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Advisors urged to give investors what they want

Do we really need to be motivated to support sustainable investments?

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 the resources we use, the air we breathe, the streets we share and the foods we consume; respect for those better off and worse off than ourselves; respect for and from the institutions we share a symbiotic relationship with. Symbiosis. Give and take. Ebb and flow. The economy.

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. Before assuming this is because they may be less jaded than the rest of the investor base, consider this: 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 ‘story’ 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.

Read: Evolving tactic against investment dogs

“Ignoring sustainable investing when making asset allocation choices can have a more negative effect on portfolio returns,” he says.

Read: Sustainable investing doesn’t mean waving goodbye to profit 

“From a financial advisor perspective, showing that you are in tune with your clients’ thinking can have the additive effect of helping you retain clients and attract new clients.”

How is the investment sector meeting the need?

Duncan admits that while many traditional funds have retrofitted ESG issues into their processes – added them – 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.”

The 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,” he says. Various options exist, including two launched by Old Mutual last November.

Do we really need it?

April saw the International Monetary Fund lower South Africa’s projected GDP growth rate for 2019 from 1.4% to 1.2%.

This puts South Africa among the worst performers in sub-Saharan Africa.

And as Duncan points out, SA’s economic growth is hampered by unemployment, poverty and inequality.

With unemployment at 27.1% in the fourth quarter of 2018 – and a startling 54.7% among the youth – according to a World Bank report on South Africa in December 2018, it is no wonder that wealth inequality in South Africa is not only high, with Gini coefficients of 0.93 in 2010/11 and 0.94 in 2014/15, it is also not reducing.

“The situation is exacerbated by poor governance,” says Duncan.

Investments that work to address the issues while delivering returns? Respect.

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SA’s economic growth is not “hampered by unemployment, poverty and inequality” as stated. Those factors do not cause the recession, they are the consequences, or symptoms, of economic stagnation. The economic policy of the government is the main driving force behind the stagnating and declining economy. It makes no sense to search for “sustainable investments” in an unsustainable economy. The economic system itself enables or destroys sustainability. The security of property rights motivates entrepreneurs to focus on the long term sustainability of their business. Communalism, on the other hand, motivates the same entrepreneurs to exploit the resource at the maximum rate.

When the populist and myopic government violate property rights, it acts as a signal to entrepreneurs to exploit the resource, rather than to protect the resource. The Mining Charter, the nationalization of mineral rights, the Security of Tenure laws, the restrictive labour legislation and protection for militant unions, BEE, high and progressive taxes, redistributive municipal rates and taxes and quotas in schools, sport, workplace and universities are serious infringements of private property rights.

These socialist actions by the government motivate the exploitation of the means of production. Socialism itself is unsustainable and it motivates all kinds of unsustainable behaviour. Labour(people) and land are the means of production that are exploited under a system of shared resources.

End of comments.

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