Start your investment journey - Season 2

[00:04] Introduction and background to the new series

[02:25] ESG explained

[06:28] The importance of a long-term approach to sustainability

[10:00] How companies do the right thing

[13:27] How investors can mitigate harm

[17:36] The role of the regulators

[20:28] Mobilising capital for sustainability

[21:39] Investec’s commitment to sustainability

[23:54] A conscious approach to investing

[27:00] Closing remarks

[0:00:04] Introduction and background to the new series

Ayabonga Cawe:  We are back with a new and engaging season of the Wealth Creation Podcast Series, brought to you by Investec Wealth and Investment.  It’s a series where we bring you insights from Investec’s community of investment professionals and discuss everything you as a potential investor need to know as you embark on your wealth creation journey.

You will recall that in the first season of the series we introduced you to the basics of investing, concepts such as the global market and the importance of diversifying your portfolio; we also unpacked various asset classes such as crypto currencies and NFTs. 

In this second season we go a bit deeper. We explore investment concepts such as taxes, fiduciary responsibilities, investing in private equity, trading and shares and we also include a discussion on technical indicators and risks relating to short-term trading.  We will also look at issues of retirement and how to create intergenerational wealth.  Now if you have missed any of the episodes from our first season, please make sure to catch up on Investec focus Radio.

Moving onto today’s episode, I am joined by Boipelo Rabothata and Barry Shamley and we will have a conversation about the ever-important topic of the history, impact investing and sustainability. 

Boipelo is an assistant portfolio manager and analyst working on the Investec Global Sustainable Equity Fund; she is also involved in ESG analysis of global companies focusing on stewardship through voting and engagement for all listed companies.  She fell in love the ESG and Sustainability because she enjoys helping to create positive social change.  She is also motivated to leave the earth better than she found it.  Boipelo is also a life skills tutor at FLY, which stands for Fun Learning for Youth and is a part-time YouTuber focusing on financial content.

Barry, on the other hand, is an equity fund manager and manages the Investec Global Sustainable Equity Fund and the Investec BCI Dynamic Equity Fund. He is also a member of the South African Asset Allocation Committee and deeply involved in driving the integration of ESG into Investec’s broader investment process and philosophy.

[0:02:25] ESG explained

Ayabonga Cawe: To Barry and Boipelo, thank you so much for joining me and maybe Barry, let me start off with you; just out of interest, when we talk about ESG, what in essence are we talking about and what implication does it have in relation to how many of you in the markets would have ordinarily approached your tasks of allocating capital?

Barry Shamley: Thanks Ayabonga.  I think ESG is a mystery for some people, probably just because it is an acronym and even when you do dig down and you say, well, it is environmental, social and governance, still that does not really mean a lot to people and that is because there are a lot of underlying metrics within those three pillars that we need to come to terms with as well. 

I think also crucial is that some metrics are relevant to some companies and others are not relevant to other companies. So that is a concept called ‘Materiality’ and you have got to understand what matters for a specific company versus another specific company, but really what has changed I would say is that investment managers are becoming far more sort of long-term focused in their thinking.  In the past it has been very short-termist and really, we have just focused on financial metrics that matter in the short-term, but what has changed now is we are looking at other metrics and while they are not necessarily financial metrics, they are material and can impact the financial outcomes of a particular company in the long-term.

What it really boils to is it is a framework for analysis; helping understand what matters to a company and what may impact the valuation of the company in the longer term.

Ayabonga Cawe:  Boipelo are you finding that a lot more of the discussions, not just among yourselves as investment professionals, but even from the ultimate owners of the capital you oversee, is requiring a lot more of this kind of focus, as Barry says, on a wider set of considerations than just typical above-average returns?

