Retail investors, by selecting portfolios, asset classes or asset managers who are focused on sustainability, have the option to ”‘invest for the good”.

It has become increasingly clear that how we invest has a wide-ranging impact – touching on the environment, on society, on inequality, and on governance. Sustainability has become a buzzword, and it is plain business savvy.

There is that lovely adage: Give a man a fish, and he eats for a day. Teach a man how to fish, and he eats for a lifetime. We should perhaps add to this: Teach a man to fish sustainably, and not only he, but his children eat for a lifetime. What’s more, he leaves enough fish so that his children won’t starve.

Investing is similar. Retail investors are often dazzled by investments or by asset managers with high short-run returns, only to find that the stellar performance fizzles out over the medium- to long-run. This is because these investments or asset managers, in some form or another, are not practising sustainable investment. They are likely investing in asset classes or in companies that may impact negatively on the environment, society, or governance (ESG). They may make use of carbon-intensive production processes, which are likely to become obsolete or increasingly costly to maintain as the world moves to a greener energy-mix. They may have exploitative labour practices, which are likely to result in difficulty in maintaining and retaining an effective and motivated workforce. Myopic and/or corrupt executives in the company may choose to pocket the lion’s share of any profit, neglecting to invest in the business and its people.

Companies that fail to consider broader objectives, companies that are run with an “extract-and-exit” mindset, ultimately fail from the perspective of the collective. Executives and individuals (including shareholders) may initially profit, but the company will eventually run itself out of business. Sustainability is essential and the key to ensuring that solid investment returns can be maintained in the long-term.

As elsewhere, funds with an explicit ESG focus are coming to market in South Africa. Old Mutual launched the first local actively managed ESG equity fund in 2020, thereby expanding its existing suite of responsible investment products available to retail and institutional investors.

Other equity asset managers apply proprietary ESG scoring systems in their stock selection process. It implies that their portfolios ultimately have a “better” ESG footprint – their portfolio may have a lighter carbon footprint, if the asset manager avoids oil stocks, or it may have a bigger impact in terms of job creation, or it may mean that a company exhibiting poor governance receives less money. Alternatively, asset managers may choose to actively engage with investee companies, pushing them to make ESG a more important consideration in their stock selection process, and many offer equity portfolios that are readily available to retail investors.

While many asset managers pay lip-service to ESG, the implementation and the follow-through on the scoring and engagement process needs critical assessment. Asset managers should, when required to do so, be able to provide evidence where stocks have been rejected, based on ESG considerations, or of their engagement with management. In South Africa, ESG policies and practices have been increasingly under the spotlight, and will continue to be.

Other than investing in equity, retail investors can also look to other asset classes to “do good”.

The South African “green bond” market is relatively young, having been launched in 2017. Green bonds are fixed income instruments that are specifically earmarked to raise capital for climate and environmental projects. JSE Green Bonds are earmarked to finance or re-finance eligible green projects that have a positive environmental or climate benefit. Now, more than ever, the appetite for these types of sustainable investment vehicles is growing, and retail investors can take advantage as early movers in this space.

– Fran Troskie
Investment Research, RisCura