30 September 2021
ESG FEATURE
The opportunity to drive impact in listed markets BY TEBOGO NALEDI MD, Old Mutual Investment Group
O
ver the past decade, the global appetite for sustainable investing has steadily gathered momentum. Most recently, the impact of the coronavirus pandemic has laid bare the vulnerability of societies when there are elevated levels of unemployment and poverty – and, this, as we have experienced first-hand, can rapidly lead to social unrest. Impact investing is largely associated with private or unlisted investments into the likes of renewable energy, education, healthcare or affordable housing projects. These projects have immediate and direct
environmental and social impacts. Within listed markets, investors have readily influenced governance practices, but environmental and social impacts have been more difficult to effect and quantify. Around 98% of all South African retirement assets are invested in the listed markets (predominantly in listed equity). Investment of these savings drives future economic growth and, as such, asset managers need to integrate more environmental, social and governance (ESG) considerations into their investment decisions. This points to the need to have universally accepted frameworks for defining impact, such as the UN Sustainable Development Goals (UN SDGs), which speak to the economic system that we are trying to shape, and provide a strong framework in which we can operate and measure impact. The key is effective measurement For listed asset managers, integrating impact thinking into equity portfolios is broadly carried out in two ways. Firstly, we can invest in companies that make a direct positive contribution, such as renewable energy related businesses, providers of
quality education or large employers. Secondly, we can favour listed companies seeking to reduce harmful practices, such as combatting water or air pollution. However, we need to be sure that impact investing is both real and measurable and is not compromising financial returns. Using cutting-edge research, we have developed an in-house proprietary ESG signal that provides a measure of the ESG risk profile of a listed company, as well as a sustainability lens through which to identify ESG performance leaders and laggards. This signal is continually reviewed to ensure it is consistently relevant and adds value over time. Our proprietary ESG Profile Score is used in varying ways across our investment processes, such as identifying
“The ability to track and measure a range of ESG factors allows us to actively respond to issues”
portfolios with bespoke, mandated ESG tilts, relative to a benchmark, and carbonrelated outcomes, as well as tracking across a range of climate risk metrics and companies’ B-BBEE progress relative to both their sector peers and the benchmark. This ESG data capability positions us to expand our client reporting beyond the risk and return attributes and to include aspects of the portfolio’s ESG impact. Active ownership enhances long-term value The ability to track and measure a range of ESG factors allows us to actively respond to issues by engaging companies to effect change through a stewardship approach. Broadly, we look at how we can influence policy or the direction of capital within those companies. As significant investors in the SA listed markets, we have an equally important role to play as unlisted investors in shaping and driving the impact agenda for the benefit of our economy and to enhance future returns within our portfolios. This thinking shapes how we manage our clients’ assets, execute our stewardship functions, and ultimately influences the products we develop.
Exposure to impact themes needs to be quantified to progress BY ADAM BENNOT Head: Responsible Investment, RisCura
O
ften the best place to start with a new initiative is to first determine where you are. With the need for impact investing becoming increasingly critical in South Africa, more and more investors want to make a positive impact with their
portfolios. But before they do, it makes sense to assess any existing impact theme exposure. That way they’ll not only know how much exposure they have, but also what development areas they’re addressing. They can then pursue new impact investments strategically and with intent. To assist retirement funds in South Africa, RisCura has developed an impact theme exposure reporting tool for its institutional clients that considers the objectives of both the South African National Development Plan (NDP) and the UN’s Sustainable Development Goals (SDGs). The objectives and goals were mapped and weighted according to South Africa’s critical developmental needs. Out of this process, 10 key impact themes have emerged: • Affordable housing • Inclusive finance • Clean energy • Natural resources and conservation • Health and wellness • Infrastructure development • Quality education • Sustainable agriculture • Water and sanitation • Environmental preservation. We calculated impact points for each theme above, based on the action points in both the NDP and the SDGs. From there, a portfolio’s overall score can be calculated. There are further steps in the process, but
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for the sake of simplicity, the methodology enables us to calculate an overall impact score that reflects the percentage of the total portfolio allocated to impact themes. This score is then calibrated to understand what a good score is versus a poor score, based on a representative universe of pension funds. While the report doesn’t yet go into finer details, such as how many schools or learners may have benefitted from the current investment programme, the overall impact theme exposure within a portfolio does become clearer, shedding light on which areas need more consideration. RisCura is a purpose-driven company, and the core of what we stand and work for can be summed up in the phrase ‘invest with care’. As such, impact investing is a critical focus for us, and we are engaging with it on many levels. It’s vital to futureproof the world we will live in, and making impactful investments is therefore no longer a nice-to-have. Imagine if the environment pension fund members retire into is unliveable? The investment decisions taken today will influence what tomorrow will look like, and all investors have a role to play in the success of the outcome.
“More and more investors want to make a positive impact with their portfolios”
