ESG investing recognises that factors other than mere financial ones have an impact when making investment allocation decisions. The acronym ESG stands for environmental, social and governance and refers broadly to companies’ commitment to the conservation of our natural world, the considerate treatment of people and relationships and also ethical standards for corporate governance.
Investment managers are increasingly applying non-financial factors in their investment process to identify both risks and growth opportunities. The result has been outcomes such as forming the net-zero asset managers’ initiative, which is committed to supporting the goal of net-zero greenhouse gas emissions by 2050 or sooner and supporting investing aligned with net zero emissions, in line with the efforts to limit global warming to 1.5 degrees Celsius.
More than just ‘green’ issues
While environmental considerations have long held the limelight within ESG discussions, the Covid-19 pandemic has brought the social aspect to the forefront. There are substantial risks posed by the existence of deep social inequalities because such inequalities lead to unrest, such as the July riots in KZN and Gauteng, which have had a detrimental impact on the entire country. As a result, corporate commitment to social equity is as important as environmental issues, such as climate change, when it comes to the mitigation of future risks.
Finally, while corporate governance happens out of sight of investors, studies have shown that stronger governance generally correlates with stronger environmental and social performance. Individual shareholders rely on the boards of directors and their appointed management to act responsibly, and asset managers must, therefore, assess how management is aligned with long-term shareholder interest by evaluating the incentives within executive director remuneration schemes and the effectiveness and independence of the oversight provides by the boards.
Shareholder activism
Asset managers may also represent a large number of shareholders via the funds that they manage and as such are often in a uniquely strategic position to hold companies to account. Shareholder activism by asset managers for the greater good is something to be encouraged.
The need for nuance
At the same time, we need to recognise the possibility of the unintended consequences of ESG pressures, such as asset-holders divesting from companies that utilise fossil fuels and thermal coal. Once sold, these companies often continue and, in some cases, expand their operations. This leaves the climate no better off and society with less engagement and, therefore, less influence over the activities of these ‘bad apples’ than before.
Responsible investing is good business
While helping you shepherd your capital, at Netto we support asset managers who promote ESG factors within their investment philosophy. We believe that responsible investing is good business and expect that this trend will continue to grow.
Christopher Pecego, CFP®
B.Com