Boipelo Rabothata:  You know, I hear your question and I agree with you and I think a lot of people are asking themselves, do we sacrifice returns by investing in sustainable funds, if we start to look at ESG factors? Firstly there are distinct and different approaches to sustainable investing. These approaches are completely different in their goals and strategies and the effects they have on the real outcomes and also I think that many people still equate sustainable investing with its predecessor, social responsible investing, and they believe that adhering to its principles means sacrificing some financial return in order to make or change the world to make it a better place. But that is not the case, and there have been a couple of reputable studies that have been done to support the thesis that high sustainability companies significantly outperform their counterparts over the long-term.  There is a guy from Harvard Business School and his colleagues who did two great studies to support this and additionally, in 2018 the Bank of America-Merrill Lynch found that companies with a better ESG record than their peers produce higher returns, and these companies are more likely to become high quality stocks or were less likely to have large priced declined. 

So I do think it is important that we start looking above just financial returns into ESGs because there are studies that support that you can benefit from both.

Ayabonga Cawe:  Yes, and Boipelo what kind of things would we be looking at here; is it just about not investing in tobacco stocks or not investing in people who continue to generate their energy in dirty ways or what is it?

Boipelo Rabothata:  Yes, I think a good start would be obviously there is an organisation named the Sustainability Accounting Standard Board, better known as SASB, that has identified material ESG issues for all 77 industries and ESG materiality refers to whether or not a piece of information is relevant and important to a company’s environmental, social governance reporting.  These are material issues that are reasonably likely to impact the financial condition or operating performance of a company and therefore are most important to investors.  Some ESG issues might be material in a specific industry, for example, water stress can disrupt operations of a mining or beverage company which rely on clean water in their production process, but not for other sectors like a bank. 

So investors now look for evidence that their portfolio of companies are focused on the material ESG issues that matter for financial performance rather than some ill-defined commitment to sustainability.

[0:06:28] The importance of a long-term approach to sustainability

Ayabonga Cawe:  Now, I guess in scope and conception Barry, as I bring you in here, a lot of this and even the focus on sustainability is a long-term undertaking. I mean it is not the kind of thing you just think about from quarter to quarter. And I seldom hear investment professionals and people or analysts in the market and so on, think beyond just I guess a particular day’s performance or even a quarterly performance insofar as some of our underlying assets are concerned. What is your thought on this and does this challenge the industry to take a much longer term view?

Barry Shamley:  Yes, I think it certainly does and I think it is about time.  I think what we have seen, certainly in the past few years as we mentioned earlier, this intense focus on short-term improvements in return on capital, but that has often been at the expense of Capex that is required for longer-term growth.   So there are companies that need to be investing in things that ensure their sustainability in the long term, but because they wanted to maximise profitability they have just looked to cut costs everywhere and ensure they can pay out as much earnings and distribute as much dividends as possible in the short-term and improve their returns above their cost of capital. But that does not work for a long time. It works until your existing assets are depleted or they run down and then you need to start investing in things like renewable energy or any processes that use less water or even in your labour force, ensuring that your L&D spend, your education spend on your staff is sufficient to keep them happy, motivated and progressing in their careers. 

So even with that commitment to Net Zero in 2050, that is a long-term commitment and companies cannot spend that money overnight. It has got to be budgeted accordingly and they have got to adjust. I mean obviously the more they do, the sooner the better, but it is a lot of money that needs to be spent and it needs to be carefully considered and budgeted for over the long-term.  Yes, while there may be an impact on short-term returns, it ensures the long-term sustainability of the company and it makes sure it is well positioned going forward.

Ayabonga Cawe:  Is it also changing, Barry, the tenure of the discussion in AGM’s, at a board level in some of the committees that we see there, in all of the sides of decision-making around distributional issues as you have said, so do you reinvest in CapEx or do you save some of that money, cut costs, buy back shares, pay dividends and so on and right through to the broader operational decision-making; are we finding that we are hearing a lot more and seeing a lot more even in the integrated reports of some of the companies you invest in, but also some of the companies whose performance you analyse?

