Putting your money where your mouth is – Sustainable Investing

USSIF (The Forum for Sustainable and Responsible Investment in the US) defines sustainable investment or SRI as:

Sustainable, responsible and impact investing (SRI) is an investment discipline that considers environmental, social and corporate governance (ESG) criteria to generate long-term competitive financial returns and positive societal impact.’

How is sustainable investment tracked in South Africa?

In South Africa, the primary system for measuring the sustainability of an investment opportunity is the Nedbank Green Index, launched in 2011. The Nedbank Green Index currently consists of a number of stocks selected from the top 100 largest South African companies listed on the JSE (Johannesburg Stock Exchange) using CDP data.  The Nedbank Green Index has been independently confirmed as effective by WWF-SA, and described as one of the “few sources of credible, publicly available data for passive investors to use in developing sophisticated investment strategies.” Selection in the Index is based on CDP data as the primary data source, based on:

  • the extent to which carbon emissions are disclosed and measured;
  • efforts made to reduce emissions; and
  • company liquidity

What is CDP (Carbon Disclosure Project)?

CDP is a global not-for-profit organization, widely recognized as the most trusted source for investors to assess the sustainability standards of listed companies. Their slogan is: “We motivate companies and cities to disclose their environmental impacts, giving decision makers the data they need to change market behavior.”

A company which has no CDP data available for example, would send up an instant red flag in the mind of an investor looking for sustainable investment opportunities on behalf of a client, whereas one with full disclosure and proven efforts to reduce emissions would be a good indication of the overall commitment of the company to more sustainable practices.

Does investing sustainably impact on returns?

While it has long been presumed that the initial startup costs of moving to cleaner energy, safer materials, or greater efficiency would be expected to pay off in the long-term; time has shown that the numbers, and overall productivity, in fact exceed expectations. In 2014, when a broad study by Oxford University reviewed 190 academic studies on the relationship between sustainability and firm performance; their findings where more than encouraging:

  • 90% showed that sound sustainability standards lowered the cost of capital.
  • 80% showed a positive relationship between stock performance and good sustainability practices.
  • 88% indicated that operational performance of firms was improved by robust Environmental, Social and Governance practices.

In South Africa, the Nedbank Green Fund, a partnership between the Department of Environmental Affairs and the Development Bank of South Africa, which focuses on supporting initiatives that contribute to transition to a low carbon, resource efficient development path by promoting innovative and high impact green initiatives, outperformed the general market by more than 35% between June 2008 and January 2011 – effectively dispelling the myth that responsible investing results in poor performance.

CEO and president of Pax World Funds, Joseph Keefe told Forbes.com:

“[Sustainable investing] is based upon an emerging body of research that suggests that companies’ environmental, social and governance performance is intimately connected to their financial performance. In fact, companies that do a better job managing their ESG or sustainability performance over time may indeed be better long-term investments. So, we think it’s a smarter way to invest.”

Of course, the scenario in reality is never as simple or clean-cut as: X company is a good sustainable investment and Y isn’t.  Neville Chester, senior portfolio manager at Coronation, uses the brewery industry in South Africa as an example. While civil society expresses great concern over alcohol abuse and underage drinking, and the more far-reaching impact on broader society; there are many more factors to be considered. Breweries may spend a great deal on awareness programs and counseling. Another consideration is their water usage, which whilst being a drain on local resources, if properly managed can also bring clean water infrastructure not just for the brewery but also for surrounding communities, reducing infant mortality amongst other benefits. The brewery itself creates employment, and frequently drives agricultural growth, upskilling, and capital for local farmers, as well as spin-off projects beneficial to the community.

Mr Chester emphasizes that painstaking consideration must be given each investment opportunity individually:

“It is not something that should be approached via a simplistic ‘one size fits all’ approach, but with the careful consideration of each business and how that business fits into the fabric of South African society.”

As such, Coronation focuses highly on engagement with the boards and management of companies which its client’s funds are invested in; as ensuring good governance is critical:

“Governance is the cornerstone upon which the foundation of a company is built. Any weakness in this area, and all parts of the investment case, whether pure valuation or the handling of environmental and social issues, are at risk… We believe it is crucial to involve all elements of ESG into our valuation and monitoring a company’s ongoing compliance.”

Specialist ESG Investments:

Increasing interest in environmentally sensitive investing has opened room for companies, especially in terms of research, for analyzing investments on a deeper level and with greater focus on ESG. On the 1st of March this year, Morningstar Inc. – a provider of investment research in North America, Europe, Australia and Asia; and Sustainalytics – an independent ESG and corporate governance research, ratings, and analysis firm; released the Morningstar Sustainability RatingTM for funds.

Watch their introduction to the new sustainability approach:

Steven Smit, CEO of Morningstar Benelux explains:

“Given the widespread and growing interest in sustainable investing around the world, investors need better tools to help them determine whether the funds they own or are considering adding to their portfolios reflect best sustainability practices,” Smit said. “Our Sustainability Rating and related metrics will provide investors with an ESG lens they can use to evaluate funds and, eventually, other managed products. This initiative will help us better serve investors who place particular importance on incorporating ESG factors into their investment decisions.”

