A Prescient approach to sustainable investing
Jessica Phalafala, Fixed Income Quantitative Analyst at Prescient Investment Management
Seeiso Matlanyane, Portfolio Manager and Analyst at Prescient Investment Management
According to data from Morningstar Direct, more than $10 billion of assets in the US have been directed towards investing in sustainable funds during the first quarter of 2020 alone.
These record-setting levels of flows underscore the growing significance of Environmental, Social and Governance (ESG) considerations when making investment decisions. Growing investor awareness and the willingness to engage on issues related to sustainability, combined with the increasingly vivid positive relationship between sustainable practices and financial performance, have cemented ESG considerations as an integral part of any robust investment strategy.
At Prescient Investment Management, the core of our investment philosophy is capital preservation and the pragmatic management of funds by systematically taking on only those risks that have proven to deliver commensurate returns over time. We have therefore adopted a holistic and integrated approach to our investment considerations, thereby ensuring that we deploy our clients’ capital in a manner that promotes sustainability. To this end, we have purposefully embedded ESG integration into our investment process, which is the way we consider and make investments; our product development, the suite of ESG-centric products we offer and; our corporate culture, which includes the structure of our organisation and the initiatives that we undertake.
When it comes to our investment process, Prescient follows rules-based security selection and portfolio construction methods that are designed to capture excess returns by investing in those factors (sometimes referred to as smart-beta) that are proven to provide positive payoffs in the long term. Common examples of such factors are Value, Low Volatility, Quality and Momentum. The recent proliferation of ESG as an undeniable driver of return and the consistent debunking of the historically held perception of an inverse relationship between financial returns and sustainability has made it clear that ESG can also be added to the list.
As such, we have developed a systematic and data-driven in-house ESG risk-analysis tool that evaluates and scores listed securities based on their ESG risks and opportunities. The Prescient ESG scorecard consists of three pillars, namely: Environmental, Social and Governance, and considers material themes such as (but not limited to) diversity, board structure, emissions and energy consumption by appropriately selecting and categorising over sixty underlying metrics. This fully automated and rules-based scorecard accounts for industry materiality and company size biases and provides a granular and in-depth measure of the proficiency of the governance practices as well as the environmental and social impact of our holdings.
At a product development level, the Prescient Clean Energy and Infrastructure Debt Fund has been specifically designed to encompass our sustainable investing philosophy and impactfully deliver on our ESG targets. It participates directly at the project level of the Renewable Energy Independent Power Producer Procurement (REIPPP) Programme. The Fund follows an investment strategy that seeks to invest in clean energy and other infrastructure projects that will have a positive social and environmental impact. The target is to build a well-diversified portfolio of infrastructure investments that will improve the sustainability of our energy supply and provide the infrastructure that is vital for the development of South Africa.
Finally, we strive to uphold and incorporate the same ESG values and principles that frame our product development and investment process at our corporate level. As South Africa’s largest black-empowered asset manager, we deem transformation and Broad-Based Black Economic Empowerment to be paramount in achieving economic inclusion and a sustainable business topography in the country. We therefore also take sustainability considerations into account when allocating brokerage services, for example, as well as in any of our enterprise development undertakings. We remain sensitive to the fact that our country is encumbered by an array of socio-economic challenges, as is reflected by our high levels of inequality and unemployment. As a corporate response, the Prescient Foundation embarks on various projects and social upliftment initiatives to address the social issues that face many South Africans.
