Sustainability: A mega trend not to be ignored

According to Jon Duncan, Environment, Social and Governance (ESG) analyst at Old Mutual Investment Group SA (OMIGSA), “Asset owners and managers that want to retain their competitive edge over the long term need to start integrating the precepts of responsible investment (RI) into their investment strategies. This involves assimilating material ESG issues into investment and ownership decisions.”

In the context of dwindling natural resources and increasing industrial demand, the balance is currently tipping towards an unsustainable relationship. Thus it is becoming important that governments and businesses around the world begin collaborating proactively regarding sustainability issues.

The good news for South Africans is that regulatory bodies, including the Institute of Directors of Southern Africa, the Association for Savings and Investment SA (ASISA), business and government, are cognisant of the implications. Duncan explains, “As we face growing pressure o­n the earth’s limited natural resources, the emerging effects of climate change and a global financial system in crisis, it is encouraging to see our regulators taking steps to promote approaches to responsible investing in South Africa. We recently became the second country after the UK to develop our own set of RI criteria for institutional investors, namely the Code for Responsible Investing in South Africa (CRISA).”

CRISA is targeted at institutional investors (i.e. the asset owners) like pension funds and insurance companies that have the clout to influence investment managers, via fund mandates, as well as the companies of which they are large shareholders.

While adherence to CRISA is thus far voluntary, RI enjoyed a legislative coup in July this year with the revision of Regulation 28 of the Pension Funds Act. The new regulation states that pension funds must “give appropriate consideration to any factor which may materially affect the sustainable long-term performance of the fund’s assets, including factors of an environmental, social and governance character”, when developing and monitoring fund mandates.

Duncan points out the business orientation of responsible investing for investment managers: “It’s not about constraining the investment universe or sacrificing performance, rather it is about identifying and incorporating material ESG risks and opportunities into ownership and investment decisions.”

He continues, “Responsible investing should thus not be confused with socially responsible investing (SRI), which aims to align investors’ desired social outcomes (e.g. job creation; education) with appropriate investment opportunities (e.g. labour intensive infrastructure projects; schools) without sacrificing investment performance. Nor should it be confused with ethical investing such as Shari’ah-compliant investing, which excludes investments that clash with the investor’s ethics (i.e. not investing in gambling or alcohol companies), nor with corporate social investment (CSI) which is very much along the lines of charity work.”

Importantly, he points out that, as an asset manager, OMIGSA’s first duty is to abide by the investment mandates of its clients. “However,” says Duncan, “we believe integrating ESG into our analysis supports our assessment of companies’ fair value. Additionally, we are actively incorporating ESG issues into our engagements with investee companies, as well as into the manner in which we fulfil our proxy voting responsibilities.

“Fortunately, o­ne of the principles of CRISA encourages engagement with listed companies for greater disclosure o­n sustainability-related risks and opportunities”.

Integrated sustainability reporting will assist analysts in assessing the management’s level of understanding of its long-term sustainability risks and/or opportunities. If a company has no sustainability report, it immediately sends up a red flag for OMIGSA’s team of analysts.

Duncan expands, “I’m not o­nly interested in how quantifiable ESG-related risks/opportunities are, but also in the quality of management’s approach to addressing them. As an example, during our analysis process we may look for environmental impacts that are currently externalised, like carbon emissions, water pollution, waste management, etc., but which may have an economic price in the future and may influence our fair value calls.

“The OMIGSA analysts will also examine the key ESG themes and trends within the sector in order to identify companies that are best positioned to act as potential service or solution providers, for example, companies offering sustainable agriculture systems, low-cost housing, innovative nutrition solutions and renewable energy.’

“We believe that a RI approach not o­nly makes sound business sense, but that it’s also the right thing to do as a custodian of our collective long-term future,” he concludes.