Barry Shamley:  Yes absolutely, so in the larger companies a lot of them have been providing sustainability reports for a large period of time.  More recently, we are starting to see ESG metrics getting incorporated into exec remuneration and then obviously incentives drive outcomes, so a lot of the exec are now focusing and saying well how can I improve my ESG risk score, how can I ensure that my investors are comfortable with me? We have seen a lot of AGMs where resolutions have been put forward for sort of, I wouldn’t say aggressive adjustments, but investors want progress and if a company is not progressing at the right pace, investors are certainly becoming a lot more activist about it and trying to force change, either through voting against resolutions, proposing their own resolutions or in some cases voting to remove directors that are not doing the right things in terms of what they think is needed.

[0:10:00] How companies do the right thing

Ayabonga Cawe:  And I guess Boipelo if I bring you back in to this discussion, you made a very important point earlier on when you said a lot of us see ESG within the scope of its predecessor, which is socially responsible investment and I remember at some stage there was an entire industry and eco-system on responsible investing, UN compacts and so on and one would be interested I guess for yourselves, where ESG would fit in not only complementing other people’s ESG efforts, but also I mean any other practical examples that you could share about companies that have done it quite well and maybe some who have probably come late to the party or have not done it as well?

Boipelo Rabothata:  Yes, I think there are a couple of really great companies that are at the forefront of sustainability and who can think through wind, solar, mining, nuclear, hydrogen, carbon capture and all these other things. Within those badges of sustainability or transition rather, there are a couple of good companies internationally, because I have been working on the global stocks, for example, in the wind category there is a Vestas, in the solar there is Solar Edge and in hydrogen there is series and Air Products and there are companies that fall under the portion that is called ‘Adaptation’ whereas your Mondi’s or your impact from a South African perspective who collect and recycle cardboards and plastics, etcetera, so there is a grade of really great international companies, and I think on a social level (because that is more environmental) there’s healthcare companies like Novartis  who are doing great things with access to healthcare and there are really good examples.

Ayabonga Cawe:  Yes and you know Barry, I mean I never thought I would hear people in the capital markets talk about the circular economy, but if one looks at announcements that have come through from companies, anywhere from mining companies to those that work in packaging, talking about this notion of reuse of materials, of products, rather than scrapping them and then extracting new products from the environment and so on, is becoming a much, much bigger part of even the operational focus, let alone where capital is allocated. 

Barry Shamley:  Yes I think it is almost an evolution of sustainability, so I think part one was maybe ESG, part two, was sustainability and then we are now moving into a sort of regeneration you referred to, it is Sustainable Development Goal 12, which is responsible consumption and production and that talks to the circular economy. It is about driving waste out of the process, examples of that would be like in fast fashion. I mean people buying an item of clothing that they wear once, for one season and then they discard it and I mean Boipelo was actually showing me today how intense the fashion industry is in terms of water consumption. 

So I think it is all about trying to make products that last a long time, when their use is over they can be recycled and find form in a new product down the line and I think all companies are considering that now because ultimately our resources are limited and even just considering the renewable energy transition, it is very commodity intensive and while we need a lot more mines to be developed, I think we also need to get to the point where we are recycling a lot of these metals to be used again. They cannot just be discarded.

[0:13:27] How investors can mitigate harm

Ayabonga Cawe:  And I guess for me that brings me to something else which I would love to hear your thoughts on, if indeed we accept and maybe you must share with me your thoughts on this Boipelo and Barry, that all of these activities, be it how we allocate capital or how we use our materials and firm and household level and how we consume, we do all of those things differently. Can we really mitigate the harm that has been wrought on our environment and our societies by our current paradigm or are we just chasing a moving target here. Maybe Boipelo your thoughts, I mean can we really change the world positively here, save the planet, rebuild and reconstruct our communities on a different basis, build back or build forward better, as people often say?

Boipelo Rabothata:  Yes, I think this is a very tricky one. Investor impact and company impact can often be confused and if we think about what impact is, this is the change that investors cause above what would have happened anyhow. So having impact means that an action, in this case OCO Investment, results in real change, for example reducing greenhouse emissions, whereas as a company’s impact is the effect the company’s activities have on people and the planet, for example, by selling a product that reduces emissions. 

