Picture: 123RF/VITALIY VODOLAZKSYY
Picture: 123RF/VITALIY VODOLAZKSYY

In about six weeks, the next decade will be ushered in. While it presents us with an opportunity to examine the decade past, it also allows us to look forward and consider which trends will transform the local and global asset management industry. There is growing consensus that sustainable investing is going to become a mainstream discipline and a key trend in the 2020s.

Regulators across the world have already set their expectations for the industry’s players with requirements of greater transparency, investment process integration and reporting. Sustainability factors have also shown evidence of enhancing performance within integrated investment processes over those that do not, while avoiding risks that may not have been avoided otherwise.

In June 2019, the Financial Sector Conduct Authority (FSCA) issued its guidance note one of 2019: “Sustainability of Investments and Assets” in the context of a retirement fund’s investment policy statement. In conjunction with regulation 28, it states that a fund should consider all factors that may materially affect the long-term performance of any asset it invests in.

Environmental, social and governance (ESG) factors, alongside economic drivers, do not form the exhaustive list of sustainability factors. The guidance note states that, in respect of domestic assets, ESG factors also relate to the advancement of broad-based BEE.

The expectations from the regulator are that a retirement fund’s process will be able to test areas of evaluation, monitoring and “active ownership” in pursuit of its sustainable investment objectives. 

There are various strategies that can be called on when implementing a sustainable investing framework. Retirement fund trustees will require a complete understanding to select asset managers and strategies that are fit for purpose:

  • Negative screening: An investor purposefully filters out the companies/entities it deems to have a negative effect on society. This approach may exclude industries involved in tobacco, thermal coal, arms or gambling. Norms-based screening is related in approach but excludes companies that break international conventions.
  • ESG integration: This approach is the most commonly used. Traditional investment analysis and decision-making at the individual instrument level is augmented with ESG performance indicators. Another related approach, the “best-in-class” ESG overlay, tilts towards specific ESG scores relative to the overall market or industry peers within a quantitative or index approach.
  • Thematic investing: As the name suggests a specific sustainability theme is selected, such as climate, housing or water, based on a financial/economic motive or clients’ need to align the portfolio with their specific values. 
  • Impact investing: This approach places money with entities that intentionally target measurable social or environmental projects with direct impact.

While the challenges are significant, the leading sustainable asset management practitioners will develop an authentic and credible approach, articulating how sustainability is rooted in their investment philosophy. Evidence-based proof of its integration in the investment approach, process and outcomes should support its credibility. “Active ownership” is a key area within the framework in which engagement, intervention and voting act as the voice of the investor.

While comprehensive proxy voting guidelines/policies and a disciplined and robust engagement approach are the table stakes, influence over the decision-making of the company’s board is the ultimate desired outcome.

Trustees need to avoid thinly resourced functions that focus more on compliance and, instead, employ authentic practitioners that drive a mandate to activate, enable and equip investment professionals to make better decisions, using a sustainable investing lens.

Asset managers will also look to differentiate themselves by expanding their ESG investment process reach to all asset classes — an important requirement or expectation from the regulator.

The much-publicised failures of corporate governance in certain SA companies have led to significant and impaired losses shared by retirement fund members. The improved and focused lens of a disciplined sustainability framework should limit the likelihood of a similar experience. Addressing the domestic socio-economic imbalances is another area in which sustainable (impact) investing can play a strong role. 

• Liddle is head of institutional distribution at Sanlam Investments.