Short-term volatility is a smokescreen: invest in clean energy now

Nedbank has taken the lead in providing innovative funding for green and renewable energy. It was the first bank in Africa to release its energy policy, in which it committed to stop the financing of fossil fuel projects by 2045 — well ahead of the UN’s 2050 net zero goal. 

Nedbank is an active participant in both the renewable energy and sustainable finance space by supporting multiple projects in this arena. Recent successes in the mining space include Harmony Gold mandating Nedbank Corporate & Investment Banking as global co-ordinator, bookrunner and sustainability co-ordinator on a significant sustainable finance debt package.

The bank also sees opportunities to offer similar innovative sustainability-linked funding to other players in the mining sector. 

Investing in the future

The real value comes from making decisions with a long-term lens instead of being swayed by the current market sentiment. Any sound capital allocation framework must take a much more measured approach in that current conditions must be considered, but companies must also look at the future environment.

At the same time, mining companies need to consider ESG, which has become a key driver in capital allocation decisions, especially in terms of environmental factors.

Another critical point is that a company should not make capital expenditure decisions based on an expected rise in the price of the minerals. Instead, companies must consider where prices will be over a longer-term horizon, typically, in this case, over the next five to 10 years. This means working out the cycle to take a responsible view of investing in either expansion or renewable energy projects.

Deciding when and where to allocate capital investment can be tricky. Investors will always want to see a return on their investment, regardless of the unpredictable long-term outlook for commodity prices, which may affect profitability.

The question then becomes how to improve the effectiveness and efficiency of capital allocation when the outlook is constantly changing.

Changing world

According to EY, the drivers behind capital allocation are changing as more companies seek to achieve a balanced range of objectives. These include ensuring the business is sustainable and providing returns to shareholders, while also being agile enough to adapt to a changing environment.

In this way, companies secure a social licence to operate, supplied through all their stakeholders — including shareholders, employees, consumers and the public — accepting their business practices. 

As a result, capital allocation is no longer about assessing, planning, reviewing and prioritising how a company spends its money, but about benefiting all stakeholders.