Ensuring sustainable returns through responsible investing

Where in the past a company’s financial statements constituted the most important reading material for analysts and asset managers, an assessment is now considered incomplete if it does not take into consideration a company’s sustainability report.

Today asset managers worth their salt are expected to consider environmental, social and governance (ESG) issues together with the more traditional P/E ratios, book value and dividends.

One of South Africa’s stalwarts of responsible investing is Cromwell Mashengete, portfolio manager at Prudential Portfolio Managers in South Africa. Backed by years of responsible investing experience Cromwell is also a member of the JSE Advisory Committee on Socially Responsible Investing (SRI).

“At Prudential we screen companies beyond their financial statements. Sustainability reports are often ignored by investors, yet they provide key insights into a company’s commitment to transformation, their approach to their employees, and their environmental protection initiatives.”

According to Mashengete, ESG issues can have a serious impact on the performance of investment portfolios, and therefore need to be taken seriously by investors.

“Unfortunately responsible investing is still associated with philanthropy and poor returns. Therefore, much more needs to be done to create a better understanding of the fact that responsible investing does not equate to poor returns, but rather to sustainable returns.

“But we are also beginning to see institutional investors in South Africa increasingly realizing the power they hold when it comes to forcing social responsibility through investment decisions.”

It is not surprising then, he says, that South Africa already boasts a handful of signatories to the Principles for Responsible Investment (PRI), launched in April last year by the United Nations. These principles are a set of global best-practice for responsible investment.

As the second largest signatory in South Africa, after the Government Employees Pension Fund (GEPF), Prudential forms part of a prestigious list of international signatories representing in excess of US$ 11 trillion in assets.

“Since Prudential considers responsible investing an integral part of risk management, it was important to become part of a global network of institutions working together to share best practice and collaborate on ESG issues to deliver long-term returns to beneficiaries and clients.”

The principles aim to help investors integrate consideration of ESG issues into investment decision-making and ownership practices, thereby improving long-term investment returns.

Signatories to the Principles for Responsible Investment commit to the following:

• Incorporating ESG issues into investment analysis and decision-making processes.
• Being active owners and incorporating ESG issues into ownership policies and practices.
• Seeking appropriate disclosure on ESG issues by the entities in which we invest.
• Promoting acceptance and implementation of the PRI within the investment industry.
• Working together to enhance effectiveness in implementing the PRI.
• Reporting on activities and progress towards implementing the PRI.

Mashengete says increasingly the credibility of a company’s sustainability efforts will have a significant impact on their reputation and investor appeal.

“You don’t want to be invested in a company that is at risk of making headlines for having, say, polluted the environment. You also don’t want to be invested in a company that has made loans to a company found guilty of forced child labour.”

He says as a value house, Prudential is constantly on the look out for undervalued assets where the share price is likely to rise over the longer-term to reflect their true value. But at the same time these stocks are also carefully screened to make sure that the management of these companies takes ESG issues seriously.