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June 2011 Edition 4
Researched by University of Cambridge
Programme for Sustainability Leadership
Sustainability rests
on a simple premise:
the interconnectedness
of all things.
CONTENTS
01 The possibility of a green economy
02 Mistiming the tipping point
03 A new resources paradigm
04 The rest of Africa also a market
for renewable energy

THE POSSIBILITY OF
A GREEN ECONOMY
German statesman, Otto von Bismarck, famously remarked
that ‘politics is the art of the possible’. For a long time proposals
for more sustainable development actions did not succeed in
the political arena, as there was little confidence that these
would be technically, economically and socially possible.
Pointing out that unsustainable development is inherently
unsustainable has not been enough. More and more studies
are, however, now emerging showing that sustainable economic
development is technically possible, economically affordable in
the short term and superior in the long term and has significant
social benefits. The most important of the recent publications
is Towards a Green Economy, i published by the United Nations
Environment Programme (UNEP) under the project leadership of
Deutsche Bank investment banker, Pavan Sukhdev.
% 4,0
3,5
3,0
2,5
2,0
1,5
1,0
0,5
Figure 1: Projected trends in annual GDP growth | Source: UNEP Green Economy report
0,0
2010
2015 2020 2025 2030 2035 2040 2045 2050
Green investment scenario
Business-as-usual scenario
The report compared, by means of a macroeconomic model,
the impacts of investments in greening the economy with
investments in a business-as-usual (BAU) scenario. The results
were measured not only in terms of traditional GDP, but also in
terms of impacts on employment, resource intensity, emissions,
and ecological impact. Overall the goal of the green economy
scenario was to address persistent poverty and achieve the
reduction of greenhouse gas (GHG) emissions, so that the
atmospheric concentration will remain under 450 parts per
million by 2050, a level essential for having a reasonable
likelihood of limiting global warming to the threshold of 2˚C.
The report concluded that an investment of about 2% of global
GDP (currently US$1,3 trillion) per annum into ten broad areas
can lead to GDP being 15,7% higher in 2050 than it would be in
the BAU scenario. The green investments path will lead to faster
economic growth within as little as six years. This is calculated
by modelling the impact of the increasing scarcity of energy
and natural resources, but without taking into account the
potential negative impacts of climate change or a major loss of
ecosystems. While the investment requirement of 2% of GDP
per annum is a big number, it should be seen relative to gross
capital formation, which stood at 22% of GDP in 2009.
A quarter (US$325 billion) of the green investments is allocated
to natural capital sectors: forestry, agriculture, fresh water
and fisheries. Some of the specific measures proposed include
paying forest land holders to conserve forests and investing in
reforestation – annual investments of about US$15 billion that
could raise the value added by the forestry industry by more than
20% compared with BAU. Annual investment of US$108 billion
in green agriculture to shift to the efficient use of water, extensive
use of organic and natural soil nutrients, optimal tillage and
integrated pest control would lead over time to enhanced soil
quality and an increase in crop yields of 10% above what is
possible with current investment strategies. The investments
in natural capital have a particular benefit for the poor, who
currently rely on subsistence farming or lack access to fresh
water and enough food. It also leads to a 21,6% decrease in total
water demand, a 21% increase in total forest land and a 47,9%
decrease in the ecological footprint-to-biocapacity ratio by 2050,
compared with BAU.
Just over 15% of the targeted investments is allocated to buildings
and industry, mostly for energy efficiency. Investments in transport
require the second highest amount, US$194 billion per annum,
and include increased energy efficiency, using clean fuels, and
modal shifts towards public and non-motorised transport.
The area requiring the greatest investment is energy supply –
US$362 billion per annum. This will allow the penetration rate
of renewables in power generation to increase to 45% by 2050.
