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Sustainable 1 - Investing in a sustainable future

Investing in a sustainable future

By Brendon Dale

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We’ve come a long way since Al Gore’s Inconvenient Truth documentary in 2006. Although not the first we’d heard of climate change and the effects of globalisation, it was an eye-opener for many and it sparked fierce debate. Things that were only spoken of then are now becoming reality, and we probably all understand the severity of global climate change, and what this means for future generations.

Sustainable business has become a new trend but it doesn’t simply imply greener practices though – it incorporates a far broader mentality touching at the heart of the problem: consumerism. We live in a wasteful society where we’re accustomed to single-use plastic, replacing instead of fixing, and generally buying whatever we want, when we want. This, of course, is what drives the economy, and it’s a strange and conflicting balancing act whereby both businesses and individuals need to find new and effective ways to reduce waste, curb costs and source renewable products.

The business case for sustainability

The business case for sustainability draws on several core arguments. Pro-environmental practices create positive brand associations among consumers, especially millennials. They also anticipate regulatory trends, and position the company favourably when such policies become law and companies are forced to find innovative ways to overcome environmental challenges. This innovation and focus on sustainable practices promotes creativity among employees, and gives people a real sense of purpose as they’re able to make a difference in the world.

Sustainability also includes a new way of doing business, a consciousness so to speak. This is harder to quantify in a business case, but it involves taking responsibility for the environment, the community and staff, and sometimes doing things that don’t make business sense based on just the numbers. The ultimate driver, however, is the ability of the business to continue for years to come – in other words, sustainability.

How to invest in sustainable business

As expected, individual investors are attracted to companies that incorporate environmentally sustainable practices and social responsibility, and practise good governance. These can be grouped under the abbreviation ESG, and we’re seeing a global trend toward ESG investing. South Africa may still be in its early days but, globally, it’s estimated that ESG investing has more than $23 trillion in assets under management – around a quarter of all professionally managed assets around the world.

Looking at individual companies, it’s hard to gauge their commitment to sustainability, and to know how far down the road they are in terms of capital investments for greener production. However, there are two Responsible Investment Indexes on the Johannesburg Stock Exchange (JSE) that rank companies based on their ESG commitments. These indexes were created in 2016, and include a market-cap weighted index as well as a Top 30 equally weighted index. The ESG ranking is calculated across many factors and supplied by FTSE Russell, the global index provider.

The ESG ranking may not be a perfect indication of how sustainable or eco-friendly a business is, but it is a fair and comparable ranking that is developing over time. Investing in companies committed to ESG practices shows some specific measurable characteristics such as lower cost of capital, better resource efficiency, lower staff turnover and stronger innovation, all of which can influence competitive advantage and long-term performance.

Old Mutual is currently the only local company offering ESG-based products with an Emerging Markets ESG index tracker as well as a World ESG tracker. There aren’t any local ETFs that follow the ESG index yet, and there is debate in the industry as to whether ESG should be a stand-alone product or not. All companies should be focused on ESG practices, but we do obviously see some who put in far greater effort, focus and money.

Going forward we should see a heightened interest in ESG investing as fund managers create dynamic offerings for investors who are demanding more options for sustainable investing.

Bottom line

ESG-based investing is still very new in South Africa, and there is a perception among some investors that ESG investments offer inferior performance due to higher capital outlay and lower profits. This is not the case, though, as ESG investments have repeatedly demonstrated that capital employed sustainably can not only meet, but often outperform investors’ return expectations. We may not have much local historic data yet, but ESG index funds are designed to offer returns in line with market performance, while offering clients exposure to companies that are not only measurably better for the planet but also sustainable for the long term.

As consumers demand that businesses change their practices, we should reward those companies by investing in their cause. Applying ESG principles will become more important when considering where to invest; it’s a new way of thinking whereby you not only look at a company’s financial performance but rather take a far more holistic view of what the company is doing, and how it plans to survive the changing world.

Looking at your next investment, consider the environmental, social and governance practices of the companies in which you plan to put your money.

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