RESPONSIBLE INVESTING DEMANDS AN INNOVATIVE APPROACH

“I am deeply concerned with the level of social inequality in our country and also think that we have lost our connection to nature. On a personal note, I have invested in solar panels and see this as an environmental return on investment.

“From a quantitative investment perspective, ESG integration is two-fold. Firstly, fund managers use quants to integrate ESG considerations into the portfolio construction process. This strategy has had the biggest focus globally. Secondly, ESG metrics can be used as factors in a quant model. This strategy is less commonly used. The key challenge is that people’s definition of ESG factors is not uniform and can be very subjective. I have found that ESG metrics are generally a lot more correlated to the quality metrics.” Leanne Micklewood, Quants Analyst

“ESG considerations are important when evaluating a company’s capital allocation framework and cash flows. We have come a long way in getting policies and procedures in place to ensure better governance. However, the environmental and social factors are more difficult to measure and disclose. Focusing solely on the financial return on investment can come at the cost of the social return. For instance, consider the long-term impact of a company closing a low-return business that is critical to the job security of a community. As investors, we need to constructively engage with companies to find the best outcome for all stakeholders.” Kayalethu Nodada, Portfolio Manager

THERE WILL BE WINNERS AND LOSERS

“With clients now expecting ESG considerations to be incorporated into investment processes, there is growing pressure on listed companies to adopt new ways of doing business. As with any major change to market incentives and structures, there will be winners and losers. Long-term winners will be companies that have structural tailwinds or participate in themes that drive sustainable growth ahead of the overall market. Sectors with exposure to the green economy (like renewable energy, green metals, paper/packaging and construction industries) should win over those that rely more on fossil fuels for revenue, as do the coal, oil, plastics and gas industries.” Siboniso Nxumalo, Head of MacroSolutions

GOVERNMENT MAY BE THE MISSING MIDDLE

“Government can play a bigger role in driving the adoption of responsible investing, particularly across the ‘E’ and ‘S’ pillars. An idea would be for Government to offer tax breaks for companies – correlated to the level and quality of employment. I think this would incentivise better labour practices and would drive better integration across both Government and business.” Irina Schulenburg, Equity Analyst

ESG EXCLUSIONARY POLICIES ARE COSTLY