Put your money where your mouth is on changing the world. Picture: 123RF/AMIKISHIYEV
Put your money where your mouth is on changing the world. Picture: 123RF/AMIKISHIYEV

The coronavirus has cast a spotlight on many social and environmental issues that you may feel strongly need to be addressed, including inequality, poverty, pollution and destruction of natural habitats.

Besides using your voice of protest, you can use your collective economic power to help fix a divided society living in a world threatened by climate change, Ebeth van Heerden, advisory business development manager at Schroders, says.

As investors, consumers and workers we can be more conscious of how businesses affect the world and force them to change, she says.

Globally there is a growing movement among investors to invest in companies that make profits in a sustainable way that takes care of all stakeholders — their employees, suppliers, consumers and investors, Van Heerden says.

In the investment industry there is a lot of talk about the coronavirus pandemic accelerating that trend, including in SA where a big focus is likely to be on social inequalities.

But when investment companies talk about “sustainable investing”, what do they mean and how are your investments actually used to bring about changes? 

If you wrap your head around the jargon, you will be able to ask questions of those recommending investments and those who make decisions about your retirement savings. Here’s a few terms to get you started.

ESG integration: Many investment houses will tell you they consider environmental, social and governance (ESG) factors when they analyse and rate a company in whose shares or bonds they plan to invest. Scoring companies on each factor, they then invest in those with the best ESG scores.

This rating may include what the company is doing to limit the damage caused by climate change — its carbon footprint and fossil fuel usage for example; and how the business affects the environment, for example, the destruction a mine causes or a food producer’s use of fertilisers.

Companies score well on social factors if they treat their employees well, providing access to healthcare and ensuring employees and surrounding communities are safe.  

Governance includes issues such as the company’s strategy, its remuneration policies and board independence or diversity, Van Heerden says.

Investment managers say considering ESG factors can lead to better returns because companies that damage the environment can be exposed to litigation or fines, and those with bad labour practices may face costly industrial action.  

Old Mutual has a fund that tracks the shares in the MSCI World ESG Leaders Index that includes the companies with the best ESG scores from the MSCI World Index’s 1,600 shares from 23 countries.

The ESG Leaders index may exclude shares of companies involved in human rights abuses, bad labour practices, pollution, contraventions of data privacy or bad governance, but it won’t exclude whole sectors represented in the World index like mining and resource companies.

Sustainable investing: Although sustainable investing involves taking ESG factors into consideration, a sustainable investment focuses on the companies that lead their sector on ESG practices and are more intentional about bringing about sustainability, Jon Duncan, head of responsible investing at Old Mutual, says.

Old Mutual recently launched a new ESG fund focused on the best-ranked ESG shares in the local market. This fund is actively managed which means the fund manager researches and chooses the shares rather than basing the choice on an index.

Active stewardship: Both the ESG-focused and sustainable investment managers engage with company management to ensure the firm is being run in the best possible way, Van Heerden says. This can mean challenging a company on its sustainability practices, she says.

Managers that practice active stewardship should be willing to tell you how they as shareholders voted on issues like executive remuneration or carbon-related issues.

Screening: Some investments screen the shares or bonds to specifically exclude some, for example, companies involved in the manufacture of weapons.

Ethical investments typically use screening to exclude investments that are deemed unethical, for example Sharia investments screen out companies that make or sell alcohol and gambling.

Impact investing: Impact investing is about putting your money to work in a way that has a specific, measurable and positive benefit to society or the environment, while earning a return for you, Van Heerden says.

Impact investments aren’t often offered to ordinary investors, but your retirement fund may include some impact investments.

Recently, for example, Stanlib launched the Khanyisa Impact Investment Fund focused on infrastructure projects, small businesses, affordable housing, healthcare projects, food security and renewable energy.

Sanlam also launched three Investors’ Legacy impact funds focusing on providing loans or equity investments to commercially viable small, mid and large businesses to assist them to pull through the Covid-19 crisis and save jobs.

Thematic investing: Thematic funds chose their investments in line with a theme. Sustainable investing is itself a big theme but a thematic fund may focus more narrowly on, for example, “green investing” by investing only in companies and technologies that are considered good for the environment, Van Heerden says.

In SA, for example, Prescient has a Living Planet Fund focused on investments that enhance environmental sustainability.

Schroders offers South Africans who want to invest in US dollars its ISF Global Sustainable Growth Fund.

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