Environmental advocacy organisation the Centre for Environmental Rights (CER) conducted a case study of the Industrial Development Corporation's (IDC's) investment in coal mining projects, in Limpopo, as part of efforts to assess the role public institutions can play in supporting sustainable industrial and economic development, as well as in enabling a just transition.
The CER conducted the study using the sustainable finance methodology developed by international development finance organisation Fair Finance International (FFI), which requires that economic, social and environmental elements must be fulfilled to be classified as sustainable development, explains CER corporate accountability and transparency programme researcher and report co-author Daiyaan Halim.
The case study of the IDC's investment in metallurgical coal miner MC Mining, states that the investment did not fulfil the required metrics and cannot be considered an investment in sustainable development.
"Development, in general, consists of economic growth and social improvements that help to reduce poverty, and lead to the achievement of some social or economic rights. Development tends to involve projects and infrastructure, such as roads and schools.
"Sustainable development can additionally include aspects such as reforestation, renewable energy and infrastructure to support its use, and redevelopment or development of new industrial value chains. This is especially relevant in the case of the IDC, such as by supporting the development of renewable energy value chains that could include component manufacturing or electric vehicle value chains," says Halim.
Sustainable development can include innovation and adaptation of existing industries, such as green steel and cement production, which have important implications for foreign direct investment, as well as industrial sectors and companies such as ArcelorMittal South Africa and PPC Cement.
"These type of development projects are large and expensive and offer low rates of return for private investors. This necessitates public financing in these project that generally lead to public goods, with little to no revenue generation taking place over the short-term. There are some returns over the longer term, but these projects present higher risks," he says.
Public development finance institutions (DFIs), such as the IDC, can play a vital role in sustainable development by funding such activities, emphasises Halim.
"There are various mechanisms that can be used, including DFIs leveraging their own capital and directly financing the construction of renewable projects or the development of value chains.
"It is especially important to recognise that these can crowd in private finance by derisking the investment and as a mechanism of credit enhancement by fulfilling a portion of the required funds and then draw in private investment for the balance of funding by providing more acceptable rates of return."
DFIs can make unattractive investments attractive, and this is positive if doing this for sustainable industrial development, he says.
The IDC, specifically, is mandated to fund industrial development in line with national priorities and objectives for the purpose of supporting new and existing industrial undertakings.
The IDC can fulfil a role in funding sustainable industrial development, such as supporting the development of new industries, including renewable energy and industrial value chains for environmental goods and services.
Additionally, the IDC can fund research and development of new green technologies to support sustainable industrial development. There is an historical precedent for this, as the IDC provided petrochemicals multinational Sasol with funding to develop the Fischer-Tropsch process that it uses to produce petrochemicals from coal, says Halim.
"The IDC can apply a similar approach to now move away from fossil fuels into a green future. The IDC can fund research and development for broader use in industry, such as hydrogen technologies that can be adopted by other players and industries," he explains.
Engineering News reported on July 5 that Sasol and the IDC had signed a memorandum of cooperation to advance South Africa's green-hydrogen economy.
The IDC can provide funding for climate change mitigation, resilience and adaptation in existing industries. It can also, in line with its mandate, leverage foreign direct investment, capital and technology from abroad to support skills development and knowledge transfers for new and existing industries.
It must not perpetuate unsustainable value chains, such as by investing in fossil fuel projects, says Halim.
The report recommended that the IDC's founding legislation be reviewed to align it with sustainable industrial development. Further, it recommends that the IDC's investment policy and guidelines explicitly consider environmental and social in addition to the economic merits of a project.
The IDC's investments must be consistent with the Constitution and United Nations Sustainable Development Goals.
Additionally, the IDC's policies and investment decisions are not made public and the report recommends that the IDC, as a public finance institution with the aim to support industrial development, should be more transparent and provide access to policies, details of clients, terms of agreements and environmental impact assessment reports, which should be available online, as should ongoing monitoring of projects and metrics, he says.
"It is important to realise the role public finance institutions have in advancing climate and environmental justice. We must acknowledge the tipping-point effect public finance institutions have, especially considering their spheres and influence in providing financing to meet developmental objectives," says climate change advocacy and development non-profit 350Africa public finance campaigner Alia Kajee.
"In terms of social, environmental and climate justice, public institutions must recognise not only the opportunity, but also the responsibility to advance sustainable development goals and standards and practices where the primary mandate is not profit but development. Public finance institutions and DFIs must recognise the danger of undermining sustainable development if they do not focus on their role in development finance, and on the opportunity to contribute to the policy and regulatory processes to support sustainable development," she says.
The CER has engaged with the IDC and invited it to participate in the presentation of the study, but it did not participate. The CER remains open to further engagement, said CER corporate accountability and transparency programme head Leanne Govindsamy.