Burning oil in a BP spill in the Gulf of Mexico in 2010. ESG-focused investments aim to avoid exposure to share price pitfalls from such disasters. Picture: BLOOMBERG
Burning oil in a BP spill in the Gulf of Mexico in 2010. ESG-focused investments aim to avoid exposure to share price pitfalls from such disasters. Picture: BLOOMBERG

Can you use your investments to influence the attitudes of publicly listed companies on the environment, climate change or carbon resources? Can you force them to treat their workers, customers and shareholders fairly and honestly?

Advocates of sustainable investing believe that now, more than ever, you can play a role as global interest in sustainable investing rises.

Sustainable investing has until now largely been the preserve of big investors with long-term investment horizons, such as retirement funds, which can use members' funds to invest in private-equity projects with a social or environmental impact. These include infrastructure development and investments in renewable energy.

But sustainable investing is now going mainstream, Hortense Bioy, Morningstar's director of passive strategies and sustainability research, told the recent Morningstar investment conferences in Cape Town and Johannesburg.

$23-trillion invested

That is because of an increasing focus on environmental, social and governance (ESG) issues in listed companies.

Bioy says that globally it is estimated that more than $23-trillion is invested in portfolios with an ESG focus - that is a quarter of all the money that is managed by professional managers around the world.

SA is seemingly following the trend. A recent survey by investment company Schroders among South Africans with more than €10,000 (R168,000) a year to invest found interest in sustainable investments was 13% higher than the global average.

The Financial Sector Conduct Authority has published a directive under the Pension Funds Act that, if implemented, will force funds to reflect on the sustainability of their investments.


80%

Of 190 reviewed studies showed that sustainability practices had a positive influence on investment performance 


This changes the direction for asset managers and brings new options to make investment choices that give leverage over the ESG decisions of listed companies.

You will be able to choose unit trust funds on investment platforms based on ESG issues. Fund-rating agency Morningstar has developed a sustainability rating for funds, including South African unit trust funds, and Old Mutual is working on a rating for funds on its platform.

World Wildlife Fund

Glacier by Sanlam plans to launch a rating endorsed by the World Wildlife Fund (WWF), says Leigh Kohler, head of research at Glacier. The platform also offers a balanced or multi-asset fund, the Prescient Living Planet Fund, that is managed in partnership with the WWF.

Several local asset managers are focusing on integrating responsible investment practices across their investment strategies. As part of its ESG focus, Old Mutual Unit Trusts is opening two ESG-focused global index-tracking funds to individual investors.

Jon Duncan, head of responsible investment at Old Mutual, says global index firm MSCI has been pragmatic about balancing the focus on ESG and returns.

Duncan and Bioy say there is evidence that ESG investments meet and often outperform investors' return expectations.

Duncan says a meta-study of 190 different studies was conducted and found that 80% of the research demonstrated that prudent sustainability practices had a positive influence on investment performance.

He says the ESG score is a measure for management quality and companies that score well on ESG do well elsewhere. These companies have a lower cost of capital, use resources more efficiently, have a lower staff turnover, better productivity, better brand recognition, a stronger social licence to operate and innovate better, he says.

They also create profits while solving social problems, he says.

Though adoption of ESG investing is growing, it isn't regarded universally as the answer to all the world's problems or even to investors' desire to achieve good returns.

SA's socially responsible index-tracking and actively managed funds have to date not been wildly successful. CoreShares closed the BGreen exchange-traded fund, a Nedbank initiative.

CoreShares manager Gareth Stobie says the fund was small and the maintenance of the customised index became problematic. He says CoreShares believes that ESG is not an asset class but should be woven into the fabric of how the company invests.

When it comes to returns, CoreShares believes selecting funds based on their ESG scores can help manage risks better, but lower risk should equal lower returns and not the other way around.

Indices with an ESG focus may also impair diversification that broad indices provide, he says.

Stobie says that globally, index-tracking investment companies that are forced to be long-term holders of, for example, the shares in the JSE all-share and top-40 indices or the S&P500 index, are motivated to be active shareholders. Active shareholders or active stewards talk to the management of companies on ESG-related issues whereas an active manager who doesn't practise active stewardship may just sell the stock.

CoreShares is not yet able to engage actively but it aims to build this capacity in time, Stobie says.

Active engagement is the focus of one of the longer-standing actively managed socially responsible funds in SA.

Terence Craig, the manager of the Element Earth Equity Fund, says the fund does not screen out, for example, all mining shares.

It, however, avoids companies with poor governance, such as Steinhoff and Naspers, but will invest in companies with good valuations (share prices relative to earnings) with which Element can engage to improve their ESG practices, says Craig.

dupreezl@tisoblackstar.co.za


Conscience is the guide

 

Morningstar's Hortense Bioy lists six drivers for the focus on sustainable investing:

1. Recent corporate scandals such as Steinhoff, Volkswagen and BP;

2. The UN's Sustainable Development Goals;

3. The Paris agreement on climate change;

4. Government regulation and standards for the financial sector;

5. Consumers turning to more sustainable consumable and investment offerings; and

6. Influence of younger generations, particularly millennials, and of women, and the transfer of wealth from older people to younger generations.


Weighting for good, globally

 

Old Mutual's two environmental, social and governance (ESG) global index-tracking funds are designed to deliver returns in line with the MSCI world developed markets and the MSCI emerging markets indices, making it easy for investors to opt for the index investment that can bring about change.

The ESG indices maintain the exposure to the same countries and market sectors that you enjoy in the MSCI indices, but with a higher concentration of shares with the best ESG scores, says Frank Sibiya, index portfolio manager at Old Mutual's index-tracking business, Customised Solutions.

The funds are offered to South African investors as rand-denominated feeder funds that feed into funds managed by Customised Solutions in Ireland.

Sibiya and Jon Duncan, head of responsible investment at Old Mutual, say the ESG indices screen out shares that have been repeat offenders against responsible investment norms - typically those involved in human rights, labour, pollution, data privacy or governance issues. Steinhoff and Facebook, for example, were excluded from the indices.

The shares with the best ESG scores on the most relevant measures in each sector in each country are given higher weightings than they have in the parent index, to omit those with lower scores.

Duncan says MSCI does not have an ESG index for SA but Old Mutual has developed its own for an institutional client. It plans to adapt this index to reduce exposure to companies with high carbon footprints, and open it to individual investors.

Old Mutual Wealth's discretionary investment manager, Tailored Fund Portfolios, which devises portfolios for financial advisers, also has a global range with ESG overlays that include green bonds - fixed interest instruments that fund projects with environmental benefits.