Responsible investment themes to consider

JON DUNCAN Head: Responsible Investment, Old Mutual Investment Group

Globally, there is now clear recognition that the safe and sound functioning of society and the biophysical environment are essential to the long-term health of the markets. As a consequence, investors are being challenged to account for whether investments being made today are building or eroding future social and environmental systems resilience.

At a local level, South Africa faces a unique set of challenges, ranging from extreme wealth and income inequality, governance challenges, low economic growth, lagging infrastructure and increasing environmental stress. However, these challenges also create interesting opportunities for long-term investors like Old Mutual. Capturing these opportunities not only allows us to generate appropriate risk-adjusted returns for our clients, but also to contribute to creating a sustainable and inclusive future for all.

We recognise that the new paradigm of investing requires a shift from balancing risk and return to balancing risk, return and impact. We have embraced this shift and embedded it as a part of our fiduciary commitment to our clients across all of our investment capabilities. We manage this effort collectively under our Group-wide Responsible Investment (RI) Program, details of which are shared in our annual Responsible Investment Report.

At the heart of our RI program is an understanding that environmental social and governance (ESG) issues can and do impact investment and system resilience outcomes. This isn’t surprising, because the nature of the world as we know it is at stake. We face a very real existential crisis if our impact on society and the environment continues unabated.

Continuing themes to consider

In the remainder of 2019, we expect that the ‘G’ factor in ESG, representing governance, will remain front and centre for South African investors. We anticipate a greater amount of shareholder proposed resolutions at company annual general meetings, coupled with more vocal pushback from civil society organisations to corporate responses on ESG issues.

The South African Carbon Tax Bill was passed in Parliament on 19 February 2019. The Bill includes a R120 per ton carbon tax for primary greenhouse gas emitters, a carbon tax on liquid fuels, economic incentives for energy efficiency, and the use of carbon offsets as a means of reducing the tax burden. What is envisaged is a phased approach, with the first phase extending from June 2019 to December 2021, escalated at 2% above CPI annually. With the planned implementation of the national carbon tax this year, we expect that the climate change debate in South Africa will gain further traction and we see greater investor focus on costs, disruption and transition risks. Coupled with this, we expect that climate consideration will feature heavily in future energy planning in South Africa by way of the Integrated Resource Plan.

Transformers

The social challenges of unemployment, skills development and inequality still facing South Africa mean that transformation also remains a priority issue for investors in 2019. Aside from Broad-Based Black Economic Empowerment score compliance, we see addressing this issue as central to building a stable and prosperous South African economy and so we’ll continue to champion progress through our engagement activities as we simultaneously drive inclusion and diversity within our own organisation.

A responsible retail market

The retail market in South Africa is slowly waking up to the fact that they can and should have a choice when it comes to how their capital is managed. Our expectation is that there will be growth in demand for ESG-themed products and, coupled with this, innovations in this area. A driving force here will be the Financial Service Conduct Authority Directive on Sustainability reporting for pension funds.

JON DUNCAN Head: Responsible Investment, Old Mutual Investment Group