Partnering with firms that address social issues is more than just a feelgood story
Across the US, Black Lives Matter (BLM) protests have continued weeks after the death of George Floyd. Similarly in the UK, sizeable crowds have gathered at Trafalgar Square for consecutive weekends. In other parts of the world BLM protests may have subdued somewhat. However, the call for the end of systemic racism and gross inequality remains an important conversation. It is our view that asset managers should start lending their voice to the matter and acknowledge that we have a significant role to play in guiding companies to address the myriad of socioeconomic challenges SA faces.
As the country with the highest official income inequality in the world — as measured by the Gini coefficient — the harmful effects of socioeconomic discrimination are a real threat to social cohesion and inclusive economic growth. This is not a uniquely SA problem, as seen in the UN’s sustainable development goals (SDGs), which seek a better and more sustainable future for all. We consider the SDGs a workable framework to align the interests of society, capital providers, companies and governments.
Using our influence — via the capital we manage and invest daily on behalf of our clients — we partner with companies to adopt sustainable practices and help them do more to address social issues and achieve the SDGs. Where previously it was a matter of profit at any cost, today sustainable companies manage their business to the benefit of all stakeholders, namely customers, employees, suppliers, communities and shareholders.
Far more than merely a feelgood story, the investment rationale for rewarding responsible companies measured by their environment, social and governance (ESG) score has been proven time and again. A study conducted by Refinitiv shows that during February and March, globally ESG funds or those that incorporate these principles into their investment processes performed on average about 1% better than conventional funds. Various other studies paint a similar picture.
This performance shouldn’t be surprising to investors as research shows that companies with a high ESG score outperform their competitors over the long term. This is because a company with a high ESG score is generally well managed and more efficient due to their sustainable operations.
One could argue that it has been a while since SA’s first democratic vote in 1994. Ditto the black vote in the US in 1965. However, often what we fail to realise is that the legislation of discrimination remains entrenched in not only the governing systems, but also in the private sector. Not only have the BLM protests increased greater awareness of systemic racism, but they have shifted the onus of responsibility to each one of us — individuals and corporates — to work towards addressing the structural barriers perpetuating inequality.
In the Old Mutual Savings and Investment Monitor conducted in 2018, one of the key impediments to savings cited by millennials was “asset catch-up”, a phenomenon where the majority of South Africans were still trying to acquire assets — property, cars, electronics, thus impairing their ability to save. We should never underestimate the impact of structural inequalities, even though for some they may appear to be long gone.
One lever we believe companies with high social scores can pull, so to speak, to address social inequality is through developing the skills of their people. In addition, it is essential to create a culture of equity and sustainability so that the investment in skills development reaps rewards. By having both the environment and the individuals empowered, we’re able to create more value and wealth as individuals, companies and communities. At Old Mutual Investment Group, we consider skills development as a critical intervention, so much so that we’re developing a database that measures and scores companies on how they fare in developing the skills of their staff. This measure falls squarely into the social aspect of the ESG equation.
According to a study by Edelman, as a result of protests in the US, nearly two-thirds of the US population is concerned about systemic racism and will buy or boycott a brand based on its response to the movement that has swept across the world.
Consumers have already made their mark on markets and studies show that they’re now doing the same in investment markets. It is calculated that the bulk of personal wealth will sit in the hands of millennials and Generation Z within the next decade, suggesting a real opportunity to transfer wealth for the better.
We’ve not yet seen the full effect of the seismic shift such thinking will have on markets, but expect it to be considerable. The decision to invest in companies that possess the right qualities and practices is available to every asset manager and investor alike. After all, stable communities are essential to creating stable economies. Unless we do, we’re likely to end up with a situation in which no-one wins, and everyone loses.
• Fakier is portfolio manager at Old Mutual ESG Equity Fund.
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