An important feature of the Green Economy report is the value
of an integrated approach as opposed to single interventions in
energy, for example. The investment in agriculture and forestry
improves those systems’ ability to absorb carbon, and thus
lowers net emissions. Similarly, increasing urban density not
only reduces the total energy demand from mobility, but can
also, according to other studies, raise labour productivity and
lower the cost of infrastructural development. i i
01 | Nedbank Sustainability Outlook

Financing the transition
An important question arising from a report such as this is:
how will the transition be financed Fortunately not all of the
US$1,3 trillion is made up of additional investments – some
of it merely requires a rechanneling of existing investments
and expenditure. A first important source could therefore be
reforming harmful subsidies. Fossil fuels consumption subsidies
globally are about US$557 billion per annum and production
subsidies another US$100 billion. Some subsidies such as
South Africa’s favourable electricity pricing agreements with the
aluminium and zinc industries, recently valued at about R6,5 billion, i i i
are tied up in long-term contracts and cannot be cancelled, but can
possibly be renegotiated. About US$19,2 billion of the subsidies
to the global fishing industry is contributing to the industry’s
contraction, so this could be reoriented to strengthen fisheries
management and financing a reduction of excess capacity.
A second potential element of funding the greening of the
economy is fiscal instruments such as various types of ecotaxes.
This could include carbon taxes, road congestion charges,
higher tariffs for waste, and royalties on mineral and petroleum
extraction. Many of these taxes can be complemented by
measures to decrease the impact on the poor or on private
sector investments. Another potential source of public funding is
fiscal stimuli similar to those put in place in response to the recent
financial and economic crisis. Out of the estimated US$3,3 trillion
in stimulus funds, almost 16%, or US$522 billion, was initially
allocated to green investments. The Chinese government’s 12th
five-year plan period, starting in 2011, indicates that they will
increase investment in green sectors to US$468 billion compared
to US$211 billion over the last five years, with a focus on waste
recycling and reutilisation, clean technologies and renewable
energy (RE). Certain countries’ ability to use fiscal stimulus is,
however, constrained by large deficits and the potentially negative
consequences of the first round of fiscal stimuli is not yet clear.
But, what is clear is that some new thinking is required to enable
the financing of a green economy. Especially in terms of ways that
public funds can be used to leverage the pools of private capital.
The funds in the financial services sector can play a major
role in funding the transition to a green economy if certain
institutional barriers can be overcome. Insurers could play a
pioneering role given the strong case that a green economy
lowers risks from social instability, crop failures, extreme weather
events and health risks. A risk-mitigation case can also be built
for commercial banks that often finance property and plant for
between 20 and 30 years. Long-term investors, such as pension
funds, some mutual funds and sovereign wealth funds, are also
important potential sources of funding. The green investment
scenario’s lower GDP growth over the first five years is cancelled
by the subsequent higher growth, and the cumulative effect
becomes positive after just more than 10 years.
One can thus, for example, see the development of structured
products that discount increased future cashflows to enable
longer term investments.
Figure 2: Global assets in 2009 | Source: TheCityUK, Fund Management 2010
45
40
35
30
25
20
15
10
5
0
28
Pension funds
22,9
Mutual funds
Growing green
20,4
Insurance funds
in trillions of US$
3,8 2,5 1,7 1
SWFs
The UNEP Towards a Green Economy report, above all, disproves
the notion that there is a necessary tradeoff between environmental
sustainability and economic progress. It makes it clear
that green investments can reduce persistent poverty and, over
the long term, lead to greater job creation, while at the same
time giving future generations the opportunity to prosper.
Creating a green economy is economically and technically
possible and should, accordingly, be compatible with the political
goals of ensuring a better life for all.
MISTIMING THE TIPPING POINT
Charles Prince, the former CE of Citigroup, infamously remarked
in July 2007, ‘As long as the music is playing, you’ve got to get
up and dance’. This was only four months before he was asked
to step down in response to the US$11 billion writedowns that
his company had to make after the credit party came to an
end. After the fact it is easy to laugh at Prince’s statement, but
the reality is that, despite several people warning of a housing
or credit bubble, few had the discipline to sit out the dance.
