Despite its challenges, ESG investing is here to stay
By Teboho Makhabane, Head of ESG and Impact at Sanlam Investments
An article in the Financial Times in June 2022 suggested that ESG investing is at a reckoning. Some even claim that the term environmental, social and governance (ESG) investing is misleading and, at times, even contradictory. The war in Ukraine is a case in point. It has forced some European governments to follow ethical rather than environmental values by reverting to fossil fuels to avoid buying gas from Russia.
Although not a new concept within global investment circles, ESG investing has grown considerably in popularity over the past three years. According to US financial-services firm Morningstar, ESG assets under management surged by 53% year-on-year to US$2.7 trillion in 2021 as funds scrambled to take advantage of the sustainable investing trend. This can be attributed to the increasing awareness of environmental issues and the need for industries to decarbonise as well as the societal inequality highlighted by COVID-19.
Given the European energy crisis, rising inflation and the turbulent geopolitical climate, some critics believe that there is now a need to step back and once again focus more on profit and returns and less on the ‘doing good’ side of investing. This is especially true if one considers how well defence, oil and gas stocks are doing on international markets, making them hard to ignore.
Actively driving the change we want to see
In South Africa, transitioning towards renewable energy has been impeded by our electricity supply problems and subsequent heavy reliance on diesel and coal. Five of the biggest economies in Africa, including Nigeria, Algeria, Morocco, South Africa and Egypt, are still highly dependent on fossil fuels. Given our existing challenges of poverty, lack of adequate infrastructure, unemployment and lack of economic growth, South Africa cannot transition too rapidly without the adequate reskilling and retention of the fossil fuel workforce.
The consideration of ESG factors, along with financial concerns, will continue to play an essential role in ensuring that investment does more good than harm and that the transition is truly just. Asset managers need to continue supporting companies that have already embraced sustainability and those that still need to transform in the future. As such, we will continue integrating ESG factors into our investment decisions and play an active role in driving the change we want to see in our investee companies.
Our sustainable investment policy is constantly evolving and covers different asset classes. These include sustainable investments related to public equity, fixed income, private equity and indexation. Our efforts are focused on four key areas:
- Board quality and strength - part of the UN’s Sustainable Development Goals (SDG 16 and SDG 5)
- Diversity, equity and inclusion (SDG 5)
- Climate action – a just transition (SDG 13)
- Shareholder alignment through remuneration (SDG 16)
Sanlam Investments remains committed to ensuring long-term sustainability for local and international investors and current and future generations through responsible investment practices, as is evidenced in our Sustainable Investments and Impact Report 2022.