Picture: 123RF/Elnur Amikishiyev
Picture: 123RF/Elnur Amikishiyev

As global warming and climate change accelerate, the need to ensure that human development is environmentally sustainable is an accepted imperative requiring fundamental change to the way we live — including how and what we consume, how we earn an income to fund our consumption and how we invest for the future.

The UN warned in its biennial assessment report in 2019 that increasingly complex risks from global warming to pollution, epidemics and climate change threaten human survival if left to escalate. It noted that the past can no longer be relied on as a guide to the future, with new risks emerging in ways not anticipated.

Against this background, individual and institutional investors now want to invest in a way that has a positive effect on the world. Surprisingly perhaps, they have found that investing with environmental, social and governance (ESG) considerations in mind can also produce superior returns.

Whereas historically financial markets were dominated by the profit maximisation approach, there is a growing support for consideration of ESG factors in investment decisions — hence the growing prevalence of words such as social return, impact investing, triple bottom line and sustainable development goals.

Market-driven efforts to invest in assets that have a positive effect are supported by initiatives led by multilateral organisations such as the UN and, in some countries, including SA, by legislation.

Principles for responsible investment

The UN enacted principles for responsible investment (PRI), a set of six principles providing global standards for responsible investing as it relates to ESG. Most big investment managers are signatories to these principles, while in SA regulation 28 of the Pension Funds Act (as amended) compels funds and boards of trustees to consider factors that may materially affect the sustainable long-term performance of assets, including but not limited to those of an ESG nature.

These factors have resulted in impact investing becoming a global trend across asset classes. This investment wave is causing fundamental economic shifts, affecting many companies, industries and economies — either detrimentally or beneficially, depending on their environmental footprint and investor appetite for investments with a positive social impact. For example, as investors shift away from heavy industry in favour of cleaner sectors, mining companies and fossil fuels companies are losing significant amounts in investments, raising the cost of capital and placing projects in jeopardy.

There is finally an understanding that environmentally-friendly companies, as well as socially impactful and well-governed businesses, enjoy enhanced access to capital.

Because sustainability concerns have a growing influence over the allocation of capital, companies need to adhere to sound ESG principles to maintain institutional investor interest. The Global Sustainable Investment Alliance estimates that about $30.7-trillion in global assets were allocated to sustainable investing at the start of 2018, which represents growth of 34% in two years.

The World Economic Forum’s Global Risks Report 2020 presents the major risks the world is likely to face in the coming year. For the first time, environmental issues account for the top five risks by likelihood, and the top three by impact.

It’s encouraging that fund managers and investors are responding to this worrying state of affairs.

Numerous institutional investors have divested from environmentally-unfriendly projects, while banks have opted to not fund fossil fuel projects such as coal-fired power stations. Investors are interested in financing bankable “green” projects. Activists and investors are also demanding more transparency from companies about their ESG and climate-related risks.

Institutional investors that are signatories to UNPRI are now ESG activists as they require, more than ever before, their investee companies to disclose environmental impact and various inputs required for UNPRI reporting.

Indicative that pressure is mounting on corporate SA to take environmental issues more seriously is that annual general meetings have become a platform for lobbyists to call companies to account. At Standard Bank’s annual meeting in May 2019, shareholders tabled and voted on a resolution relating to climate risk for the first time. The bank’s board recommended shareholders vote against the resolution.

In the end shareholders voted down the resolution, which would have required Standard to report climate risk in its activities, though it received support from 38% of shareholders. A number of institutional investors backed the proposal, including Old Mutual Investment Management and Mergence Investment Managers.

In contrast Sasol, the reported worst emitter of greenhouse gases after Eskom, refused to table resolutions on the climate crisis, denying shareholders the opportunity to vote on the issue at its meeting in late November. This despite the resolutions being backed by some of SA’s biggest investors.

Net inflows into sustainable investment funds in the US almost quadrupled in 2019 to $20.6bn, according to Morningstar. Not surprisingly, fund managers are capitalising on the demand for investments that align profits with social goals.

Bank of America, for example, announced it would invest $300bn over the next decade in sustainable business projects. BlackRock said sustainability would be the centre of the firm’s investment approach, stating that climate change will lead to a fundamental reshaping of finance. Capital reallocation will happen quicker than expected as clients prioritise climate change.

• Mongalo is chief investment officer at Novare Investments.

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