As John Maynard Keynes once quipped, ‘A sound banker, alas,
is not one who foresees danger and avoids it, but one who,
when he is ruined, is ruined in a conventional and orthodox
Private equity
way along with his fellows, so that no one can really blame him’. iv
Hedge funds
ETFs
39
Private wealth
02 | Nedbank Sustainability Outlook

The financial crisis should, however, be a reminder that not
leaving the dance floor soon enough, or not knowing when
the tune changes, can have significant consequences.
Malcolm Gladwell popularised the idea of ‘tipping points’ in
his eponymous 2000 book. The thesis is that ideas, trends or
social behaviours often mimic epidemics that start out slowly,
but then suddenly cross a threshold and spread like wildfire.
After the tipping point the growth is not comparable with
that experienced before. This goes against our intuition as
Gladwell writes, ‘The idea of sudden change is at the centre of
the idea of the Tipping Point and might well be the hardest of
all to accept’. Besides that, it is very hard to predict if or when
something will tip. It does not necessarily tip, for example, after
a median is reached. Often it takes only a few actions to tip it,
what Gladwell calls the ‘Law of the Few’.
Harvard historian, Niall Ferguson, outlined a similar idea in his
2010 article, Complexity and Collapse: Empires on the Edge of
Chaos. v He asks, ‘What if history is not cyclical and slow moving
but arhythmic – at times almost stationary, but also capable of
accelerating suddenly, like a sports car What if collapse does
not arrive over a number of centuries but comes suddenly, like
a thief in the night’ His argument is based on the premise that
political and economic structures are complex adaptive systems.
The complexity theory describes how it takes only a small trigger
to let a complex system ‘go critical’, triggering a phase transition
from benign equilibrium to a crisis. Ferguson employs his theory
to critique gradual-rise-and-decline explanations for the fall of
empires, the causes of war and the financial crisis of 2007.
‘Over the last three years, the complex system of the global
economy flipped from boom to bust – all because a bunch of
Americans started to default on their subprime mortgages,
thereby blowing huge holes in the business models of
thousands of highly leveraged financial institutions.’
Referencing Jared Diamond’s book, Collapse, where the author
warns of ecological collapse occurring because leaders have
limited incentive to address problems that are unlikely to
manifest themselves for decades, he compares this with
climate change negotiations. Pleas to save the planet for future
generations are insufficient to overcome economic distribution
between rich and poor countries that exists in the here and now.
Instead of debating the state of decline, what leaders and citizens
should be worried about is a precipitous and unexpected fall.
Similar to a highly leveraged financial system, the ecological
system is currently being stretched beyond its carrying capacity.
Climate scientists warn that our great concern should be
climatic tipping points when positive feedback loops (with
very negative consequences) are triggered. These include forest
dieback in the Amazon and melting of the continental ice caps.
Using a slightly different approach, a group of scientists vi has
developed a planetary-boundaries framework to explore the
safe operating space for humanity. When we transgress any of
these boundaries, the system can ‘tip’ at any stage and go into
a new, more undesirable state. According to their research, we
have already transgressed the planetary boundary in three of
the nine identified areas, namely climate change, nitrogen flow
and biodiversity loss.
Changing tack before it tips
The prevailing sentiment seems to be that the change to a more
sustainable economy will happen gradually, maybe over decades,
possibly only as a next generation more steeped in sustainability
takes over decisionmaking. Following this line of thought, we
can continue with investing activities as usual and gradually shift
portfolios into more sustainability practices. It says that the music
will still continue playing and one will lose too much by sitting
it out or moving too early into something different, despite the
market being built on unsustainable foundations.The possibility
exists, however, that this paradigm could be wrong. Whether
the system is tipped by an extreme environmental event or by
enough people who suddenly realise that the short-termism
of the investment community is undermining their long-term
welfare, is impossible to forecast. But, for those investing in,
for example, new mines or large fossil fuel energy systems this is a
risk big enough to warrant much more serious consideration.
