ESG INVESTING
28 February 2021
MIKE ADSETTS Deputy Chief Investment Officer, Momentum Investments
Six degrees of separation commission. Responsible investing practices have always resonated with our outcome-based investing philosophy and the alignment of our clients’ long-term goals to positively influence the world they will retire to. Responsible investing has come into the mainstream in the mind of investors, and rightly so. As we increasingly question not just warming that followed, was a good example of how the return on our investments but the effect and consideration of Environmental (E) factors is going purpose thereof, there is a real opportunity not to become increasingly important when considering only to achieve healthy returns but also affect the energy (and renewable energy) investments in the health of the interconnected world. Responsible future. Societal (S) effects of COVID-19 and the investing can help to create investments that are need for re-invigorating the economy good for clients and the world we after South Africa endured one of live in. This is why Momentum the hardest lockdowns globally is Investments plays an active role RESPONSIBLE evident all around us. Investments in proxy voting as institutional INVESTING HAS in infrastructure have been flagged investors (Governance), invests COME INTO THE as one mechanism for reigniting in wind farming projects economic growth. There are good (Environmental), and helps alleviate MAINSTREAM and bad infrastructure investments challenges such as a shortage of IN THE MIND OF but undoubtedly this will warrant student accommodation close to INVESTORS, AND universities, by investing in our a lot of focus in South Africa over the next few years. Governance (G) unique Rise Student Living project RIGHTLY SO failures and the destruction of capital in Pretoria (Societal). We’re here to was brought into sharp focus through the Zondo help clients achieve their goals on their investment Commission. If there is ever a need to evidence journey, because when it comes to sustainable the role for good governance and the devastation investment growth, for us it’s personal. wrought by bad governance, there is no better 1 Wikipedia teacher than the revelations at the state capture
Six degrees of separation is the idea that all people on average are six, or fewer, social connections away from each other. As a result, a chain of ‘a friend of a friend’ statements can be made to connect any two people in a maximum of six steps…. It is sometimes generalised to the average social distance being logarithmic in the size of the population.1
I
f we ever needed a real-life demonstration of the interconnectedness of all of us, the events unfolding in 2020 showed us that we are part of a highly unified global family. The other feature that typified 2020 was how timelines have been redacted – be it the speed with which information is carried around the world, the speed and depth of the market crash in March, followed by an equally dizzying and rapid market recovery and, as the end of 2020 approached, the development of numerous vaccines. In the context of 2020, it is no surprise that investors are increasingly starting to question the effect of their investments beyond just return. ‘Capital with purpose’ is a good descriptor of this shift in mindset. Responsible investing and environmental, social and governance (ESG) risk factors received unprecedented attention, and rightly so. The importance of each of the three ESG factors in sound and sustainable investment decision-making was evident in 2020. The high temperature of 54,4°C in the aptly named ‘Death Valley’ in California on 16 August, with the public outcry on the effect of global
KHAYA GOBODO Managing Director, Old Mutual Investments
A
sset managers are in a unique position to make decisions that influence the economy, the environment and society as a whole. As an industry, they direct a material portion of capital flows in the economy, and so have a genuine interest in ensuring that the economy sustains itself. Critical in this work is an appreciation of the interconnected nature of the economy, society and the environment.
WE HAVE THE RESPONSIBILITY OF UNDERSTANDING THE IMPACT OF OUR INVESTMENT AND STEWARDSHIP DECISIONS ON SOCIETY AND THE ENVIRONMENT
Pandemic exposes home truths about critical need for responsible investment
The continuing COVID-19 pandemic has heightened this awareness and laid bare the vulnerability of the economy to outside biophysical system shocks. A measure of this vulnerability is the scale of fiscal stimulus presently being rolled out around the globe, far outstripping the stimulus packages post the 2008 global financial crisis. There are questions to be asked around how this capital will be deployed. Will it be directed to enable more of the same kind of economic growth and its attendant social and environmental system risk? Or will it be used to build back better in a manner that drives socially inclusive, low-carbon and resource-efficient growth? Asset managers will have to choose which side of the fence they sit on in respect of this issue. The side they choose could well define their future prospects. This is all while focusing on the fiduciary responsibility to act in the best interest of clients and deliver investment outcomes that meet or
22 WWW.MONEYMARKETING.CO.ZA
exceed their expectations. Capturing the green growth and build-back-better opportunity will require collective action by asset managers, asset owners and asset consultants. As industry partners, we have the responsibility of understanding the impact of our investment and stewardship decisions on society and the environment. A critical element of this will be formulating long-term partnerships based on measurable sustainability outcomes. Asset managers will not only need to engage proactively with investee companies on sustainability issues, but will similarly need to engage asset owners on their views. Seeking alignment on these issues, solutions that deliver appropriate risk-adjusted returns and impact will remain at the forefront of innovation in the asset management industry for the foreseeable future. Long-term partnerships will be a key to success here, as will the ability of managers to collect and report on ESG impact
metrics. For asset managers, it is clear that it’s no longer enough to only focus on providing appropriate risk-adjusted returns, excellent client servicing and competitive fees. The type and scale of impact will rightfully also become an important consideration when selecting a long-term partner. Furthermore, we expect large-scale asset owners, with long-term time horizons, to start exercising their fiduciary right in a more co-ordinated fashion. As such, an important means of driving impact in the listed markets is through active stewardship. This is a material opportunity to drive market transformation while, at the same time, reducing long-term systemic risk. While we cannot possibly anticipate all the factors impacting the asset management industry going forward, we can be sure that the COVID-19 pandemic has strengthened and hastened the pre-existing trend of responsible investment and green growth.
