Why sustainable investing is good investing

We can’t afford not to.

CAPE TOWN – For many investors, the idea of sustainable investing is an immediate turn-off. It suggests investing for reasons other than generating returns, and that seems pointless.

Because, after all, a company’s share price is based on its earnings potential and cash flow, not whether or not it has installed energy saving light bulbs at its head office.

And this is a reasonable concern. As investors, we ultimately want our money to deliver the best returns over the long term.

However there is growing a realisation that, over the long term, sustainability themes are not just a niche concern or a nice-to-have. If we don’t consider issues such as environmental protection, social engagement and corporate governance, we are ignoring major risks to future economic growth.

“There is a growing awareness of the interplay between the biophysical, social and economic systems,” says the head of sustainability research and engagement at the Old Mutual Investment Group Jon Duncan. “You have to look at them collectively to create any meaningful long term sustainable future.”

It’s the sort of thinking summed up by Unilever chief executive Paul Polman, who wrote in a McKinsey publication in May that: “business simply can’t be a bystander in a system that gives it life in the first place.”

Understanding the risk

Around the world, it is becoming understood that sustainability is not something that we can afford to just pay lip service to.

In the most recent World Economic Forum Global Risk Perception survey that asked CEOs to identify the issues that they are most concerned about, seven of the top ten risks were directly related to sustainability. They included ‘water crises’, ‘severe income disparity’, ‘extreme weather events’, and ‘food crises’.

And businesses and investors alike have to consider how they relate to these concerns. For both parties, that means being proactive in how they allocate capital.

“There is an inertia amongst many companies to address issues in innovative ways because new ideas tend to be scary,” says Waseem Thokan, an economist at Legae Securities. “But at some point, the cost of addressing these issues in a sustainable way will be far lower than the cost of not addressing them.”

Where do investors stand?

For investors, identifying those companies that take environmental, social and governance (ESG) issues seriously and are operating business models that take a long term view has two important benefits. Firstly, it increases the likelihood of their own future returns being protected, but secondly it supports the sustainability of the entire economic system.

The problem is that, at the moment, there is very little opportunity for retail investors in South Africa to tap into these themes. Unless you are running your own share portfolio, there are very few ways to ‘buy green’.

To some extent this is due to a market that is primarily concerned with short term performance numbers, rather than understanding how funds are constructed and the philosophies behind them.

“It takes a level of sophistication to identify a fund based on its characteristics rather than just its short term investment performance,” says Nerina Visser, the head of Beta and ETFs at Nedbank Capital. “I don’t believe the South African market is there yet, but we will get to the point where more of these solutions are available.”

Obviously that requires asset managers to consider their role. How do they create attractive products that find their way into mainstream investing?

“It’s finding the right balance between twin requirements,” says Visser. “There is the very specific requirement of ensuring that you produce the return, but at the same time the funds or the assets in the funds must be applied in such a way as to have a certain impact on the environment or social initiatives.”

Sustainability can be good business

As Duncan argues, the two are not mutually exclusive. There is no need to sacrifice returns when adopting a sustainable investing strategy.

“I think we are at a point now where we can ‘get organic’ at the same price,” Duncan says. “The responsible investment movement has raised the profile of looking at the world in a way that prices in risk.”

“It’s true that, to date, much of this has been fuelled by institutional investors,” he adds. “However, there is also an emerging set of retail or high net worth individuals who are starting to connect the dots between their long terms savings objectives and the idea that the money they are putting aside can also be put to work in a manner that produces positive social and environmental outcomes.”

In the South African context there are obviously significant social issues in particular that pose specific challenges for business. However, there are opportunities here too.

“When we look at what South Africa will look like in 2030, the National Development Plan points the way to some extent,” says Duncan. “It highlights the building blocks that will help us achieve a sustainable economy.

“And so what is starting to emerge is an opportunity set that allows investors to invest directly in these themes, such as affordable housing, renewable energy, schools, agriculture and water,” he explains. “And in South Africa the listed market does offer exposure to some of these areas.”

However, he believes that there are a lot more opportunities outside of listed equity to find sustainability themes.

“There is a real opportunity to look towards the alternative investment sphere, including both debt and equity” says Duncan. “Within the Old Mutual Investment Group we have been quite pioneering in our work on initiatives such as affordable housing and schools funds. While these products are designed for the institutional investor, perhaps in time they may be directly available to the retail investor as well. In the meantime, people who want to invest their savings in funds that promote a sustainable future can opt for pension funds that have exposure to these themes.”

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