A NEW RESOURCES PARADIGM
When the chief executives of America’s largest oil companies
were summoned to Washington in May this year to discuss
the current high fuel prices, there was a certain irony to it.
It was almost exactly 100 years after the breakup of Standard Oil,
John D Rockefeller’s oil monopoly, deemed as profiting at the
expense of the American people. Adding to the irony was the fact
that the person taking the oil companies to task was Senator
John D Rockefeller IV, great-grandson of the famous oil man.
At issue was the US$2 billion in tax breaks that the companies
receive every year.
Whether the tax breaks are repealed or not would probably
make little difference to the overall profits of the oil companies
as a tight demand-supply relationship is keeping prices high.
03 | Nedbank Sustainability Outlook

One of the proposals currently touted in the United States to
increase local oil supply is to open the Arctic Wildlife National
Reserve for drilling. But, according to the US Energy Information
Administration, that would add only between 0,4 and 1,2 percent
of total world oil consumption by 2030. That could decrease
oil prices by about one dollar, assuming the Organisation of
Petroleum Exporting Countries (OPEC) did nothing. vii
upheaval in the rest of the Middle East. Of course, as many
governments have learned, it is not very easy to cut social
expenditure once these measures are in place. So, with Saudi
Arabia’s ability to influence the price of oil through supply, it
is hard to see how the Saudi Arabians would be keen for an
average price that is much lower going forward, despite the
obvious potential for short-term price volatility.
Jeremy Grantham, the cofounder of the US$100 billion
investment management firm, GMO, wrote in his April 2011
newsletter vii i that he believed a paradigm shift might have
occurred with commodities in 2002. Grantham does not make
these claims lightly. He has built his very successful investment
career around the belief in ‘reversion to the mean’ – the idea
that prices revert to their long-term trend over time. In his
January 2011 letter ix he still made fun of efficient market
disciples who view all extreme over- or undervaluations as
a paradigm shift, when in fact it is a bubble.
But he believes the statistical probability of the current prices
being a bubble is so slim that it is more likely that it is indeed
a new paradigm. He calculated that over the 102 years from
1900 to 2002, the price of commodities (measured as an equally
weighted basket of 33 commodities) declined by 70% in real
terms. That is an average decline of 1,2% per annum after
inflation. But, since 2002, that entire decline was erased by a
bigger price surge than occurred during World War II. The GMO
team has studied 330 completed asset bubbles, which they
define as prices more than two standard deviations from the
long-term trend. Currently 22 of the 33 commodities in the
basket are more than two deviations away from the declining
trend, 12 of those more than three standard deviations out.
This means that either commodities are in a greater bubble
than stock prices were during the technology bubble, or that
the declining trend has in fact changed.
Grantham points out that oil has always behaved slightly
differently to the other commodities and instead of declining
by 1,2% per annum, it stayed flat at a real price of around
US$16 a barrel from 1875 to 1974 and then went on to a new
trend of US$35 a barrel. Since 2003, he believes, it might have
gone on to a new long-term average of US$75, but even this
migh be an underestimate.
According to the Centre for Global Energy Studies, Saudi Arabia,
the world’s largest crude-oil exporter, needs oil to trade above
US$91 a barrel in order to balance its budget this year, as a result
of having ratcheted up spending, partly in response to social
If we are indeed on a new paradigm, the implications are farreaching,
as most of our industrial base was developed in an
era of relatively low energy prices and decreasing commodity
prices. For overall economic growth this is most likely negative,
as we will now pay more but get the same utility. It is especially
negative for the poor, who do not have real assets to protect
themselves against inflation. But, for investors and for certain
resource companies, the new paradigm could be a real boon.
