of vulnerability and readiness, and the inevitable impact on human capital and social cohesiveness, it is fair to say that the entire South African economy is at risk from climate change impacts.
As an economy still heavily dependent on coal, and trapped in rhetoric and continued resistance to shifting that dial, it is clear first and foremost that we need to address our energy base.
Encouragingly, we’ve seen some businesses making interesting, early moves into the renewable space. Coal-fired energy group Seriti Resources is a case in point, having acquired a majority stake in wind and solar-focused Windlab Africa in August 2022. The likes of Shoprite, Anglo American and Sibanye-Stillwater also are moving heavily into renewable self-generation.
South Africa’s renewable framework is increasingly aligning to this reality, particularly since early 2022, when President Cyril Ramaphosa lifted the cap on private power generation. If we continue on this trajectory, I believe we could be talking renewable investment inflows of about R100 billion a year over the next decade. That’s a massive stimulus to the economy with high multiplier impacts and material, positive spill-over effects. It would also usher in a new energy regime that is substantially lower cost, and that would inject a wave of competitiveness into the economy.
From a geographic and radiation perspective, South Africa has an enviable natural competitive advantage when it comes to solar energy production, in particular. In spite of some initial own goals, policy has caught up and this could now point to a victory in the making. However, these gains will be wiped out in a second if we do not heed the warnings of future strategies and researchers and prepare ourselves for considerable local and regional shifts in the decade to come.
ESG talking point
According to a survey of South African organisations by professional services firm PwC, 80% of companies polled had not yet made a commitment in terms of their environmental, social and governance (ESG) policies to achieve net-zero emissions – in line with accepted climate change mitigation thinking. While 28% of CEOs globally have made such a commitment, only 20% of leaders in South Africa had done so, noted the Global CEO Survey.
Given the research shared in this article, it is clear that South Africa is precariously positioned to deal with its vulnerabilities from a climate change perspective. Undoubtedly, the environmental impact of climate change on the South African economy will be felt with key rural sectors like agriculture and forestry being hard hit. However, the social impact – from inequality to gender and migration – will have far-reaching effects on communities and families. Governance, in the form of internal sustainability policies and industry compliance, already exist in many of the core industries that make up the South African economy. And yet commitment and action appear to be lacking to the extent that real change – with an iota of a chance to mitigate against industry and economic impacts – is put into play before ‘Mad Max' territory is inevitable.
Place your bets…
When it comes to making hard choices in seemingly impossible situations, there is no better resource than the work of professional poker player-turned-decision strategist Annie Duke, whose best-selling book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts, explains how to make ‘better bets’ in a pressure-cooker world.
If we apply Duke’s thinking, then the probability of an ‘easy’ solution to the climate change problem – be it geo-engineering efforts to slow global warming or moving people en masse to Mars – is likely very low. Equally low is the probability of being able to meaningfully change planet-wide behaviours to ensure we don’t overshoot the widely proposed 1.5 degree temperature threshold.
This leaves us with the reality that climate change has been politicised to the point that action has been derailed. Even in high-mitigation scenarios – where we do everything right from now on – severe impacts at a global, regional and national level are inevitable.
How would you bet on South Africa’s economy? The odds don’t look good.
Dr Adrian Saville holds a professorship in economics, finance and strategy at GIBS, where he is the founding director of the Centre for African Management and Markets. He is the author of the Visa Africa Integration Index (2012-2020) and the Investec GIBS Savings Index (2015-2020), and has worked in many markets, from Brazil to Singapore. Adrian has a long and distinguished career in investment and asset management spanning more than 25 years. He is an investment specialist at multi-family investment office Genera Capital, where he runs a multi-asset investment portfolio alongside a special opportunities portfolio.
