Are you gearing towards ESG?

Richard Rattue,
Managing Director of Compli-Serve SA

Environmental, Social and Governance – ESG, once an acronym we heard about sometimes, has moved into mainstream conversation.  Concern over the impact of climate change is growing, particularly with the reality check of the floods in Europe and heatwaves in the US. These matters are further compounded by rising social and financial inequality as felt by recent looting and violence in South Africa or painful international issues such as Black Lives Matter. The injustices are more under the microscope than ever before and change is on course, even if it will take some time.

The investment world can, and must, do its part to help facilitate change – it’s no longer nice to include ESG in your mandate – it should be among your main strategy. The setting of concrete ESG goals, means we’re all going to feel the effect of this shift in investment momentum too.

The WEF knows best

Proposed by the World Economic Forum (WEF) are core and expanded goals aligned to four pillars or themes, namely Principles of Governance, Planet, People, and Prosperity with various deliverables per theme. These should also align with the six United Nations Sustainable Development Goals:

  • Clean water and sanitation
  • Affordable and clean energy
  • Responsible resource consumption and production
  • Climate action
  • Life on land
  • Life below water

Local is lekker but global is good too (and often worldwide approaches apply in the end anyway)

International approaches are likely to apply to South Africa in time. Looking at the EU Sustainable Finance Disclosure Regulation, funds could be categorised according to ESG status. The three proposed categories are:

•             funds without any sustainability integrated into the investment process (these could extend to being invested in stocks such as tobacco companies or thermal coal producers, which are of course examples that exclude ESG). The marketing of these funds will need to clearly state that they are non-sustainable, which could impact investor interest against more sustainable options.

•             funds that are inclusive of ESG factors (such as companies with good governance and environmental practices) and

•             products or funds targeting sustainable investments (sustainable investment would be the core objective, with an index designated as a reference benchmark).

What are you waiting for?

The Covid-19 pandemic has truly highlighted why there is urgency to improve the way many people live, as well as the outlook for the future environment that lies ahead. There are several global and local concerns that resonate, and these have been a wake-up call for many of us.  Addressing these issues should be everybody’s responsibility to fix, even though it’s easier for some to encourage and make change than others. Investors are likely to look to more sustainable investing given the crisis we face without it, so it’s not going to be something one can wait to see play out. Options to grow and evolve (and improve) need to be available.

Growing the network of good globally

All G20 countries have been called on by the Financial Stability Board (FSB) to specifically address the financial risks climate change will create. A comprehensive roadmap to address these risks and what needs to done, in the next few years to prepare, has already been actioned.  There are four key policy areas: Disclosures, Data, Vulnerabilities analysis, and Regulatory and supervisory approaches. The IFRS Foundation’s programme of work aims to develop a baseline global sustainability reporting standard too, which the FSB supports. This would be under ‘’robust governance and public oversight, which would enable the development of climate-related disclosures that are globally consistent and comparable,” according to the programme.

It may be trendy for the powers that be, but pop culture is to thank too

The ultimate global citizen and champion for the environment, Sir David Attenborough has opened our eyes to the realities of climate change, and the narrative has truly spread, helped by influencers and activists like Greta Thunberg. These are not new names, nor are they telling new stories, but they are consistently keeping climate change on the agenda and helping to bring about recognition of what needs to be solved. Global awareness of the problem is one thing, changing how we act is the next vital step.

Nedbank as one example, is no longer investing in companies who use fossil fuel. The eradication of diesel-powered vehicles is a big trend, electric vehicles are said to match (if not beat) the cost of fossil fuelled cars by 2024, and this story is backed up by what car manufacturers are actually doing on the ground. More opportunities to invest better to live better are presenting themselves. 

Get compliance on track

Ensuring an effective and comprehensive compliance programme is in place is essential for FSPs, which should factor in what is coming in terms of ESG impacted legislation and customer demand. The goals are just that – what we need to work towards and in time, complying with ESG guidelines and principles will be as relevant as any compliance requirement today and as meaningful, if not more important, than achieving stated returns.  In fact, failure to take ESG into account, may leave a manager with a portfolio of stranded assets, with no value (no-one wants to buy them) and so meeting returns may only be possible with the right ESG focus.

It is also worth mentioning that ESG returns are not necessarily lower than non-ESG returns and as they gain popularity, they are likely to present even more opportunity.

Are you on board?

It’s best to get on board sooner rather than later, as the ESG train is already pulling out of the station. Being left behind might mean limited chances to catch-up as the industry begins to embrace a better investment landscape for all. Few can deny the important consequences of ignoring ESG altogether (for our earth and the investment returns to come).