Over the past few years, Environmental, Social and Governance (ESG) considerations have become part of the mainstream investment process. What was once seen as a specialist, segregated activity, is now recognised as an integral part of the risk management process.
This is emphasised in the Pension Funds Act regulation 28 which broadens investment objectives beyond financial return only. It speaks to the consideration of factors that may materially affect the sustainable long-term performance, including ESG factors.
One of the key themes in the investment world is how to balance sustainability factors with return objectives. There is an outdated myth that sustainable investing comes with a trade-off between social and environmental return and risk-adjusted financial returns. The truth is that sustainability is becoming widely accepted as a source of downside protection against ESG risks. Research shows that considering sustainability and ESG factors can enhance investment selection, reduce overall portfolio volatility and improve performance over time. A better understanding of ESG matters allows for improved portfolio risk management which ultimately supports stable returns.
Ashburton Investments commissioned research, carried out by financial research firm, Intellidex, to assess the attitudes of South African institutional investors to impact investing. From August 2019 to December 2019, 49 South African pension funds, representing a combined assets under management (AUM) of R2.6 trillion were surveyed. This is equivalent to 65% of the total R4.3 trillion AUM in the pension fund industry.
Respondents have several clear investment objectives for their funds. Sustainability, diversification and high risk-adjusted returns were all considered important. The weighted results showed sustainability to be as important as risk-adjusted returns, with 73% of respondents saying it was “extremely important”.
A majority of respondents (98.5%) indicated that they expect sustainable investing to play a more important role in the next five years. While ESG factors were acknowledged by 86% of respondents as a consideration for investment decisions.
Encouragingly, institutional investors are not just paying lip services to these factors - they are putting money behind them too. When asked about changes in portfolios over the past five years, 81% said they had changed their portfolios’ exposures to help solve social and environmental challenges and 81% said that they made analysis of ESG risks and opportunities part of the fundamental analysis process.
While it is inspiring to see such high levels of understanding of these factors, the report also noted that pension funds consider difficulty in measurement and lack of transparency to be major challenges to increased sustainable investments. This is an indication that much more work is needed in this space.
It is clear that for pension funds, sustainability is an important concern. Investing in entities that deliver short-term profits at the expense of society and the environment does not serve investors who have a long-term investment horizon and are also concerned about the plight of future generations.
There may be some hurdles ahead, but there is positive momentum driving the growth and importance of sustainable investing in South Africa.