So I think therefore as an investor, a way of affecting change through investing is either by becoming an active shareholder or using your voice as a shareholder to convince companies to improve their business practices or invest in funds that use engagement as a part of their broader sustainable investing strategy.  So engagement is a way for investors to drive incremental positive impact or investors can alternatively encourage change by excluding companies that breach worldly accepted norms, right, like that is just an exclusionary type of investor. 

So investors can play some role in solving social problems in general and sustainability problems, to be specific, they can challenge also asset managers to use their muscle to deliver change, I think that is a way you can impact.

Ayabonga Cawe:  I mean I like this idea that you can use how incentives are configured as a way to achieve incremental change. I mean a few years ago probably what people thought of when they heard activist investor was probably the person of Theo Botha, right, who raised certain issues about how companies are run and the impact that that would have on multiple stakeholders. It seems now it is more widely accepted, this notion of a triple bottom line, and I would like to hear from you, I mean if this is the kind of thing we want to encourage, from a regulatory perspective, what do we do and what are some of the things that are already being done and maybe what is missing in some of the sort of policy mix that has been proposed thus far?

Barry Shamley:  Well, I think the most important starting point as an investor is to insist on disclosure from the companies that you are investing in, so that has happened to a large extent already. I would say a large proportion of companies are providing disclosure, as an example of that would be CDP, the Climate Disclosure Project, they have tens of thousands of companies that disclose in terms of the questionnaire that they ... so it is a voluntary questionnaire that you do, but we were part of that programme, where we send a letter to these companies saying, look, we would like you to participate in the survey because without actually understanding your own carbon footprint, without understanding all these various metrics, these environmental, social and governance metrics, you are not in a place to improve them, so that is the very first starting point.

Another interesting aspect is, I think the best returns you can make are finding the companies that are not doing this right, engaging with them and getting them on the right track, because it has been noted that as your ESG risk rating improves, so does your cost to capital reduce and your cost in debt.  For activist investors, I think it is a fantastic opportunity to find those companies that are not behaving well, get them to disclose, help them. Once they have disclosed, they have a base to work from and then help them improve that base and they should be very willing and happy to do so because it is good for them, it is good for shareholders, it is good for management.

[0:17:36] The role of the regulators

Ayabonga Cawe:  And on the part of the regulators? I think the point was made earlier on, in many ways you kind of have to shift the incentive mix, if firms feel they won’t be able to access capital markets on relatively favourable terms or on the same terms that they would now or in the future if they don’t make these changes, one would think that regulation plays the same role, that it fixes the incentives in a particular kind of way where you risk courting punitive sanction if you do certain things or if you don’t do certain things; what are we seeing insofar as that is concerned?

Barry Shamley:  So it is moving at different paces in different jurisdictions. So Europe was definitely the leader with their EU Green Taxonomy and their Sustainable Finance Disclosure Reporting, the UK is following that, the US to a lesser extent. I know South Africa has been working on its own taxonomy  as well, and I mean there are various regulations moving at a different pace in South Africa in terms of Reg 28. Pension Fund Trustees are required to determine whether the fund manager is in fact incorporating ESG in his or her strategy and then, if not, understand why not, because the default expectation is that you are and I think it is also, just a point to highlight, there is a difference between ESG and integration and sustainability.  So to me, ESG integration is actually almost becoming the default now. I mean it does not preclude you from owning anything really, it just makes sure you account for all those risks in your valuation.  Sustainability is more looking outward, like how is that company impacting the environment or society through what it produces or how it manages its own business?

Ultimately, it would be great if we could get to a level playing field around the world.  Like I said people, different countries are moving at a different pace, but particularly with the environment, it affects all of us in all countries equally in a sense that, if we do not all work together towards it, if two countries decide they are not interested, it creates a big problem for the rest of the planet.  So it is something that actually requires a cohesive response and something that I suppose someone like the United Nations would have to be quite involved in, in terms of making sure everyone is on side in terms of regulations and having similar outcomes. 