Higher prices mean higher profits for those with access to the
resources. One only needs to look at the profits of oil companies
at current oil prices – Exxon, Chevron, ConocoPhillips, Royal
Dutch Shell and BP had combined earnings of US$18,2 billion
in the first quarter of 2011. x This new paradigm thus has the
potential to increase inequality in society in a rather arbitrary
fashion, and thought needs to be given as to how to address this.
Failing to do so, will not just lead to more congressional hearings,
but rather to the upheaval that beset the Middle East.
Figure 3: GMO’s commodity index | Source: GMO, 28 February 2011
100
World War I
effect
Post-war
depression Great
depression
World War II
effect
Great
depression
Part 2
33 commodity index
Inflationary
oil shock
-1.2%
Annual decline
‘The
Great
Paradigm
Shift’
10
Jan 1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010
THE REST OF AFRICA ALSO A MARKET
FOR RENEWABLE ENERGY
The process around finalising South Africa’s Integrated Resource
Plan 2010 (IRP 2010) provides an interesting case study about
balancing the goals of energy security, minimising cost and
minimising carbon emissions. The ‘Revised Balanced Scenario’ that
was eventually adopted is indeed a compromise between these
goals. Prof Harald Winkler of the University of Cape Town (UCT)
04 | Nedbank Sustainability Outlook

points out that while the plan takes carbon into account it sees
electricity taking up a greater share of our carbon space, thus
requiring more mitigation from the rest of the economy. xi
The final plan sees total investment requirements of R852 billion
in present-value terms up to 2030. This is only 8% more
expensive than the lowest cost option, but carbon emissions
in the revised balanced scenario are only 275 MT CO 2 in
2030, as opposed to 381 MT (current emissions are 237 MT). x i i
The final IRP does call for renewable energy (RE) to make up
42% of new capacity up to 2030. That would constitute 9% of
the total energy mix by 2030. This increasing role for renewables
was welcomed, but many people’s enthusiasm was dampened
by the new Renewable Feed-In Tariffs (REFIT) that the National
Energy Regulator (NERSA) published a week after the IRP was
announced. This saw tariffs for RE being decreased by up to 40%
in some cases, making it less lucrative to roll out these projects.
The IRP is based on a least-cost model, so lower cost for RE
should make it possible to include more in the final mix, but
the REFIT did not inform the IRP. What is probable is that the
parameters for the IRP informed the REFIT.
As it stands, South Africa has virtually no installed RE capacity.
Other African countries have been faster adopters, Tanzania
has 50 MW of wind production, Morocco 140 MW, and Kenya
has a 310 MW wind plant that is planned for 2012. The cost
of RE is often put forward as one of the main reasons why
it is not being rolled out faster. The cost of RE has, however,
come down significantly and will most likely continue to do
so. The installation cost of the new plant in Kenya is only
R11 million per megawatt, compared with the R25 million per
megawatt cost for constructing the coal-fired Medupi power
station in South Africa. x i i i This is obviously not a completely
useful comparison as wind is an intermittent source of power
and cannot be guaranteed all the time. Wind projects in South Africa
work on a capacity factor of around 30%, so the like-for-like
installation cost for wind is around R37 million per megawatt.
But the running costs for a wind farm are limited, while a coalfired
power station needs to be supplied with coal. The cost of
coal to Eskom is about R0,10 per KWh, but there is great upward
pressure on that figure. x i v
The average price that Eskom charged its clients for the year ending
31 March 2011 was R0,40 per KWh. x v But over the next three
years that price will increase to about R0,78 per KWh. In addition,
South Africa is expected to implement a carbon tax within the
next two years and current estimates are that it will be between
R75 and R200 per ton of CO 2 . Using a price of R150 per ton
would translate into an additional cost of about R0,13 per KWh,
given Eskom’s current emissions profile. If all of these factors
are considered, the proposed REFIT rate for wind of about
R0,94 per KWh does not sound very high, as many residential
consumers already pay more than that.
