Responsible investments and why we should care
Your choices can make the world a better place
With various corporate governance scandals unfolding, environmental disasters like the floods in KZN destabilising communities and social ills like high unemployment threatening economic growth, you may be wondering how you can play a part in making the world a better place.
Increasingly you can by choosing where to invest – choosing managers who invest responsibly and pay attention to environmental, social and governances or ESG issues.
Jon Duncan, the head of responsible investment at Old Mutual, says responsible investing is no longer just an issue for large corporate investors, like retirement funds, to worry about. Individual investors can now also influence companies through their investment choices.
He says although emerging markets like South Africa lag the rest of the world when it comes to ESG investments, the focus should be less about whether you should invest responsibly or not and more about the impact investing responsibly can have on your investment returns.
When you invest in companies that pay attention to ESG issues, they are less likely to be embroiled in scandals that affect the value of the business and its share prices, as was the case with African Bank or Steinhoff.
Data from global financial services firm, Morningstar, shows that sustainable funds globally have delivered strong track records over the last three to five years. Last year was reportedly an exceptionally good year in which many sustainable funds outperformed their global benchmarks.
Additional data from the Global Sustainable Investment Alliance, an alliance following sustainable investing, shows that about $23-trillion is now allocated to funds committed to responsible investing globally.
Jessica Ground, the global head of stewardship at the global investment manager based in the UK, Schroders, says in order to identify the true opportunities in ESG investing and avoid the risks in the market, you need a deep understanding of your values and the different ESG approaches your fund manager may take.
Funds that do offer ESG investment opportunities could apply any one of these approaches:
- They may screen out all companies that are involved in certain practices regarded as harmful, for example those involved in tobacco, alcohol or weapons;
- They may incorporate ESG factors into their investment decisions;
- They may invest in companies – often unlisted – that will have a positive impact on for example communities or environments, for example, companies involved in developing alternative energy sources;
- They may engage the management of companies on ESG issues in order to influence companies’ decisions;
- They may follow a market index that gives higher weightings the shares of companies that score well on ESG factors.
Where can I get ESG Unit Trusts?
Old Mutual launched the country’s first unit trusts that track global ESG indices last year, the Old Mutual MSCI World ESG Index Feeder Fund and the Old Mutual MSCI Emerging Markets ESG Index Feeder Fund. The funds exclude companies involved in alcohol, gambling, tobacco, nuclear power and weapons firms and currently has no big fossil fuel companies listed in their top 10 holdings.
Both funds invest in offshore markets, but the MSCI Emerging Markets ESG Index Feeder Fund does have an initial 10% exposure to South African equities, Duncan says.
The South African funds feed into ones based in Ireland which means you can invest in rands from R500 a month, he says.
The funds use the shares in the MSCI World Developed Markets and the MSCI Emerging Markets indices as a start, and then exclude the shares of companies involved in controversies. The ESG index then gives a higher weighting to shares that have the best scores on ESG factors.
Many managers now consider how a company fares on ESG principles when they make investment decisions and some investment platforms are ranking funds on how much attention they pay to ESG factors.
You can also find actively funds, like the Element Earth Equity Fund, that seek out shares of companies with good ESG practices.
The Financial Sector Conduct Authority is mulling over making it compulsory for pension funds to report on how they implement ESG provisions in their investment approach. This will give you some insight into what managers are doing to change companies’ views on ESG issues.
The move will also see fund managers held accountable for not thoroughly investigating the company’s in which they invest.
The increasing focus on ESG will broaden your options to invest in companies that are well managed and take care of their environment and have a positive impact on the communities in which they operate. Ask your adviser to help you find those that do.
Or if you are looking for an easy way to invest, remain invested for at least five years and understand that your investment will go up and down in line with the markets, an index-tracking investment with broad exposure to top shares is a good place to start.
Using one with an ESG focus has the added bonus of giving you an opportunity to shape the world you live in through your hard-earned money.