Having said that, we also do have to be considerate to [implement a] just transition in terms of emerging markets. Developed markets have had that benefit of cheap fossil fuels for many years, but on the other hand, I think a lot has been done already and a lot will be done in terms of driving finance or capital flows to emerging markets to help them perhaps even leapfrog some of the developed markets in getting ahead in that renewable transition. 

So I think we must embrace it; I know it is a bit like going into the unknown, but we have to be pragmatic and we have to be strategic and invest for the long-term.

[0:20:28] Mobilising capital for sustainability

Ayabonga Cawe:  Yes, and it does seem Boipelo that I guess, the point is to make sure that all of those activities that contribute to favourable ESG outcomes are not starved of any capital; are you finding that alongside yourselves, I mean as global investors out at Investec, that there are others that are coming to the party, philanthropic capital or DFI capital and so on, that are effectively pooling capital for these environmental, social and governance-focused projects or a pipeline of projects insofar as that is concerned?

Boipelo Rabothata:  Yes, so obviously there has been a huge pool of funds towards sustainable investing in the last couple of years. And I think as Barry has spoken, as  the regulation increases and people are forced to adhere, it is going to pull a lot more people to start thinking, how do we incorporate this and which funds that are sustainable can we look at? And I think that will pull funds into sustainable investing as a theme and I do think that will probably continue increasing as time goes on.

[0:21:39] Investec’s commitment to sustainability

Ayabonga Cawe:  And Barry, I mean one of the things we have not spoken about, many consumers are a lot more conscious of who they interact with, who they transact with and whether or not those people are as sensitive to the ecological, social and governance related issues that we have been talking about.  From an Investec perspective, I mean what is that you offer insofar as that is concerned?

Barry Shamley:  So I think just as an organisation I think it is important to note that Investec has for probably two decades been very serious and embraced sustainability wholeheartedly; I think we were very early to the party and I would say if you looked at us compared to our peers in the banking industry, both locally and in the UK, you would see that I think we do rate best in terms of our sustainability as an organisation as a whole. 

There have been a number of developments probably in the last two or three years in terms of our product offerings; the one is the Investec Global Sustainable Equity Fund, the other is green bonds and sustainability-linked loans that Investec has issued to the market and then there are a number of other initiatives that we are looking at. I know the bank has made a small investment in an impact fund that works with the export credit agencies to help sustainable development on the African continent. 

So I think what is key for us I think as a bank we know that this is a key focus for us and I think over the next couple of years, I think you will just see more and more offerings.  I think that in our banking operation we have tried to encourage our banking clients to understand their carbon footprint and probably the most important thing I think we are doing, is education. So we are trying our utmost to ensure that people understand the risks; there is a phrase I use, ‘wilful blindness’. It is a legal term; it is really people actually sometimes just don’t want to know what the problems are because they do not have to deal with them, so through our Road to 2030 campaign and our Class of 2030 education campaign, we are trying to help our clients and our staff understand this so that they can change their ways, can potentially change their investments and can change the planet in the long-term and as I said, I think it all starts with education.

[0:23:54] A conscious approach to investing

Ayabonga Cawe:  And I guess that is the important part. Because at the end of the day, it is not just about educating the management teams, educating the investment community or even educating all of those who represent the owners of capital, but from a consumer perspective I mean I am quite interested, Boipelo and Barry as well, whether or not some of the areas of ESG, I mean if you take the social one, you know, are we interested as consumers in the labour processes that give rise to the products that we consume or interact with every single day, are we interested in where the food that we consume comes from or the metals; Barry was saying earlier on, a big part of the green shift that is happening is very, very resource intensive. Are we bothered about where some of those resources come from, be they in our smart phones or even in some of the devices that we use Barry, or do we have some of that ‘wilful ignorance’ that you were talking about?

