SHAWN HAGEDORN: Time for ESG managers to reassess tools to cut poverty

The popularity of environmental, social and governance (ESG) funds has surged to the point where their tools should be freshly reappraised. Specifically, can they sharply reduce poverty in, and around, SA?

Investors outpaced governments in discouraging investments in fossil fuel production last year. As sufficient supplies of alternative energy sources have not yet been developed, this created hardships for many lower-income households through higher prices and compounding supply uncertainties. 

In response, the objective is now a “just transition” to a greener global economy. “Just” means the social impacts must be managed alongside the environmental effects. “Transition” suggests the governance issues will be adroitly managed. 

This implies ESG investors must improve functions that societies expect governments to perform. While investors have developed impressive expertise for funding disruptive innovations, few portfolio managers expected to navigate climate change versus poverty-type trade-offs.

Societies normally employ political tools and processes to weigh such competing priorities. How vulnerable might global poverty be to a fresh fusion of disparate skills?

Pre-Covid trends pointed to Sub-Saharan Africa accounting for nearly 90% of the world’s extreme poverty by 2030. The pandemic has further challenged this region’s prospects, with climate warming and measures to slow it.

Too jaded

Poverty has been plunging elsewhere while becoming entrenched in SA and across this region. Solution blueprints can be imported and modified for local conditions. Will ESG managers, with their trillions of dollars, make this happen?

While many factors contribute to poverty, the core blockages point to governance shortcomings. SA’s ESG managers are generally more knowledgeable about these challenges than their counterparts in other regions. But are they too jaded by the depth of SA’s corruption to resist judging and focus on delivering potent solutions?

If ESG managers can’t meaningfully accelerate poverty alleviation, their credibility will suffer. They have long directed more capital on better terms to countries that are well governed. This did not persuade leaders such as Jacob Zuma, Robert Mugabe or Hugo Chavez. Nor has it inspired President Cyril Ramaphosa to adopt progrowth policies and practices, despite his continually emphasising the importance of attracting investments to spur growth. 

Poverty is concentrated in resource-endowed nations because their leaders can fund lavish lifestyles despite low worker productivity. These are now the countries that most need to restructure their economies as the world continues to transition from manufacturing and mining towards services and emerging digital possibilities.

To vanquish the blockages that entrench poverty across this region, ESG investors must acknowledge that governance is the central blockage. Innovative investors have already developed the ability to upgrade governance in dynamic tech upstarts as well as sclerotic industrial companies.

Constructive engagement

Attracting huge investment inflows is prioritised by Ramaphosa because the ANC’s policies and practices destroy capital. Future inflows will simply prolong the agony unless there is far greater financial discipline.

That ESG behemoths seek to alter behaviours by curtailing funding points to this technique being used to punish SA’s apartheid supporters by isolating them. With the advantage of much hindsight, the case for “constructive engagement”, strong then, is even stronger now.

The economic advantages of intense globalisation provoked the fall of the Berlin Wall, which triggered apartheid’s demise, and the Rise of Asia, which thumped global poverty. Yet SA, this region’s economic hegemon, still creates few jobs through adding value to exports, and this is the norm across Sub-Saharan Africa.

It is impossible for a country to simultaneously sustain high rates of savings and spending. High-poverty countries can only achieve rapid upliftment through exporting. Almost 90% of Chinese were extremely poor in the early 1980s, versus less than 1% now. The roles of ESG investors and commodity exporting to the rise of Asia were insignificant. Conversely, the role of effective, albeit imperfect, governance was profound.

As the most developed country in the region, which will soon become home to nearly everyone who is trapped in extreme poverty, SA is the obvious place to shape antipoverty solutions. Meanwhile, the ANC’s political machinery is threatened by the necessary transition from being an isolated, resource-based economy. Given these disconnects, our business elites remain unable to articulate a workable plan. 

Direct reporting

Rather than using allocation filters, ESG investors should freshly consider how private equity practitioners have improved the governance, and thus the performance, of thousands of diverse companies. Unlike consulting companies, which are at best motivated by imperfect incentive fee structures, private equity investors are inherently incentivised to create enough value that they can exit profitably. Their interests are firmly aligned with governance and performance outcomes. 

ESG investors should also adopt a direct reporting style, such as that of Warren Buffett. They should plainly express how they see their challenges and the decisions they have taken. This would inspire far greater innovations than a managing-against-an-index approach.

There is no easy way to repair SA’s public sector governance shortcomings, but as trillions of dollars flow into ESG funds such managers should develop the expertise to shepherd state-owned enterprises (SOEs) towards initial public offerings. Consider how different SA’s prospects would be now if, in the 1990s, SOEs such as Eskom and SAA had been set on a path similar to that of Telkom.

Improving SOE performance must be the first among many steps leading to SA becoming vastly more integrated into the global economy. Our top asset managers have much to offer, and to gain, by reassessing the tools in their toolboxes.

• Hagedorn is an independent strategy adviser.