At the turn of the century it might have been acceptable to invest based only on financial metrics. However, given what South Africans have been through in the last few years, that approach now seems incredibly naïve.
If you’re not asking how companies are making their profits, where they are making those profits, who is involved and who is affected, you are taking significant investment risk. If you are not highly conscious of the sustainability of the financial figures you are looking at, you are falling short of a proper analysis.
It seems apparent that most local investors are aware of this. The recent Global Investor Study by international asset manager Schroders has found that South Africans are serious about taking environmental, social and governance (ESG) factors into account when making investment decisions.
“South Africans have quite a sophisticated investment understanding and a thoughtful approach then it comes to sustainable investing,” says Jessica Ground, global head of stewardship at Schroders. “It is much more evolved than we see in some other countries.”
Appreciating the importance
A large part of the reason for this appears to be that these issues are very real for the average local investor. Whether due to state capture or the collapse of the Steinhoff share price, South Africans have seen the impacts of poor corporate governance. The Cape drought has also made environmental issues extremely tangible, while #FeesMustFall and the land debate have highlighted the imperative of social change.
Ground points out that if one looks at broad national attitudes towards sustainable investing and then compares them to see where those same countries sit on indexes that measure issues like corruption or inequality, there are often clear correlations.
“Those countries that tend to have day-to-day exposure to challenges as measured by those indexes see more value in sustainable investing,” she says. “If you are aware of them, you are perhaps thinking more holistically in terms of how you can have an impact.”
It is therefore not surprising that there has been a rapid increase in local interest in sustainable investing.
“If we look in South Africa, 88% of people say sustainable investing has become more important to them in last five years,” Ground points out. “That is among the highest in the world. It seems that countries at the forefront of some sustainability challenges become really interested in this area when things like the water shortage in Cape Town impact them directly.”
What is additionally significant is how South African investors view the concept of sustainable investing. For a majority it is not about excluding firms that are controversial for some reason, such as tobacco or mining companies, but rather maximising returns by identifying companies that have more sustainable operations.
“We are really encouraged that 62% of South African investors felt it’s about companies that are likely to become more profitable because they are more proactive,” Ground says. “They are seeing the challenges posed by issues such as water shortages or demographic changes and positioning their businesses accordingly.”
For many local investors, however, their appetite to invest sustainably is not being matched by what they are being offered. Schroders found that 70% of investors feel that they are not being given enough information about sustainable investments.
Lack of information
“Of the 350 investors in South Africa who took part in the survey, 35% said the biggest barrier is a lack of information on how fund managers are engaging with companies and what they are doing,” says Ground. “That is a huge call out to the industry to be more transparent about how they are holding companies to account.”
A second significant problem is a lack of advice on sustainable investing. Advisors are less positive in general than end investors, and, as a consequence, are often less informed.
“I wouldn’t want to single out only South African advisors because this is a trend we see globally,” Ground says. “It is an area where we want to do more research on how we can educate advisors, but also better understand what their reluctance is.”
She feels there is a business opportunity here that advisors may be missing.
“Millennials are particularly interested in sustainable investing,” Ground points out. “So for advisors looking to grow their business, this could be a key future area of growth.”
What is also significant is that Schroders found a direct correlation between people’s sense of their investment knowledge and their likelihood of investing in sustainable investments. The more people feel that they know about investing, the more likely they are to feel sustainability is important.
“The overall picture from South Africa is that there are high levels of engagement on this topic,” says Ground. “Investors are quite sophisticated and taking a broad view when it comes to the issues. They understand what sustainable investing is and that it’s part of the solution to challenges they see in their day-to-day lives.”