Socially responsible investing (SRI) and investing taking account of environmental, social and governance (ESG) factors is not new. But the movement that started as little more than a warm fuzzy idea more than two decades ago is quickly gaining momentum across the world, and the financial services industry, if it hasn’t already, is quickly being forced to sit up and take notice.
Nowhere was this more apparent in South Africa than at this week’s Investment for Inclusion Forum at the Gordon Institute of Business Science in Sandton.
The event was hosted by Just Share, a non-profit organisation dedicated to driving change through, among other things, investor activism, whereby investors in listed companies have a greater say in the running of those companies.
It was gratifying to note both the calibre of the speakers and panellists and the large turnout from the financial services industry, including representatives of pension funds, which are obliged through regulation to take account of ESG factors when investing.
Sadly, some of the largest asset managers in South Africa were noticeable by their absence.
An underlying theme was that the establishment of a more equal, fairer society, where everyone enjoys the benefits of economic growth, is in everyone’s interests, and the investment community should be playing a far bigger role in working towards this goal.
Tracey Davies, the executive director of Just Share, outlined some of the glaring paradoxes of South African society. The JSE has been one of the best-performing stock exchanges in the world over more than 100 years. Remuneration for company executives is among the highest in the world. Yet wealth creation is not succeeding in reducing poverty; in fact, it appears to be exacerbating the gap between rich and poor.
Gross domestic product growth alone does not lead to less inequality, Davies said, and she quoted a recent study by the World Economic Forum that showed South Africa to be ranked 69th on a list of 73 emerging economies for inclusive growth.
For growth to be inclusive and sustainable, a major change of mindset is required in the business sector and among the people, including you and me, who invest in it. A fundamental issue is the focus on short-term profits at the expense of broader long-term benefits.
Nicky Newton-King, the chief executive of the JSE, emphasised the gravity of the problem. “Over time, [the swing to ESG investing] will make a difference, but there are far more fundamental issues to tackle. Businesses have far greater responsibilities than their legal right to operate. This goes beyond ESG to the heart of capitalism and of the commercial model. Where there is such great inequality, we must question the basics of how companies operate - we have to tackle the actual model of capitalism,” she said.
Newton-King said all citizens should be obliged to operate differently, and if we are serious about making a difference, we must be serious about our individual roles.
There are many things government and business can and should be doing. For example, there needs to be tighter regulation on companies’ disclosure of ESG standards; asset managers should be a stronger voice at annual general meetings in driving change and opposing unethical behaviour; and, as leading entrepreneur Wendy Luhabe pointed out, a major challenge is in providing better support for entrepreneurs.
But you and I, as consumers, ultimately call the shots. We can drive change through our spending and investment behaviour. For example, you can choose to support a small business in your community that is providing employment. You can choose not to support a company that treats its employees badly or that grants obscene remuneration packages to its top executives or that pollutes the environment. And you can support initiatives, such as Just Share, that are at the forefront of this movement.
WHAT CAN YOU DO AS AN INVESTOR?
Know where your money is invested
You may have discretionary investments in the form of unit trusts, for example, as well as retirement investments in pension funds. Jon Duncan, the head of responsible investing at Old Mutual Investment Group, pointed out at the conference that very few people knew what the top 10 holdings in their investment portfolios were. “Everyone has to wake up and be an activist, and part of that is knowing what you own,” he said.
Have this conversation with your financial adviser, asset manager and pension fund representative
Question to what degree your savings are invested in companies that you feel comfortable with. Question whether your asset manager is a signatory to the United Nations-supported Principles for Responsible Investment in South Africa (only about 40 asset managers are). Ask to what extent your proxy votes on the shares you hold in your investments are being used to good effect at company annual general meetings.
Demand appropriate investment products
Product providers should be designing and marketing ESG-focused investment products for the consumer. There are just too few out there. (Boutique manager Futuregrowth provides such funds in the institutional space only.) And, as Futuregrowth's Andrew Canter pointed out, there should be no compromise on returns. There is no reason an ESG investment should underperform, particularly over the long term. In fact, it should outperform.
According to its website, Just Share was established in 2017 by the corporate accountability team at the Centre for Environmental Rights, with support from the Raith Foundation. Its vision is of an investment system in which investors actively engage with and challenge companies to become good corporate citizens, contributing to a just and equal society and a healthy environment.
It aims to advance responsible investment and stimulate active ownership to reduce social inequality, prevent environmental degradation and accelerate the transition to a low-carbon economy by:
* Building partnerships with and enhancing collaboration between investors, civil society, savers, financial institutions and government;
* Providing meaningful environmental, social and governance information to investors;
* Incentivising and supporting the use of shareholder power to drive good corporate citizenship; and
* Connecting the lived realities of communities and social justice organisations with the decisions of the investor community.