Finding exposure to impact themes on the JSE – not as easy as you might think

Adam Bennot, Head of Responsible Investment, RisCura

When looking to  invest in impact themes,  the equity market might seem like  a good place to start.  Surprisingly, RisCura found that only about 3% of the JSE’s nearly R19 trillion market cap has exposure to impact themes, by its impact barometer measure.

In fact, 3.2% of the JSE has exposure to the impact themes* in our impact barometer. However when you adjust for the fact that a significant portion of JSE listed companies earn revenues offshore only 1.7% of the JSE has exposure to impact themes in South Africa.   And, of this, the lion’s share falls into the health and wellness impact theme (just one of many) because of the large hospital and medical groups listed on the bourse.

Many other impact sectors could benefit from greater investment as well. Just 2% (of the total impact theme exposure) goes to education for example  – a sector that is so in need of support in South Africa. 

We didn’t assess each company’s exposure to, and management of, environmental, social and governance (ESG) issues. The focus of our work was to look solely at the JSE’s exposure to impact themes.

In frontier and emerging markets generally, impact investing solutions exist mostly beyond stock markets. The asset class with the highest impact potential is private equity. As private equity (PE) typically invests in SMEs, infrastructure, education, and renewable energy to name a few key areas, the overlap with high impact sectors and themes is evident.

Sustainable debt is another popular instrument for investing into impact areas, such as clean energy in the form of green bonds. We carefully investigated the investable universe of assets in South Africa and have found that most impact investment is occurring in PE and debt investments. In both these investment categories, the impact coverage is much broader against both the UN’s Sustainable Development Goals as well as South Africa’s National Development Plan priorities.  

The International Finance Corporation (IFC) defines impact investing as investments with the intention to generate positive, measurable, social, and environmental impact alongside a financial return. The global financial crisis was a pivotal turning point in thinking around investment and economic development. Now, the Covid-19 pandemic has easily outstripped the previous global economic crises in its impact on the global economy, and on the livelihoods of millions of people worldwide.  It has given us a harsh reminder of the acute issues around health, in addition to education, poverty, human rights, the environment and racial, gender and income inequality.

New impact exposure reporting for institutions

The retirement industry may be working hard to improve the outcome for retirees to ensure they end up in a financial position that allows them a dignified retirement. But the industry also needs to be thinking sustainability and the world and  environment that members retire into.  What if it is not fit to live in?

An impact investing strategy offers a potentially powerful lever for retirement funds to diversify, spread their risk, and enhance returns all in a way that positively contributes to our struggling South African economy. But before developing such a strategy, investors need to know what they own and the impact themes they target, and to do this they need to measure their current exposure. 

This entails analysing how much of their existing portfolios have exposure to impact themes (see list below). In keeping with our group-wide passion for a better future for retirees we have developed an impact exposure report for institutions. 

Using the objectives of the National Development Plan (NDP) as a point of departure, we mapped these to the 169 targets that underlie the 17 UN’s Sustainable Development Goals (SDGs) and arrived at 10 specific themes, and one cross-sector category for investments that impact multiple themes.  The 10 themes are:

Impact Themes

  • Inclusive Finance
  • Clean Energy
  • Natural Resources and Conservation
  • Affordable Housing
  • Health and Wellness
  • Infrastructure Development
  • Quality Education
  • Sustainable Agriculture
  • Water and Sanitation
  • Environmental Preservation

We then weighted the themes according to how critical they are based on South Africa’s NDPs, and the SDGs, and devised a scoring methodology to evaluate  each instrument in a portfolio  against the impact themes, and calculate an  overall impact score for a fund. We calibrated our score to understand what a good score is compared to a poor score based on a representative universe of South African pension fund assets.

The result is an impact exposure report that not only shows what impact themes and SDGs a portfolio is contributing to but also points to what improvements can be made to ignite change.  An essential tool for institutional investors to assess their impact exposure.

The investment decisions we make today will massively affect tomorrow. To establish a reality check that reflects the true impact of retirement fund portfolios on the world people will retire into can encourage trustees to strive to achieve even more impact with their investment decisions.

*We used IRIS+ thematic taxonomy to define the impact themes and assess which delivery models fall within each theme. For a company to be included in an impact theme, at least 50% of its revenue must be generated from segments that meet the IRIS+ thematic taxonomy definition.