Responsible investing - no longer just a nice to have

Responsible investing - no longer just a nice to have

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Article highlights

  • Climate change featured as one of the top 5 topics at the WEF this year
  • This shows that issues related to RI are no longer just broad themes
  • The investment community is re-looking at what RI means in 2020

At the recent gathering of world leaders in Davos for the annual World Economic Forum (WEF), one of the topics that took centre stage clearly set the tone for what we can expect in the sphere of responsible investing in 2020 and beyond.

Even without the headlines covering the Trump/Thunberg war of words, it is extremely encouraging to note that for the first time the climate crisis was in the top five spots in the WEF’s annual risk report (see the chart below for those identified as high-risk). The fact that the topic has so firmly entrenched itself as a global issue of discussion means that the conversation can however no longer be approached as a purely environmental issue.

The issues highlighted in the chart below make it clear that risks under the climate change label have become undeniably entwined and interdependent with some of the most serious social issues affecting global risk. While this means that there will be significantly increased focus on the area of responsible investing, it also brings with it some new challenges – especially in a South African context.

This becomes evident as we start to reframe the environmental crisis as a social one. South Africa, and by proxy its listed markets, with all its complexities offers a precarious balancing act between environmental and social concerns. It is time to no longer consider the two as mutually exclusive.

How is Nedgroup Investments approaching this?

Nedgroup Investments’ approach to fund management is becoming increasingly relevant and synonymous with the strategic direction of Nedbank Ltd, with the United Nations Sustainable Development Goals providing a guiding framework. In the realm of asset management, this largely takes the form of Responsible Investing. Responsible Investment (RI) encompasses many aspects and can stretch from company culture to the way that capital is allocated, with the end goal of being responsible stewardship of client capital and shared equitable growth.

The Nedgroup Investments Responsible investing (RI) review

In 2019 we embarked on an extensive RI review of Nedgroup Investments’ assets under management. The assessment was not limited to internally managed funds but extended to include external sub-advised portfolios and the role that environmental, social and corporate governance (ESG) factors play in investment decision-making.

The 2019 review culminated in R270 billion of clients’ assets being assessed on a responsible investing basis. The collective effort undertaken between Nedgroup Investments analysts and our partner asset managers covered our entire range of funds. This included SA-domestic and global portfolios across multiple asset classes, while covering both active and passively managed unit trusts.

Responsible investing: the next step

Over recent years there has existed an overwhelming belief that by merely incorporating ESG factors into one’s investment process, one has earned the tagline of being a ‘responsible investor’. During much of our work during 2019 we have attempted to challenge this comfort zone that SA fund managers have eased into. For us the key word is ‘responsible’, and if we look to reframe the concept of responsible investment, the Oxford English Dictionary offers a good place to start.

Responsible:  /rɪˈspɒnsəbl/
  • having the job or duty of doing something or taking care of somebody/something, so that you may be blamed if something goes wrong
  • (of people, organizations or their actions or behaviour) that you can trust and rely on
  • needing somebody who can be trusted and relied on; involving important duties
  • having to report to somebody/something with authority or in a higher position and explain to them what you have done

The definition alludes to accountability, trust and stewardship. All three are applicable in the convoluted relationship that exists between asset managers, the businesses they invest in, their stakeholders, and of course the end client. Our responsibility is to assist our clients to retire comfortably, but what is meaningful for us is the type of world that clients retire into.

This has forced us at Nedgroup Investments to reflect on our own internal efforts and culture, while extending this to our partner managers. With material assets under management we have a crucial role to play in the evolution of South Africa’s sustainability roadmap. Over the past year we have assessed our numerous funds through a responsible investment lens, while attempting to move on from the ESG tick-box to placing substantial weight on the quality and depth to which our managers engage with investee companies.

Below is a snapshot from some of the findings of our RI review, and it offers interesting insight into the current state of ESG adoption. As expected the scars of recent failures in corporate SA have led to the conviction that governance can have a material performance of a share price. As we challenge our fund managers and collectively evolve the conversation around environmental and social issues, we would expect subsequent annual reviews to place greater emphasis on natural capital and the humanitarian implications.