Barry Shamley:  Yes, so I think that is something that is increasingly happening, I think particularly with the millennial generation: they are more conscious of where things come from, how things are made.  I think it is probably less so with the older generation but I think that is part of our job in terms of this education, is understanding supply chains, understanding that well maybe something is cheaper but that you are importing from overseas, but it may be from a country that does not respect human rights and you could be actually creating jobs in your own country and those items then would be affordable. 

I think we are getting there. I think there are certain generations that are more advanced in it, but I think hopefully through this education process, people will start asking those questions more and you will probably find. I think I saw something today, where people will start labelling even their food in terms of the carbon intensity of food, understanding that piece of meat that you eat, just understanding carbon intensity in various products I think is going to increase.

Ayabonga Cawe:  Yes, Boipelo any thoughts on that one?

Boipelo Rabothata:  Yes, I was going to say I am actually going to try make it personal. Look I am not vegan but I definitely do try to reduce my meat consumption and I think that is where it starts; it is being aware and starting to alter, before we call on companies to change; we also need to be making a change.  I have reduced my meat consumptions where I have meat-free Monday, this is only if you try to impact the reduction of meat then as Barry has said, meat emissions from livestock are actually more damaging than emissions from transport. So methane, for example, is 28 times to 36 times more potent than carbon dioxide, so CO2, so I think it is just being aware of those things and then trying to see where you can balance it out and try change yourself.

Ayabonga Cawe:  I must say, I mean I find whenever I do meatless Monday’s, that I sleep a tad better than when I have had a lot of meat in my diet, but also meat takes so much longer to cook, so there must also be a massive energy requirement there as well Boipelo.

Boipelo Rabothata:  No that is true and yes, that is true.

[0:27:00] Closing remarks

Ayabonga Cawe:  Maybe then Barry and Boipelo, just as we wrap up: I think for many of our listeners who are interested in what ESG approaches as a way of allocating capital and investing might mean for their portfolios, might mean for their consumption baskets, might mean for how they live and interact with the environment and the social context therein and how they govern firms and their lives. What message, just as we close, would we have? Boipelo I will start off with you and then get some perspective from Barry as well, on how we make sure that this change, not just in how we invest, is also translated into other changes that we make in our lives to change the world positively, save the planet and save our communities and build forward a bit better?

Boipelo Rabothata:  Sure, I think I will just close off with a quote which is very relevant from Larry Fink, the CEO of BlackRock. He wrote to company CEOs at the beginning of 2018 and said that: “To prosper over time, every company must not only deliver financial performance, but also show how it makes a positive contribution to society.” And I think this quote is encouraging because it shows just how the world has come in making a shift.  I think every generation has to fight for future generations and it is encouraging to see that this generation is starting to take, maximising stakeholder value instead of just shareholder value and taking sustainability in impact, investing variously.  So it is encouraging to see the progress that has come from far and even us having this conversation, is good progress.

Ayabonga Cawe:  Boipelo thank you very much, I never thought in my life that some of the big asset managers in the world would let go of their Friedmanite ideological origins, so I guess the world is a changing place and Barry, some of your closing reflections.

Barry Shamley:  Yes, I think the point I would like to leave everyone with is: we are all saving for our retirement, for our kids, and what is the point of saving for that if the planet that we are going to live in, in 20- or 30-years’ time or 40 years’ time when we retire, is just a sort of plagued with unrest because of growing wealth, inequality, extreme climate change and extreme weather events.   So it is really, like, invest in the future you are saving for, that is what I would like to say. It is no point investing money and then yes, you are very rich, but at what expense and how good is that money going to be when you get to that point in time and we carry on, on the same trajectory that we have been going on?  That’s it.

Ayabonga Cawe:  Barry and Boipelo, thank you to the pair of you for your time and so generously sharing of it and yes, folks, that was our first episode in this second season of our Wealth Creation Podcast Series, brought to you by Investec Wealth & Investment. Don’t miss our next episodes and if you have missed any of the episodes from the first season, please make sure to catch up on Investec Focus Radio.  From myself your host, Ayabonga Cawe, until we meet again.