If you were to choose a single word to sum up what environmental, social and governance (ESG) considerations actually mean to people, how about this one: Respect.
Respect for and from the companies we share a symbiotic relationship with – through sound corporate governance in addition to the so-called ‘softer’ issues – is something investors are increasingly seeking, and may soon be demanding.
Millennials are twice as likely as the overall investor population to put their money into companies with social or environmental strategies, according to the Morgan Stanley Institute for Sustainable Investing. They may be less jaded than the rest of the investor base, but a 2017 investor survey by Schroders showed that 81% of South African investors had already attached increasing importance to the need for sustainable investment growth.
Growing call for the best of both worlds
“When building a relationship with clients, advisors now have to consider that clients want both risk-adjusted returns as well as the value-add of knowing that their investments match a safe and secure lifestyle,” Jon Duncan, head of responsible investment at Old Mutual told the Old Mutual Wealth Advice Forum in Cape Town this week.
Duncan says the traditional ‘storyʼ is that making asset allocation choices based on sustainable investing parameters can hurt a portfolio, causing negative returns – when in fact the opposite is true.
“Ignoring sustainable investing when making asset allocation choices can have a more negative effect on portfolio returns.”
He adds: “From a financial advisor perspective, showing that you are in tune with your clientsʼ thinking can have the additive effect of helping you retain clients and attract new clients.”
Andrew Canter, chief investment officer at Futuregrowth Asset Management, says climate risks could have a material impact on retirement funds’ financial performance in the short, medium and long term.
“Notably, the consequences of environmental degradation or climate change could adversely affect fund members’ quality of life.” He adds that Futuregrowth has integrated the consideration of environmental impact into its investment process and, in 2016, stopped investing clients’ funds in mooted coal-fired independent power plants.
Duncan admits that while many traditional funds have retrofitted ESG issues into their processes, few domestic equity funds intentionally target ESG or green economy outcomes.
“This is in part a consequence of the structure of our local listed market, where the large incumbents offer little direct exposure to [the] green economy theme.”
There are essentially two alternatives for South African investors to consider.
“Accessing such opportunities requires investors to look to the unlisted market, which is often difficult for retail investors,” says Duncan.
“There are, however, some balanced funds that offer great exposure through their alternative allocations to themes such as renewable energy, schools and housing,” Duncan says.
There are a number of renewable energy projects that private equity funders are working with in the country.
African Infrastructure Investment Managers (AIIM), for example, is the largest single equity investor in the renewable energy space and considers the Cookhouse Wind Farm its flagship renewable energy project.
Vuyo Ntoi, portfolio manager, of the Ideas Managed Fund at AIIM, says the project was constructed at a total cost of R2.5 billion, started operating commercially in November 2014, and supplies the country with an average of 341 000 megawatt hours (Mwh) of green energy per year.
Metier Private Equity’s flagship project at Bokpoort uses concentrated solar power (CSP) trough technology, which currently makes up the bulk of the installed base of global CSP capacity and has a thermal energy storage capacity of 1 300Mwh (thermal), equivalent to about 9.5 hours of operation.
Marc Immerman, managing principal at Metier Sustainable Capital, says the Northern Cape, where the project is based, is on par with the Mohabi Desert and is considered among the best locations in the world for solar powered thermal plants.
Various options exist when it comes to balanced funds that offer ESG exposure through alternative allocations, including two launched by Old Mutual last November – the Old Mutual MSCI World ESG Index Feeder Fund and the Old Mutual MSCI Emerging Markets ESG Index Feeder Fund.
Other retail funds include the Kagiso Islamic Balanced Fund and the Oasis Crescent Balanced High Equity Fund of Funds.
Institutional investors have the likes of the Futuregrowth Agri-Funds available to them, portfolios that specialise in investment in agricultural land, biological assets, agricultural infrastructure and related farming implements.
Do we really need it?
April saw the International Monetary Fund lower South Africaʼs projected GDP growth rate for 2019 from 1.4% to 1.2%. This puts South Africa among the worst performers in sub-Saharan Africa.
GDP growth is influenced by a diverse set of factors, not least of all investor and consumer confidence, which are directly affected by issues such as policy uncertainty. This is a multi-faceted challenge that is exacerbated by poor governance. SA Inc has to lead the way, and investors are increasingly demanding that it does.
Investments designed to deliver returns – not despite issues such as this, but by addressing them? Respect.