A trend that has exceeded even my expectations as an eternal optimist is the flood of capital and energy into environmental, social and governance (ESG) focused funds. In the teeth of climate denialism and US President Donald Trump’s flouting of climate change science, the global investment community has flexed its muscle in a dramatic fashion.
Bloomberg recently reported on a new paper by PwC, which forecasts that as much as 57% of mutual fund assets in Europe will be held in funds that consider ESG factors by 2025, or EUR7.6 trillion (US$8.9 trillion), up from 15.1% at the end of last year. In addition, 77% of institutional investors surveyed by PwC said they plan to stop buying non-ESG investment products within the next two years.
“With racial and economic injustice, as well as climate change, becoming key societal issues in recent years, financial firms have been forced to pay greater attention to their own contributions to making the world fairer and greener. That has primarily manifested in an explosion of ESG funds with money managers of all stripes, from pension funds to private equity firms and hedge funds, hiring sustainability teams, rolling out new products and touting their green credentials,” notes PwC.
“ESG is nothing less than an all-encompassing shift in the investment landscape; placing financial and non-financial performance criteria on a level playing field,” PwC says.
Investor capital has enormous (and growing) power to do good and bring about positive change, as we have seen in the increasing affordability of non coal energy alternatives such as solar and wind, in my opinion.
ESG investing in practice
At Investec Wealth & Investment, we have been passionate as a business about ESG for some time and are actively incorporating it into our business*. So far we have:
- Formed an ESG International Committee with members drawn from South Africa, the United Kingdom and Switzerland to develop our ESG framework and further embed responsible investing and sustainability as a collective
- Published our ESG framework and made a public commitment to make our framework available
- Incorporate the Code of Responsible Investing in South Africa (“CRISA”) principles and made a public commitment to integrate and further embed the principles
- Developed a responsible investing webpage which will house our framework and client content.
- We have partnered with Sustainalytics, a global leader in ESG research and risk metrics to further strengthen our incorporation of ESG factors into our investment analysis.
While we are still working on incorporating the environmental and social aspects more fully into our processes, the governance aspect is already integrated, being our voting process. We exercise our fiduciary voting responsibilities on all material issues, which can encompass anything from remuneration to board composition.
To date, we have voted on all resolutions posed at company meetings where we hold the stocks within our portfolios. We use the services of a global research provider and this research is thoroughly vetted by our research analysts, with final voting recommendations reviewed by our voting committee.
How investment committees factor in ESG in voting decisions
Where we voted against resolutions related to remuneration policy, this was most often because the long-term incentives were not linked to any key performance indicators (KPIs), or because the overall remuneration package for directors was excessive relative to their peer group.
Where we voted against resolutions related to independent directors, this most often related to directors who weren’t considered independent and to their subsequent membership of audit committees.
Where we voted against resolutions related to share issuance, this most often related to a request for an authority to issue more than 10% of authorised share capital which is considered excessive. Often this excessive issuance is linked to the share incentive scheme.
Casting off the "Wolf of Wall Street" stereotype
The above are just some of the examples of the governance aspect of ESG in action. This diligent application of governance principles should help the investment management world away from the “Wolf of Wall Street” image that it has in some quarters.
Investor capital has enormous (and growing) power to do good and bring about positive change, as we have seen in the increasing affordability of non-coal energy alternatives such as solar and wind, in my opinion.
To me this highlights yet another benefit of truly active investing and, true to my nature, I am optimistic about the scope for swift positive change in the world as a result.
Podcast: food for thought
To end off I include a podcast between our very own Maxine Gray and renowned behavioural psychologist Daniel Crosby.
Maxine unpacks the UN’s sustainable development goals (SDGs) and explains why companies should operate in an environmentally sustainable manner that allows them to look beyond just profitability.
The differences between shareholder capitalism and stakeholder capitalism are discussed and how these approaches coexist, as well as why environmental concerns are being considered legitimate risks to businesses.
She looks at the interconnected nature of the SDGs and where to start on your personal journey to understand them and make them relevant to you.
*With special thanks to Simone Smith, Maxine Gray and Barry Shamley for their assistance in providing the background and data referred to in this article.
Responsible Investing and Sustainability at Investec Wealth & Investment
As Sustainability is core to our fundamental investment approach, we have integrated ESG considerations into our investment decision making and broader investment process.
Kate holds a Business Science degree – her clients are Financial Advisers who use Investec's Investment Services. Keeping abreast of market conditions and being able to communicate relevant information is an important component of her role. Kate is also a qualified level 1 Kundalini Yoga teacher.
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