CONWAY WILLIAMS: Naysayers are wrong, ESG is here to stay

The role of environmental, social & governance (ESG) issues in investment management is being criticised and minimised globally. Some US asset managers are reportedly rethinking the usefulness of integrating ESG and sustainability measures into their decision-making processes.

However, the evidence shows that if taken seriously integrating ESG into investment processes offers enduring value for clients. It is not just a hallmark of responsible investing but a strategic imperative for delivering superior, risk-adjusted returns.

Two studies in particular highlight ESG’s contribution to investment results. Morningstar research into the performance of sustainable funds versus traditional funds over a 10-year period found that “58.8% of sustainable funds outperformed their traditional peers”. Meanwhile, New York University’s Stern Centre for Sustainable Business aggregated findings from 1,000 research papers authored in 2015-20 and found a positive relationship between ESG and financial performance in 58% of corporate studies.

Yet there are still asset managers who are not truly committed to unlocking the benefits of incorporating ESG in their investment processes, and greenwashing does exist. However, it is not accurate to generalise that these are common occurrences across the entire industry. Many asset managers do take ESG seriously.

We integrate ESG factors into our investment processes because for ESG to be effective it must be rooted in rigorous, evidence-based methodologies. Thus, our ESG strategy is not a superficial add-on but a deeply integrated component of our investment process. Our systematic approach, supported by extensive data analysis, ensures that ESG considerations are genuinely embedded in our decision-making.

While there may be challenges in standardising and implementing ESG criteria, dismissing the entire framework ignores the strides made in this area. Research consistently shows that ESG integration leads to better risk management and long-term financial performance, as long as investment processes ensure non-financial risks are identified and managed effectively within an ESG framework.

We believe ESG is not a mere vehicle for “saving the world”, which has contributed to its waning popularity, but is a fundamental pillar of a comprehensive investment strategy. The positive strides we’ve seen include the growing adoption of ESG criteria across multiple asset classes, the development of innovative ESG-linked financial products and increasing collaboration between investors and companies to drive meaningful change.

These advancements underscore the enduring value of ESG in the investment landscape and highlight its potential to enhance both financial performance and societal affect. Given the complexity of the world’s ESG challenges, regulation must continue to evolve.

Globally there has been broad support for the International Sustainability Standards Board’s (ISSB’s) sustainability disclosure standards, the International Financial Reporting Standards 1 and 2 (IFRS 1 and IFRS 2). These aim to consolidate the multiple sustainability-related disclosure standards across global jurisdictions into standardised measurement and reporting guidelines, enabling comparability and consistency.

To date several countries — including Brazil, Nigeria and Australia — have agreed to either adopt or integrate these regulatory standards in their sustainability frameworks, and the EU has aligned its corporate sustainability standards with the ISSB standards. SA has also taken the first steps towards embracing these standards. In June 2023 the SA Institute of Chartered Accountants and the JSE participated in the global launch of the two sustainability disclosure standards, hosting an event in SA.

Suresh Kana, trustee of the IFRS Foundation and deputy chair of the JSE, said the worldwide launch aimed to create “a transparent, robust, global baseline of sustainability-related disclosures for the capital markets” and would enable companies “to tell their stories about risks, opportunities and metrics in line with governance”.

Incorporating these global standards into SA ESG practices would have profound implications for corporates and asset managers. They present an opportunity to align our ESG framework with global best practice, enhancing the comparability of SA companies with their international peers and making them more attractive to global investors, who prioritise ESG factors in their decision-making.

From an asset management perspective it is crucial to anticipate and respond to these shifts, ensuring that we are compliant and strategically positioned to leverage the opportunities that come with enhanced ESG transparency.

Given political agendas and the diverse views surrounding sustainability, ESG will remain the subject of heated debate. US political stances informed by climate change and ESG naysayers are likely to influence the global discourse about ESG in the years ahead. However, ESG should not become a politically fraught concept. It is a critical aspect of modern risk management, with the evolution of ESG investment practices leading to more sophisticated risk assessment models, enhanced corporate transparency, and closer alignment of investment portfolios with long-term sustainability goals.

Regulation 28 of the Pension Funds Act ensures ESG is taken seriously by mandating that fiduciary investors consider quantitative and qualitative risks, including ESG factors, in their decision-making processes. This regulatory requirement underscores the importance of ESG as a fiduciary duty and crucial nonfinancial risk assessment.

Thus, the investment industry should focus solely on the objective benefits of ESG integration, such as enhanced risk management, improved corporate governance and sustainable long-term returns. We remain committed to ESG integration, independent of external influences, because we believe it is essential for achieving superior, risk-adjusted returns for our clients. It provides a deeper understanding of potential risks and opportunities and ensures that clients' portfolios are resilient and positioned for sustainable growth in the long term.

Through our systematic and holistic approach, combining quantitative analysis derived from vast amounts of data with qualitative insights, we are committed to remaining a forerunner in the industry. ESG factors will always inform our investment decisions, ensuring that our clients’ capital can withstand growing climate change risks, ever-present societal challenges and corporate governance transgressions.

• Williams is head of credit at Prescient Investment Management