The rating helps investors gauge how well the companies held in a fund are managing the ESG issues most relevant to their industries and compare funds with one another and to benchmarks; meaning that they have the power to support funds most in line with their ethics. Jon Hale, head of sustainability, adds:

“Some firms say that they invest according to sustainability principles, but it’s been hard to verify. Now investors can draw their own conclusions, using an independent, robust check of that claim that’s based on comprehensive analysis of a fund’s holdings.”

Morningstar’s initial analysis of the ratings reveals that funds with explicit sustainable or responsible mandates are generally practicing what they preach. Nearly two out of three such funds received the highest ratings, more than double the percentage of funds with Sustainability Ratings overall. It’s important to note that funds with explicit sustainable or responsible investment mandates comprise only about 2 percent of the fund universe.

Corporations rising to the challenge

To satisfy growing investor demands, corporations are engaging with the investment community on related issues. In particular, transparency and corporate responsibility (CR) reporting are on the rise. The audit firm KPMG found in a 2013 survey that CR reporting is undertaken by almost three-quarters (71%) of the 4,100 companies surveyed worldwide, an increase of seven percentage points since 2011.

So how do you decide upon an investment portfolio?

It is always advisable to consult with a qualified financial advisor before investing, especially if it is your first time doing so. The Financial Planning Institute (www.fpi.co.za ) offers a searchable internet directory of qualified financial advisors.

Have some specific areas of concern to you ready. Is climate change your main concern, or are you more worried about job creation, or biodiversity conservation? Are there specific issues you especially do not want your money to go towards such as industries known to pollute oceans and waterways? Do you feel particularly strongly about investing in renewable energy for example? If so there are specialist investment companies such as Leaf Clean Energy, with a specific focus on renewable energy. Closer to home, Vantage Capital offers the GreenX fund, which invests in specific solar plants in Mpumalanga, the Eastern and Northern Cape; and specifically avoids projects with do not meet environmental and social standards.

Sitting down with a portfolio manager, you can then run through investment options filtered by certain ESG considerations. Many forward-thinking investment firms are turning away from investing in fossil fuel reliant companies as these are no longer seen as sustainable long-term investments. Various ratings are applied in valuation and stock picking; which either screen out investments in companies against the clients wishes; or make positive indications as to which investments will support the values of the client. Themed sustainable investment funds may focus on trends such as changes in energy supply, scarcity of resources and new technologies.

Sustainable portfolios offered in South Africa:

While many fund managers offer ESG considered investment strategies, your first port of call it to make sure your fund manager or investment manager is a signatory of the CRISA (Code for Responsible Investing in South Africa) Code launched in 2011, which requires institutional investors to take ESG issues seriously.  Many asset management companies such as Ethos, Sanlam, Old Mutual, Prudential, Cadiz, Allan Gray, Coronation, Discovery and many others subscribe to this code.

Alternatives to traditional investing:

Remember also that corporate investing is not the only route for sustainable investing; though the risk may be much higher, investing in a specific startup company in an industry you feel passionate about is also an option.  One such site is InvestorContacts.co.za – where startups can state their case and look for investors. Investment opportunities can be sorted by sector, including green startups. Investing in companies directly needs a little more business acumen and know-how, but this way you can directly support companies that share your values.

For the more hands-on investor, another way of investing your money is in green property. Buying or building a ‘green building’, which can be rented out for an ongoing income, is a great way for the investor who wants to be more directly involved in their investment. This way you have complete control over where and how building materials are sourced, and can ensure that work goes to local communities, including use of renewables such as solar panels, grey water, recycling of construction material, incorporation of tree planting, rooftop gardens, etc.

If you already have investments:

Ask your advisor to give you the fund fact sheets of the funds you are invested in. Below is an example from the Nedbank Investors Entrepreneur Fund:

Fund fact sheet example - carte blanche shweshwe clothing

The area highlighted in green shows the top ten companies which your money is invested in – make sure that these are companies that you believe in supporting.

Why is sustainable investment important?

“When you try to create infinite growth on a finite planet… either the planet gets bigger or the economy stops growing.”

Paul Gilding – The Great Disruption

By definition; only sustainable investment will allow us to build economies and financial resources for the future.

 

Sources and further reading:

http://www.nedbank.com/website/content/QAndA/indexgreen.asp?subcatid=352&subsubcatid=1091

https://www.morganstanley.com/sustainableinvesting/pdf/sustainable-reality.pdf

http://www.moneyweb.co.za/archive/nedbanks-green-index-outperforms-the-alsi-and-sri/

https://www.cdp.net/en-US/WhatWeDo/Pages/investors/testimonials/Nedbank.htm

http://www.sustainalytics.com/morningstar-introduces-industrys-first-sustainability-rating-20000-funds-globally

http://www.investopedia.com/articles/younginvestors/07/protesters.asp

http://www.morganstanley.com/content/dam/msdotcom/articles/only-human/only_human.pdf

http://www.bdlive.co.za/indepth/greeningyourbusiness/2014/03/18/sustainable-investing-comes-of-age

http://divestinvest.org/wp-content/uploads/2014/01/HIP-Investor-Resilient-Portfolio-Fossil-Free-Pensions.pdf

https://blogs.cfainstitute.org/investor/2014/01/20/how-to-integrate-esg-considerations-in-investments/

https://www.discovery.co.za/discovery_coza/web/linked_content/pdfs/invest/choose_your_investment/socially_responsible_investing.pdf