Figure 4: The learning curve for selected renewable-energy sources | Source: IPCC,
Special Report on Renewable Energy Sources and Climate Change Mitigation (2011)
Average price [USD 2005 W]
100
50
10
2
1
1976
[65 USD/W]
1981
[2.6 USD/W]
1984
[4.3 USD/W]
The Intergovernmental Panel on Climate Change (IPCC), the highlevel
scientific body tasked with climate research, in May 2011
brought out a Special Report on Renewable Energy Sources and
Climate Change Mitigation. x v i They found that, of the approximate
300 GW of new electricity-generating capacity added globally
over the period from 2008 to 2009, 140 GW came from RE
additions. They further concluded that the technical potential for
RE is substantially higher than global energy demand. Furthermore,
the cost of RE technologies has declined and additional expected
technical advances would result in further cost reductions. The
examples of wind and solar photovoltaic panels are instructive
from a cost-reduction point of view.
Produced silicon PV modules
(Global)
Onshore wind power plants
(Denmark)
Onshore wind power plants
(USA)
2010
[1.4 USD/W]
0.5
1 10 100 1 000 10 000 100 000 1 000 000
Cumulative global capacity [MW]
The IPCC report highlights another fact that South African
businesses should take notice of: the role that RE can play in
accelerating access to electricity for those who do not have access.
In sub-Saharan Africa that amounts to 77% of the population.
In the absence of centralised energy grids, decentralised RE is
not only easier to roll out, but most likely cheaper. Furthermore,
non-electrical RE technologies also offer great opportunities,
for example, using solar energy for water heating and crop
2009
[1.9 USD/W]
2009
[1.4 USD/W]
drying, biofuels for transportation, biogas and modern biomass
for heating, cooling, cooking and lighting, and wind for water
pumping. With so many local businesses looking to Africa as a
growth area, this is an opportunity that should not be ignored.
05 | Nedbank Sustainability Outlook

References
i
www.unep.org/greeneconomy.
i i
i i i
i v
v
vi
vi i
World Bank. 2010. African Infrastructure.
The Citizen. 2011. Special contract cost Eskom R6,5bn. 15 March.
Keynes, John Maynard. 1930. Treatise on money.
Ferguson, Niall. 2010. Complexity and Collapse: Empires on the Edge of Chaos. Foreign Affairs 89 (2): 18.
Rockström, Johan, et al. 2009. Planetary boundaries: exploring the safe operating space for humanity. Ecology and Society 14(2): 32.
[Online] URL: http://www.ecologyandsociety.org/vol14/iss2/art32/.
http://www.technologyreview.com/blog/energy/26766/p1=blogs.
vi ii
Grantham, Jeremy. 2011. GMO Quarterly Letter, April.
ix
x
xi
xi i
Grantham, Jeremy. 2011. GMO Quarterly Letter, January.
Bloomberg. 2011. http://www.bloomberg.com/news/2011-05-19/both-parties-wrong-on-tax-breaks-for-big-oil-commentary-bycaroline-baum.html.
http://www.engineeringnews.co.za/article/will-the-irp-meet-south-africas-carbon-emission-target-2011-04-22.
Integrated Resource Plan for Electricity 2010 – 2030. Final report. http://www.doe-irp.co.za/content/IRP2010_2030_Final_Report_
20110325.pdf.
xi i i
http://www.bbqonline.co.za/articles/other/336-wind-energy-could-power-the-future.
xi v
x v
x v i
Eberhard, Anton. 2011. The future of South African coal: market, investment and policy challenges.
http://eepublishers.co.za/article/eskom-bhp-billiton-and-the-secret-electricity-pricing-deals.html.
IPCC. 2011. Special Report on Renewable Energy Sources and Climate Change Mitigation.
purpleberry 0611/6222
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06 | Nedbank Sustainability Outlook