Aligning purpose with performance

Despite global political headwinds, most notably from the US, where President Donald Trump’s return to the White House has reignited scepticism about environmental, social and governance (ESG) investing, it remains a dominant investment theme.

“The global narrative — particularly the ‘Trump effect’ — has cast ESG as a cost burden or ideological agenda,” says Michelle Green, credit analyst and chair of Prescient Investment Management’s ESG committee

However, ESG investing is thriving globally. According to the Morgan Stanley Institute for Sustainable Investing, sustainable funds reached a record $3.56-trillion in assets under management at the end of 2024.

An analysis of Morningstar data found that investing a hypothetical $100 into a sustainable fund in December 2018 would equate to $136 today, while the same investment in a traditional fund over the same period would have delivered $5 less.

This performance affirms the ability of the right ESG investment to not only do good but also deliver market-beating returns.

In South Africa, interest in ESG investing continues to grow, bolstered by a maturing regulatory framework and increasing investor demand for sustainable, risk-adjusted returns.

Green says ESG investing in South Africa is shaped by a blend of environmental urgency, social development needs and governance reform.

“Key environmental priorities include energy sustainability, particularly the need to strengthen generation and transmission infrastructure, and addressing water scarcity, which is becoming a critical national risk.”

Beyond these focus areas, Green identifies a pressing need to improve logistics and transport systems, health care, education and digital connectivity, especially for underserved communities.

Local retail investors looking to tap into ESG opportunities have multiple avenues. Chantal Marx, head of investment research at FNB Wealth & Investments, highlights the value of exchange-traded products, such as exchange-traded funds (ETFs) and exchange-traded notes (ETNs).

“It’s a difficult and onerous process to self-identify companies with a strong ESG track record. ETFs and ETNs offer a low-cost, efficient way to access ESG-focused companies, both locally and internationally.”

Marx adds that beyond traditional ETFs, investors can consider more targeted exposure through funds or companies involved in future-focused industries that contribute directly to environmental or social goals.

Those seeking tailored solutions can consider bespoke discretionary portfolios and actively managed ESG funds.

“It’s about matching an investor’s sustainability preferences with a solid investment approach,” says Ayabulela Quzu, ESG and impact analyst at Sanlam Investments.

“Beyond listed markets, some managers are also allocating capital to infrastructure and climate-focused investments. These investments reflect a growing trend where ESG is no longer just about screening out risks but also about targeting opportunities that can drive returns and impact.”

Green highlights the Just Energy Transition Investment Plan (JET IP) as a prime example of an ESG investment mobilising private sector capital into renewables while ensuring social equity.

Quzu echoes the view, noting that the Climate Change Act and the updated Companies Amendment Act are shifting ESG from principle to practice. “In emerging markets such as South Africa and Kenya, ESG integration enhances sustainability and financial resilience.”

While the ESG opportunity set is broad, it’s not without risk. Unsurprisingly, the local sector is seeing an uptick in investor scrutiny around governance. In this regard, enhanced JSE disclosure rules and efforts to combat greenwashing are improving transparency.

“Our systematic process uses a proprietary ESG scorecard, ensuring decisions are driven by objective data — not corporate narratives. Companies must show measurable impact, not just make claims,” adds Green.

Concentration risk is a major concern, warns Marx. “Funds may be concentrated in specific industries or sectors, such as renewable energy or technology, which can result in underperformance in the event of sector-wide pressure on profitability or a broader valuation derating.”

Quzu emphasises the importance of authenticity and transparency. “While ESG is gaining traction, it must go beyond box-ticking. It should be grounded in objectivity and financial fundamentals.”

Looking ahead, several themes are likely to dominate the sector. Green highlights advanced analytics in ESG data, the JET IP and growing regulation as key drivers.

“We expect further convergence around ESG disclosure standards, which will help investors make better comparisons.”

Quzu also notes divergence in the global narrative. “While Europe is reinforcing ESG through regulation, the US faces political resistance. But that doesn’t diminish the value ESG brings to portfolio construction. At its core, risk mitigation and long-term performance remain.”