ESG concerns

Jessica Ground, Global Head of Stewardship at Schroders

All company bosses want a policy on corporate social responsibility. The positive effect is hard to quantify, but the negative consequences of a disaster are enormous - Noreena Hertz, an internationally acclaimed Economist.

This is the challenge that faces investors in the current day and age. Investing in companies to generate alpha is not enough. Millennial investors want their fund managers to source alpha from companies whose actions are aligned with the core beliefs of making a difference in the world. 

This was a topic that was discussed extensively at the recently held Schroders Investment Symposium. Jessica Ground, Global Head of Stewardship at Schroders, said that this alignment is not necessarily easy found. 

Massive pressure

“There is massive pressure on asset managers to show that they are being good stewards by holding companies to account for their actions. Environmental, social and governance (ESG) investing is creating strong headwinds that companies need to take into account when going about their business,” said Ground. 

This could spell trouble for South African investors in years to come. The majority of the investment by South African retirement funds have to be made in companies that are domiciled in South Africa. A corner stone of the South African economy has been the mining industry which has come under fire in the past for the its social responsibility programmes. 

On the rise

Companies are aware that ESG concerns are on the rise and that there is pressure on them to improve their actions when it comes to social responsibility. Not only for the communities that they serve, but for the environment. According to Ground, while these companies have acknowledged that there is an increased focus on their actions, addressing these concerns is difficult and they face a long road ahead. 

This adjustment better come quickly. In some countries, stewardship codes are on the rise and government are putting pressure on asset management companies to hold companies to account for their actions. 

And the numbers do not lie. According to the Schroders Global Investor Study, 62% of the surveyed companies said that they will only invest in companies which are proactive in making sure their businesses are prepared for environmental and social changes which will affect them. 

In addition, 41% of the surveyed companies said that they will only invest in companies that are best in class when it comes to environmental social or governance issues, even if they are not the most attractive investments. 

Finally, 19% of the surveyed companies said that they will specifically avoids companies that are active in controversial areas when it comes to ESG investing. 

Again, this is scary news for mining companies who depend on this type of investment in a market where is a decreased demand for commodities.

Key engagements

So what does sustainability and stewardship look like? 

Identifying issues poorly understood by the market, understanding the materiality and the impact on valuations, engaging with companies to encourage ongoing improvement, and providing transparency for investors. 

There are a number of practical examples that we can analyse. Climate change is becoming a real challenge with water shortages becoming a major concern. 

“SAB Miller is one of the companies that Schroders invests in. The drought in the Western Cape was close to becoming crippling and as Day Zero approached, SAB Miller offered key assurances that if Day Zero was reached that the company would stop producing beer and would exclusively produce bottled water. This is the kind of social responsibility concerns that investors are looking for,” said Ground. 

There is another important example to analyse from the mining industry. 

“Anglo American is a company that Schroders invests heavily in. Between 2003 and 2013, Schroders engaged in a decade of climate change discussions with Anglo American which was initially focused on setting climate change targets. In 2014, Schroders questioned the continued expansion of thermal coal projects in South Africa and encouraged Anglo American to undertake carbon scenario planning. After a published report in 2015, Anglo American confirmed it would undertake scenario analysis within one year. In 2016, Anglo American announced restructuring which included a move away from thermal coal. In 2017, Anglo American announced a 2030 emissions reduction target and announced a move to science-based targets in the next two years,” said Ground. 

In addition, after engagement withSchroders, Mining company South 32 announced in 2018 that the company would be putting its South African thermal coal assets up for sale, which will remove thermal coal entirely from the company’s portfolio. Further, South 32 gave Schroders clarification on its 2050 carbon emission targets. 

Where to from here

Balancing ESG concerns with profitability is tough for companies to achieve. However, it is necessary. How do companies achieve this balance? 

Ground pointed out that there are several steps that companies can take in the future. “Companies need to engage in insightful implementation, this includes limiting unintended performance consequences. Secondly, companies need to be forward looking which means that they need to think about future risks in investment terms. Thirdly, companies need to have a comprehensive approach to their business where solutions are tailored to the different needs of asset owners. Finally, there needs to be a level of transparency which includes innovative reporting engagement and the sustainability profile of portfolios," said Ground. 

Editor’s Thoughts:
ESG investing is not something that can be ignored. According to the Schroders Global Investor Study, 88% of surveyed companies said that sustainable investing has become more important to them over a five-year period (short-term). Additionally, 77% of surveyed companies said say they have significantly or somewhat increased their investments in sustainable investment funds. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.