Barometer reveals SA’s investor appeal

Environmental, Social and Governance (ESG) imperatives have become fundamental to how businesses make investment decisions, said Andile Khumalo, Master of Ceremonies at the Sanlam ESG Barometer conference.

“By effectively including and implementing ESG in business strategies, South African businesses can become more attractive for foreign investment to boost economic growth. But far more than this, the impact that investing for good has on the whole of South Africa is immeasurable.

Investing for the planet and people creates a better world, a world where we can all live confidently, knowing we are leaving the right legacy for future generations,” he said.
 
What the Barometer revealed

At the conference, business leaders discussed what the Barometer revealed about SA’s international investor appeal.

“ESG investing is increasingly based on screening processes that eliminate or down-weight investments based on an assessment of their ESG features. This has had global ramifications on the flow of investment. In particular, countries and companies which are rated poorly on social, governance and environmental factors find themselves down-weighted, even as those markets and issuers are actively working to improve their performance,” said Dr Stuart Theobald, Chairman, of Intellidex.

“This lack of sensitivity to companies’ plans to improve ESG performance means they may be starved of capital, precisely when they are attempting to invest to change. This has macro-level implications for a country like South Africa, which requires considerable investment to finance the just transition of its economy from mainly fossil-based sources of energy to renewable energy,” stated Dr Theobald.

Abel Sakhau, Sanlam’s Chief Sustainability Officer says, “The current methodology and analysis tools being used fail to recognise how countries like South Africa have led in integrating social impact and diverse participation as part of a business’s responsibility. This best practice, which should be recognised, is neglected when assessments are done.”

The substantial local investment which is directed towards building climate resilience in the energy and water sector is of critical importance and should be recognised.

Given South Africa’s high carbon-intensive grid, which is outside the control of business, companies are marked down as their GHG emissions for scope 2 and 3 tend to be higher than the global average. This is despite investment in renewable energy and water security initiatives funded by companies.

Investors who seek additionality

“We term this notion - the extent to which desirable outcomes would have occurred without investment interventions in the ESG space - “additionality”. Investors who seek additionality are making investment decisions to allocate capital toward firms that are working to create sustainable and measurable ESG outcomes. Such capital may finance specific projects that improve environmental or social outcomes or may be allocated to companies as a whole, where it is clear that they are investing to improve their ESG performance,” he added.

“Our view is that the goals that most stakeholders agree are important, namely improved environment and social outcomes, are achieved faster when investors are aiming for additionality rather than merely screening out firms based on the status quo,” continued Dr Theobald.

“Understanding and integrating local context into impact investing strategies to deal effectively and holistically with socio-economic issues is the only way,” says Sakhau.

A multi-pronged approach to promoting ESG additionality is important - we cannot afford to weigh more issues of GHG emissions and climate change at the expense of immediate and critical socio-economic issues.

“In some jurisdictions, GHG emissions will be reason enough to mark businesses down, but they should be considered holistically to ensure that the solutions do not result in further social challenges like unemployment, poor access to social infrastructure, low economic and social unrest,” concluded Sakhau.

Writer’s Thoughts

Environmental, Social, and Corporate Governance (ESG) has become big. Adapting strategies to the challenges and opportunities ahead will be more important than ever before, if South African businesses are to become more attractive for foreign investment. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.