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BusinessDay www.businessday.co.za Wednesday 16 February 2022
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Investors make an impact The term “impact investing” has its roots in the concept of ethical responsibility or, in other words, making a difference to society in a positive manner through meaningful investment. It’s a trend that has gained traction in the past decade as companies try to conduct business in a social responsible, accountable and inclusive manner. Marcel Goncalves, head of Corporate Finance at Merchantec Capital, points out that asset owners — both private and institutional — as well as asset managers have made substantial commitments to divest from harmful investments, deepen their impact and tackle social and environmental issues. “The three key elements of impact investing revolve around the intent to improve social and environmental outcomes; making a positive contribution by investing in capital or through additional assistance; and increases or measurable improvements in social and environmental outcomes,” he says.
CONTRIBUTION
“Simply put, impact investments are made with the specific intent to make a measurable contribution to the achievement of social and environmental goals,” he says, adding that a growing number of investors have goals beyond that of only maximising profits and returns. Investors are being
Marcel Goncalves … there are three key elements. incentivised to invest responsibly and this can be seen by governments and institutions making funding available for such initiatives by way of investing in “green funds” or “green bonds”. Globally, governments and key financial institutions have called on companies to act more ethically. Goncalves explains that measures and other scoring criteria to benchmark a public company’s social performance against their peers have been implemented globally which has had a direct impact on share prices and public perception of a company. Investors who have made the transition towards social and ethical investing are now looking to deploy capital in mutually beneficial opportunities and business
ventures. These include businesses looking to achieve carbon neutrality, create inclusion within the communities in which they operate, or enriching lives and living standards with the aim of achieving tangible social upliftment together with sustainable financial returns. “Currently, key impact investors include governments, development finance institutions, asset managers, venture capital firms and impact intent funds,” he explains. In the South African context, capital deployment by impact investors has been advanced to achieve sustainable development goals through inclusiveness and to help build a sustainable economy to address socioeconomic challenges.
BENEFIT FOR SOCIETY
“By managing their investments in a different way, impact investors may help investee firms to increase their impact on social objectives which ultimately benefits society as a whole,” says Goncalves. “In SA impact investments have become one of the largest sources of funding for companies that meet the required criteria and we expect this to continue in the short term as more international development finance institutions set up and raise impact funds in Africa for investments into Africa and SA in particular.”
Capital allocations create an enabling environment move to •alignFirms businesses with efforts to limit global warming, writes Lynette Dicey
T
he role of capital allocation is one of the single-most vital tools in the world’s climate change response to date. The furore surrounding Shell’s seismic survey plans for the Wild Coast of SA has highlighted the powerful role civil resistance can play in the decarbonisation drive. But there are other weighty tools that can influence the direction of the world’s climate change response, foremost among these being the role of longterm capital allocation. Capital, or the impactful application of capital, has been singled out as one of the most vital components in the world’s climate change response machinery to date, says Robert Lewenson, head of Responsible
ESG strategies a must for financial institutions Financial institutions around the world are increasingly facing risks as a result of regulatory and reporting requirements that focus on the environmental, social and governance (ESG) impacts of their operations. New ESG legislation includes the Sustainable Finance Disclosure Regulation in the EU and the Executive Order on Climate-Related Financial Risk in the US. Spiros Fatouros, CEO of Marsh Africa, says the ESG performance of companies is progressively influencing investment decision making, lending criteria and insurance considerations. “Companies unable to demonstrate an ESG strategy will be putting the long-term viability and resilience of their business at risk,” he says. The ESG risks financial institutions must consider typically include a blend of considerations. For example, criteria examining an organisation’s environmental impact could include calculating their total emissions; its plans for transitioning to low-carbon usage to ensure energy security; monitoring and disclosure of greenhouse gas emissions; establishing targets for pollution and waste practices; and projects they invest in or loan to, and the impact of those projects. “For financial institutions, the transition to green financing is not only key to an organisation’s reputation, but is also emerging as a regulatory requirement globally,” says Fatouros. From a social perspective, the criteria could include its labour management policies; its commitments to health, safety, and wellbeing; the impact it has on the local community and whether those effects are beneficial or adverse; the labour standards of its suppliers; and the need to embed diversity and inclusion policies, social equality and customer privacy. Governance criteria would focus on board structure, board diversity, audit quality and transparency, and issues surrounding remuneration, such as executive pay. Fatouros points out that financial institutions differ vastly
in their readiness for the transition to sustainability, at which point organisational agility to respond to new laws, requirements and customer expectations is going to be key. In a recent survey by Marsh, 80% of respondents in the financial services sector ranked climate change and ESG as either an important, or the most important, issue for their
operations. However, 42% of respondents said they have an ineffective process, or no process at all, for identifying, responding to and implementing changes based on climate threats and ESGrelated factors. The survey also found 80% of financial companies had not yet carried out a comprehensive stress test on
financial impacts from climate threats across current and future operations. “Organisations adopting a more proactive and methodical approach to understanding the impact ESG factors and climate change will have on their most valuable assets will be able to embed greater levels of resilience into their operations,” says Fatouros.
