RI was discussed at the Nedgroup Investments Engage event
RI is more than just looking at ESG factors
Shareholder activism is on the rise in SA
At a panel discussion at the Nedgroup Institutional Engage event, Responsible Investing (RI), and where South African investors in particular are focusing, was one of the key topics of discussion.
The panel consisted of Ndabe Mkize, Chief investment officer of the Eskom Pension and Provident Fund; David Levinson, Investment Analyst at Nedgroup Investments and Tracy Davis, Executive Director of Just Share.
Importantly the panel agreed that RI in South Africa has become much more than just integrating the Environmental, Social and Governance factors into investments.
According to Davis, companies have been reporting on ESG factors for years – but now there is a focus on activating and implementing real change.
Levinson said that for Nedgroup Investments, with over R240bn in assets under management, RI has become an increasing focus for the business. He says it is important to distinguish RI from Corporate Social Investment (CSI) and Social Impact Investing. “These terms can often be used interchangeably which can create some ambiguity and confusion. Significantly, RI does not translate into sacrificed returns in the pursuit of environmentally- or socially-focused investments. Rather, we believe that companies incorporating best environmental, social, and governance (ESG) practices will yield superior financial returns in the long-run. In fact, it is the inclusion of these non-financial factors into traditional analysis that enables us to holistically manage risk and achieve sustainable returns,” he explained.
Mkize echoed this sentiment saying RI is not purely an exclusionary strategy – but rather an approach where all long-term investors should be looking at factors like valuations, quality and ESG across all their investments in order to consider themselves responsible investors. We want to make sure our investors have enough money to retire with – that is obviously our focus, but we also want to make sure that they have a good enough world to retire to.”
“We believe ESG data serves as an enabler for deeper and more constructive engagement with the companies that we invest in. In our view, it is the companies who embrace sustainability that will show outperformance over the long-term, and thus better align themselves with the investment horizons of our fund offerings,” said Levinson.
Levinson published an article for Nedgroup Investments earlier in 2019 that showed a growing appetite across the globe for ESG-related investment products. According to Morningstar, U.S.-domiciled sustainable investment ETFs attracted nearly USD 5.5 billion in net flows during 2018. It was the third straight year of record annual net flows and starkly contrasts with the overall U.S. fund universe. Larry Fink, BlackRock’s CEO, recently forecast AUM in the ESG category to grow from the current USD 25 billion to USD 400 billion by 2028 (a 32% compound annual growth rate).
These trends capture the rising demand for such investment products but can also be attributable to national regulations and codes that look to steer assets towards RI-centred investments. These include the Stewardship Code (UK), Article 173 (France), the Corporate Governance Principles and Recommendations (Australia), and the UN Global Compact. McKinsey, a global consultant, believe that more than a quarter of the USD 88 trillion assets under management globally are now invested according to such ESG principles.
Locally, RI is in its relative infancy, but the approach is undoubtedly gathering steam, particularly when it comes to shareholder activism. “South African companies and shareholders have traditionally been quite cautious when it comes to taking a stand but we are starting to see more activism now which is driving real change and is very encouraging”, said Davis.
Events at the likes of Steinhoff and Resilient have given ammunition to the argument for stringent governance and independent oversight. Shareholders cannot underestimate their role in championing corporate governance, encouraging companies to better mitigate their environmental footprints, or ensuring that social risks are managed in a fair and just manner. Responsible investing does not merely serve to satisfy a moral stance but is an important tool in the pursuit of long-term performance.