2 minute read
The opportunity to drive impact in listed markets
BY TEBOGO NALEDI MD, Old Mutual Investment Group
Over 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 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.