Robert Lewenson … stewardship. Investment at Old Mutual Investment Group (OMIG). He argues that asset managers globally can and must now play a decisive role in redirecting institutional and retail investors’ capital towards sustainable investments. “As asset managers, we have a responsibility to understand how climate action affects the companies we invest in,” says Lewenson. OMIG, which stewards about R350bn in client capital, is among the many savings and investment industry stakeholders aligned with the global climate goal of reducing carbon emissions to limit the global average annual temperature increase to less than 1.5°C between now and 2100. Recently it announced it has joined the Net Zero Asset Managers Alliance, a group of about 220 global asset managers with $57-trillion of assets under management that have pledged to align their businesses with global efforts to limit global warming. “In line with our commitment to the Net Zero Asset Managers Initiative, OMIG will be working on decarbonisation investment targets and will be disclosing these publicly in the next 12
months,” says Lewenson. Talk of a second seismic survey planned by Australian geoscience data supplier Searcher Seismic has followed Dutch petroleum company Shell’s most recent efforts. This raises the question of the role of developed markets in helping to steer emerging markets such as SA in the right direction to support a just transition, in addition to the role of developing markets to plan the pursuit of a less carbonintensive growth path. Among the notable developments in the climate change fight are the recent large value transactions by the Green Climate Fund (GCF), which was created to support developing countries in responding to climate change. “The GCF’s decisions reinforce the shared, but differentiated, responsibility between developed and emerging economies, namely that countries that were historical polluters should act early and support access to technology and financing, whereas emerging market economies should plan the growth of their economies to be low carbon and socially inclusive,” says Lewenson. At last year’s COP26 event, it was announced that SA had secured funding commitments totalling $8.5bn from developed market countries to invest towards a just transition to netzero carbon emissions. “The funding is an opportunity to reset, not only from a governance perspective but also to imagine a new reindustrialisation pathway for the South African economy,” says Lewenson. He points out, however, that asset managers are not responsible for enforcing or monitoring climate change
targets. Instead, allocators of capital must create an environment that enables climate goals to be achieved. “It is in our interest to steward investee firms towards positive climate outcomes and provide the market with the debt and equity products to achieve this,” he says. Global listed markets have already seen a big shift away from primary producers of fossil fuels, which today account for only 2.5% of the MSCI World Index. But decarbonisation is not as simple as steering portfolio investments towards listed companies with high environmental, social and governance (ESG) ratings. “Yes, investors should start thinking about decarbonising their investment portfolios; but we must also consider the realworld infrastructure investments in, for example,
SA WILL HAVE TO CLEAR SOME TOUGH SOCIOECONOMIC HURDLES TO ACHIEVE A JUST TRANSITION AWAY FROM FOSSIL FUELS renewable energy, needed to achieve net-zero targets over the next three to four decades,” says Lewenson. Support for portfolios that achieve ESG outcomes, including decarbonisation, is on the rise thanks to growing evidence that sustainable investing enhances rather than impedes investment returns. “Stewardship will emerge as our biggest impact in delivering sustainable development outcomes; our North Star is to achieve impact-aligned
sustainable development goals through our proactive stewardship,” says Lewenson. In this context, all stakeholder engagements take place in cognisance of factors such as climate risk, ethical leadership, social inequality, sound pay and social justice and transformation. SA will have to clear some tough socioeconomic hurdles to achieve a just transition away from fossil fuels. These hurdles will be overcome by a combination of reallocating capital from areas with high fossil fuel exposure towards renewables and ongoing engagements with listed companies on their transition plans. The country’s main carbon culprits are easily identifiable, offering clear wins for purposeful policymakers. More than 50% of the JSE’s carbon intensity links to electricity grid emissions from Eskom’s ageing coal-fired power infrastructure, while much of Sasol’s carbon footprint stems from its steam reformation hydrogen extraction process. An accelerated shift to renewables seems a sensible starting point. “We are in the top 5% of the world in terms of the quality of both our solar and wind resources; and modelling has been done to show that our base load peak demand can be met with renewable energy,” says Lewenson. “SA’s private sector developers and funders, in partnership with government, already have a solid track record of bringing solar and wind power projects on stream, quickly. All that is needed for SA to meet its 2050 net-zero emissions target is to scale our renewables response,” he concludes.
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