The future of investment strategy

In the investment world, there is increasing pressure on funds to demonstrate they are serious about ESG. What’s more, evidence increasingly shows ESG-positive investments may perform better over the long term by investing in enterprises and projects designed to build a brighter future.

To find out more about ESG, we spoke to Nerina Visser, Director of ETFSA.

Individual and institutional investors around the world are looking more closely at Environmental, Social and Governance (ESG) factors in their investment decisions.

With ESG, investors look beyond financial metrics to consider the following:

  • Environmental: Whether a company conducts its business in an environmentally responsible and sustainable way—for example, does it seek to minimise carbon emissions? Is it a major polluter? Do its operations lead to deforestation?
  • Social: This broad category can include factors such as whether the company is diverse and inclusive, how it treats employees and customers, and its conduct is around social justice issues.
  • Governance: Relates to factors such as the tax strategy, internal controls, shareholder rights, and executive remuneration.

ESG investment isn’t a new idea and many companies have embraced so-called triple-bottom-line reporting for a number of years. However, the idea is certainly gaining traction, with corporate scandals like the BP oil spill in the Gulf of Mexico, and the Global Financial Crisis over a decade ago, prompting many people to ask if it was time to rethink how companies operate.

It marks a break from the more old-fashioned idea that a publicly-traded entity’s primary responsibility—almost to the complete exclusion of everything else—is to make money for shareholders. Investors have come to realise that the traditional focus on quarterly and annual financials leads to short-term thinking that can be as bad for the sustainability of a company as it is for the environment and society within which it operates.

Reporting on ESG factors helps to turn the focus on the company’s longer-term performance. Robust ESG performance shows investors that a company is running sustainably—because it’s building consumer trust, attracting high-calibre talent and running its business in a way that minimises reputational, legal and regulatory risks.

Paying attention to ESG shows that a company is investing in society and its business ecosystem for the long haul. It also often demonstrates that it’s a purpose-driven, well-managed and strategically-run organisation that is positioned to thrive in an environment of transparency, social contract and governance.

From a South African perspective, we’re seeing many institutional investors take a more assertive stance on ESG. One example shows how some are stepping away from funding coal-fired power projects. Pension fund regulations also require trustees of retirement funds to incorporate ESG considerations in their investment decisions.

Nerina Visser
Director of ETFSA

There is a growing acknowledgement that ESG is not just about managing the risks associated with scandals like the Volkswagen emissions debacle or the Wirecard fraud, but also about creating opportunity. As investment professionals allocate capital to ESG-focused companies, they are helping to shape a better economy, financial market and society.

As we pick up the pieces following the COVID-19 pandemic, we can expect to see ESG move up even higher on the agenda. The crisis has forced us to ask what we value as individuals, organisations and societies, and it’s putting a glaring spotlight on many business and investment practices.

We may look back on 2020 and appreciate that the crisis created not only new ways of working, playing, and shopping but also a new way of approaching our investments.

We have a collection of resources and support to help guide you through the coronavirus crisis.