Initiatives that will impact our industry in the coming years
There are several medium-term trends that we are seeing in the industry currently. The first, according to Professor Evan Gilbert, Research Strategist at Momentum Investments, relates to the integration of Environmental, Social, and Governance (ESG) aspects into the investment process, the second to managing costs of investment, and finally, we are seeing increased interest in factor-based smart beta investment products.
“Taking a shorter-term view, we are also seeing an increased emphasis on inflation-hedging investment strategies, as the interest rate environment normalises in response to increased inflationary pressures,” added Gilbert.
“The is an increased focus on ESG factors. The key areas seem to be climate change, as proxied through carbon emission management, and (which is more challenging to manage) the problem of social impact. In particular, the areas of diversity, both in terms of gender and racial equality are of particular interest to clients,” he added.
Robert Lewenson, Head of Responsible Investment, at Old Mutual Investment Group added that, “In boardrooms across the world, there is a realisation that markets, and capital flows can play a powerful role in directing investment toward sustainable assets without compromising returns. This universal acceptance has enabled capital allocators to become significant drivers of decarbonisation.”
In light of this, Lewenson believes there are a few initiatives that will have a significant impact on his business and the broader industry in the coming years.
Committing to net zero
“This coming decade will be a watershed time in terms of the world collectively countering global warming and addressing social inequalities and injustices. In early 2022, Old Mutual Investment Group joined the Net Zero Asset Managers initiative of more than 236 global asset managers committed to the goal of net-zero greenhouse gas emissions by 2050 or sooner. Committing to a net-zero world will fundamentally change how asset managers operate. It will change the conversations we have with our clients, the financial products we offer them and how we manage ourselves internally. All of this has to be done in a manner that considers the socio-economic realities of our carbon-intensive stock market - many of these listed companies are large employers underpinning our economy,” emphasised Lewenson.
Gilbert added that, “Effectively managing the carbon emissions impact of portfolios is predicated on two things. Firstly, the quality (the breadth and depth) of the data that is available for the carbon emissions of listed companies in South Africa. This data set is unfortunately not as complete (and independently verified) as we would like. Secondly, there is the direct trade-off between limiting carbon emissions and risk adjusted returns, which is particularly acute for investors on the JSE. This market is a relatively narrow and concentrated equity market, with a relatively large number of resources companies. This significantly limits our ability to directly reduce our portfolios’ carbon footprint. An exclusion-only approach is simply not a viable option in a market with these characteristics. It is so much easier to manage this offshore, as global equity markets offer a far greater breadth and depth in terms of investable companies with low carbon emissions. Managing the social impact of investments is made more challenging by the lack of good quality data on these dimensions. We are actively researching ways to fix this problem.”
Setting the goalposts
Lewenson added, “When clients entrust us with money, it is attached to a benchmark or expected return outcome. The benchmark we generally use is the FTSE/JSE Capped SWIX All Share Index. As at the end of December 2021, its weighted average carbon intensity was 315.1 tons of CO2 emissions per US$1 million in revenue. By comparison, the MSCI Emerging Markets Index had a carbon intensity of 330 tons of CO2, and the MSCI World Climate Aligned Index was 33.6. While the Capped SWIX has been decreasing its carbon intensity, primarily because of a growing number of companies’ commitments to net-zero emissions by 2050, it is still very far from the 1.5°C aligned target.”
“In this context, it is necessary to develop a South African-centric low carbon net-zero benchmark to better reflect the country’s on-the-ground economic and social realities. We believe that this can be achieved through collaboration between local asset managers, asset owners, industry bodies, regulators, the JSE and other key stakeholders. In addition to achieving a measurable and reliable low-carbon benchmark, the process of self-creation should enhance ESG-aligned portfolio construction and performance measurement, and lead to better product innovation,” continued Lewenson.
Keeping it real
“With the growing pressure to decarbonise listed asset portfolios within the country’s vulnerable social context, there is the ever-present risk of greenwashing, whereby companies make unsubstantiated or misleading claims about the environmental/social benefits of a product. We expect scrutiny from regulators on the true ESG credentials of investment products to rachet up during the years ahead. To counter this, and to both evidence the real ESG impact of investment products and enhance the depth and quality of research across our investment processes, some investment firms have established Artificial Intelligence (AI) task teams. Reflecting enhancements in the availability of ESG data, their data-intensive research aims to identify quantitative ESG signals through machine learning, to explore the real value of ESG factors and to incorporate relevant trends within the South African and global markets. If we are to ensure a sustainable future for generations to come, there is no time to waste,” added Lewenson.
“I believe these three key initiatives will usher in an era of action when it comes to sustainable investment. Investment teams should remain committed to supporting businesses in their efforts to better align portfolios with climate goals and positive social outcomes. Employing experts in responsible investing will be key to this and strengthening the capacity of teams to ensure world class ESG integration and stewardship outcomes for clients is offered,” concluded Lewenson.
“Get the best possible outcome for clients by leveraging the choice afforded by global equity markets, to minimize the challenges presented by the local ones. Work with global partners to come up with ways to measure and, thus, integrate the social impact of portfolios in terms of their gender and racial diversity in investment decision making,” Gilbert concluded.
Writer’s Thoughts
As the investment world latches on to the ESG theme, your clients will start asking whether or not the investments you choose for them are environmentally and socially sound. Your response will most likely be guided by the promises that asset managers make about the ESG exposure of their funds. There are, however, growing concerns that unethical firms will try to trick asset managers into investing in them by misrepresenting their assets, products or services as ‘greener’ or more sustainable than they actually are. As an adviser, one author recently said, “you should engage with your asset manager and request further details about their sustainability investment policies, progress reports and whether they adopt external rating agencies or mechanism issues to provide a level of independent assurance.” Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za.
