As concerns over climate change heighten, investors should demand that asset managers give greater consideration to ESG factors when analysing and selecting investments. Picture: 123RF/TSUNG-LIN WU
As concerns over climate change heighten, investors should demand that asset managers give greater consideration to ESG factors when analysing and selecting investments. Picture: 123RF/TSUNG-LIN WU

Investors concerned about social and environmental issues have started, and should continue, to ask more questions about how their investments can influence change, leaders in the investment industry say. 

Many SA asset managers have signed the UN Principles of Responsible Investment, which commit them to incorporating environmental, social and governance (ESG) issues into investment analysis and decision-making.

It also commits them to actively exercising their rights as shareholders by voting at company meetings and having active dialogues about ESG issues with the management of companies in which they invest. 

As a result, you will find many asset managers reporting the integration of ESG into their investment decision-making. However, not all of them do so — not even all of those who have signed the UN pact, according to a study conducted by Stellenbosch academics Suzette Viviers and Johan Steyn.

Your retirement-fund trustees are obliged in terms of regulation 28 of the Pension Funds Act to consider ESG factors before investing your savings. In June 2019 the Financial Sector Conduct Authority issued a guidance note on how retirement funds should comply with this requirement — a move that disappointed Tracey Davies, the executive director of the non-profit organisation Just Share, who says the guidance note fails to oblige funds to report on ESG.

Jon Duncan, the head of responsible investing at Old Mutual, believes that in future all money will be managed with an ESG lens, as companies that make a profit by solving social and environmental issues will be the winners in the end. These companies are also more likely to have good governance, he says. 

But investor demand is important to maintain the pace at which asset managers engage on these issues and devise investments that do more to further social and environmental goals and keep governance in check.

Just as people started asking Nike and Reebok 15 years ago about where and how their shoes were being manufactured, the same kind of questions are starting to be asked in the wealth industry today, Duncan told financial advisers at the recent Meet the Managers conference held in Cape Town and Johannesburg.

He says while globally the ESG and socially responsible movement has been driven by institutional investors, the spotlight is now shifting to the private-wealth market, and increasingly consumers with a long-term vision are starting to ask different questions about where their money is being invested.

He says the first question you should ask yourself is what is important to you and what you want your money to be used for. 

Then you can tell your financial adviser or fund manager what you care about and ask them to tell you what is in your portfolio and what options you have within SA’s limited market, he says.

Fatima Vawda, the MD at multimanager 27Four, told advisers who attended the Financial Planning Institute’s recent annual conference in Johannesburg that they should understand your values and mindset so they can recommend appropriate investments. 

If you have strong views about, for example, not supporting companies that manufacture guns or tobacco or alcohol, your adviser should recommend an investment that actively screens out these stocks, she says. 

Investments with ESG integration may or may not exclude the shares of a company whose practices you may feel strongly about.

Duncan says the MSCI World Leaders ESG index, for example, screens out the shares of some companies — largely those involved in controversial practices such as alcohol, gambling, nuclear power and weapons, as well as those of companies involved in controversy such as fraud.

But after screening out certain companies, it still invests in the sectors and regions represented in the parent MSCI World index in order to earn returns in line or better than that index.

The MSCI World index tracks about 1,654 stocks. The MSCI World ESG index tracks a subset made up of 799 of these stocks.

After screening out certain companies, the ESG index weights those remaining in the world index on ESG factors and excludes the worst 50% in each sector and region in the index. 

This means as an investor in a fund tracking the index like one provided by Old Mutual, you will still be exposed to companies involved in the oil and gas industry and the automotive industry, but only in those companies that score well on ESG factors. 

Socially responsible investments 

You can also invest with an active manager who will take active bets on shares in line with its research into responsible investing and may, for example, invest more in companies generating earnings in the green economy, Duncan says. 

But be aware that managers have different skills and resources, and you should find out what those are, he says. This is an emerging space in SA but globally there are many more investment opportunities.

ESG rating companies and companies that design indices provide asset managers, advisers and investors with the information on how companies are performing on ESG principles, but ratings and indices differ from provider to provider. 

Fund data providers, such as Morningstar, now rate funds on how well they integrate ESG into their investment processes and some investment platforms make ratings like these available to investors. 

If you hold certain beliefs and do not want to invest in funds that, for instance, invest in alcohol, tobacco and companies that earn interest, an index tracker or an actively managed fund that excludes the relevant stocks are good options. There are a number of these funds, such as Shariah-compliant funds, available domestically and globally, Duncan says. 

Vawda says you should not confuse funds that integrate ESG with those that actively screen out certain stocks or purposely include certain stocks because of their impact on the environment or society. Funds that actively screen certain securities in or out are known as socially responsible investments.

Impact investing is another term that is often confused with responsible investing, but impact investments are those made with the primary goal of achieving specific, positive social benefits while also delivering a financial return, says Jessica Ground, head of sustainability at global asset manager Schroders. There is a direct link between investment and socially beneficial activities, and mostly these investments have been unlisted ones that are difficult for individual investors to navigate.

If you want to invest in a way that will have a positive impact but also want market-related returns, your best bet in SA is to look for a multi-asset or balanced fund that makes use of its allowed allocation to unlisted equities for impact investing — investing in housing or schooling projects or in renewable energy providers, Duncan says. 

Lastly, don’t let your adviser or investment provider forget about the G in ESG. Failing to pay attention to social and governance issues was the reason why advisers have had to have uncomfortable conversations with investors about their losses from exposure to shares in Steinhoff, Tongaat Hulett, EOH, Omnia, Ascendis and Aspen. 

Vawda says your adviser should be asking asset managers questions to be sure you are protected from governance failures like these.