New mindset needed for investment strategies
In this new global economic paradigm investors and shareholders have no choice but to rethink their approach to wealth retention and growth.
Risk as we know it has moved to a completely different dimension, while investment philosophy is changing with a greater emphasis on responsibility empathy and values.
The Treasury conservatively estimates the SA economy will contract by over 7% in 2020. Business for SA (B4SA) says we are now at a tipping point and without dramatic and sustained reform we will slide into an abyss. We are still digesting the full impact of the devastating Nids-Cam survey that estimates 3-million jobs have been lost since the lockdown. Put another way, that is about 25,000 jobs a day.
While survival for most is top of mind, preserving and building wealth post the pandemic is vital and new strategies and a different mindset needs to be adopted.
Long before the outbreak of the pandemic, investors were starting to embrace the principles of sustainable investing with best estimates saying more than a quarter of assets under management globally are being invested according to the premise of environmental, social, and governance (ESG) factors.
The reason is simple: companies are under much greater scrutiny, driven in part by the relentless power and scrutiny of social media and the growing influence of the millennial generation. One misstep can have a negative impact unless there is strict and transparent adherence to ESG principles.
McKinsey estimates that the scale of the sustainable investing market differs greatly from region to region. European asset managers have the highest proportion of sustainable investments at about 53% followed by Australia and New Zealand at about 50%. While the notion of ESG is gaining traction in SA we are not yet close to those numbers. But it would be folly for investors not to take heed.
Global data says most portfolios across the world that are biased or weighted in favour of companies with better ESG scores than their market benchmarks, outperform by close to 3%.
Last year Jon Duncan, head of responsible investments at Old Mutual, was spot on when he said companies that embrace the principles of ESG will achieve stronger brand recognition, better access to markets, lower cost of capital, better resource efficiency, stronger innovation and, relative to their peers, show long-term competitive advantage and ultimately higher valuation in the market.
The argument for adopting an ESG mindset is now beyond compelling. Data from Morningstar at the end of 2019 examining the US market revealed that close to $18-billion was channelled into ESG funds.
While ESG is now becoming a mainstream philosophy, it must also be acknowledged the concept can be amorphous and investors need to do their research. Standard risk parameters differ from sector to sector and ESG is often predicated on judgment and bias.
Notwithstanding that caveat, measurement of how companies are performing in this sphere and how they are rated has become precise analytical and rigorous and that should dispel underlying fears.
Big corporate players in SA are embracing the principles of ESG with alacrity and not, as perhaps in the past, being forced down a path that might have been considered irrelevant and onerous.
This is what Sim Tshabalala, joint CEO of the Standard Bank Group and CEO of Standard Bank SA, wrote in his ESG report last year: “We identified ESG risks as one of the group’s material risks in 2019 and have begun a comprehensive review of our governance systems and processes to ensure we’re aligned with global good practice. As a responsible corporate citizen, we aim to understand the impacts of our business activities on society, the environment, and economies.”
While the Covid-19 crisis might have diverted some attention away from the momentum that ESG has been garnering, investors both institutional and private simply cannot let up and most importantly have to keep asking questions about corporate commitment and authenticity.
There is a worry that big investors may become too focused on outcomes and achieving a corporate thumbs up rather than on the difficult processes required to get there. ESG cannot become a label or a tick box, it is about a necessary and radical shift in corporate behaviour.
And unless that happens investors will pay the hefty price as they did after Sasol’s Lake Charles chemical adventure in the US or the Steinhoff collapse that continues to impact lives and livelihoods.
• Bogdanov is founder and MD of risk-management advisory and consultancy Risk Insights
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