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If you have spent some of your time reading, watching or listening to what has been happening in our country over the past 2 months, you will be aware of the difficulties companies like KPMG, SAP and McKinsey have found themselves in. The public and corporate outcry against blatant corruption and the suspicion that these companies have “turned a blind eye” to immoral transactions have been enormous. Whether these companies will be held accountable for their involvement in South Africa’s alleged state capture, is to be seen, but it is clear that South Africans demand better ethical conduct by these companies.
The Environmental, Social and Governance (ESG) Criteria is a set of standards for a company’s operations that socially conscious investors use to screen investments. Environmental criteria look at how a company performs as a steward of the natural environment. Social criteria examine how a company manages relationships with its employees, suppliers, customers and the communities where it operates. Governance deals with a company’s leadership, audits and internal controls.
It seems that today, people care more than ever about how a company is able to provide returns to investors. Awareness of ESG factors as being critical in the investment process will only continue to spread as governments aim to eliminate corruption and the impact of global warming affects more and more people in the shape of severe storms.
The below chart from Morningstar illustrates the fact that millennials (people born between 1982 and 2004) are becoming more and more interested in ESG investing. Millennials might not be the investors with the odd million or two waiting to be invested in the next best fund, but they are the future of the investment industry. The report also highlights that advisors haven’t yet responded to the increased interest in ESG investing by investors.
Source: Morgan Stanley Institute for Sustainable Investing & Morningstar (August 2017)
The growth of ESG investments in the United States has been enormous. The industry has seen 33% growth over the past two years, and a 14-fold increase since 1995. The Report on US Sustainable, Responsible and Impact Investing Trends 2016 identified the following factors which have contributed to the growth in ESG assets:
- Climate change – Concern about climate change and carbon emissions now ranks as the second most important ESG issue for institutional investors, nearly quadrupling since 2014
- Clean technology
- Conflict risk – The exclusion of companies doing business in countries with oppressive regimes or that sponsor terrorism
- Human rights
- Board issues – matters such as directors’ independence, diversity, pay and responsiveness to shareholders, an increase of over 240% from 2014
- Product-specific criteria, such as restrictions on investment in tobacco and alcohol
Sustainable, Responsible and Impact Investing in the United States 1995-2016
Source: US SIF Foundation, US Sustainable, Responsible and Impact Investing 2016 Report
In South Africa, there are a growing number of financial products that focus on responsible investment, aimed at getting companies to account for how they deal with ESG issues. Although there are a growing number of products and tools that focus on ESG factors available to institutional investors, there are fewer options available to retail investors, especially when it comes to low-cost, passive investments such as exchange traded funds.
As investors become more socially and environmentally conscious and they realise that they don’t have to sacrifice returns with ESG strategies performing in line, and at times outperforming, the more traditional investments, ESG investing will gain traction. And what we know as “ESG investing” today, might simply be known “investing” in the near future. At Seed Investments we are currently looking into a range of ESG solutions that can be included in our Fund. We expect that they will enhance our risk and return metrics and at the same time contribute to a better/cleaner world.
Stephan van der Merwe