Initially, companies and investors pursued sustainability as a moral obligation and a means of enhancing public image. Nowadays, research suggests that companies with higher environmental, social, and governance (ESG) ratings do better in the long run. But how do you measure sustainability?
Retirement funds are one of the largest contributors to the South African economy, with total assets amounting to about R4 trillion. The Financial Sector Conduct Authority and the International Finance Corporation collaborated to survey sustainable finance practices, highlighting the potential for green investments. And despite COVID-19 disruptions, over 150 retirement funds participated, reflecting a strong interest in sustainable finance. In fact, 61% of retirement funds said they would be willing to increase allocations to green and climate-focused investments and 67% were willing to increase their allocations to investments with a positive social impact.
In South Africa, the regulatory landscape has also evolved to support sustainable investment. Regulation 28 of the Pension Funds Act requires retirement funds to consider factors, such as ESG, that may affect long-term financial performance.
What are sustainable investments?
Sustainable investing is an innovative tool to deploy capital where it has an impact. There are three common approaches:
1. ESG Integration
A company’s sustainability is often measured in terms of environmental, social and corporate (ESG) factors. Before making an investment decision, an investment manager will, alongside traditional financial data research, also analyse a company’s ESG performance. This approach is based on the understanding that ESG factors impact investment performance and risk.
According to the global report Investor trust in sustainability data (March 2024) by Deloitte and Tufts University, about 8o% of surveyed investors, incorporate sustainability information into fundamental analyses. This approach is based on the understanding that ESG factors can impact investment performance and risk.
Examples of ESG Metrics
2. Socially Responsible Investing (SRI)
SRI is the type of investment that incorporates ethical values into the investment process. A key aspect of SRI (also called ethical investment) involves screening out “sin” shares – businesses that engage in activities considered harmful or detrimental to society, such as military arms, tobacco and fossil fuels. Ethical investors aim to promote positive change by excluding these industries while pursuing financial goals.
3. Impact Investing
This proactive approach seeks out investments that actively align with certain social goals. Themes such as the United Nations’ Sustainable Development Goals (SDGs) guide these investments, focusing on key social development issues like low-income housing, health, education and clean technology projects. These investments aim to generate tangible benefits for society and the environment while striving for financial returns.
Measuring meaningful investments
So, how can investors determine the impact of a company’s sustainability measures? In much the same way as anything else, namely through data and analysis. Sustainability analytics is an umbrella term for the multifaceted tool that aims to quantify sustainability.
Only a handful of financial institutions offer platforms that evaluate the ESG performance of an investor’s portfolio by analysing data and metrics related to factors such as carbon emissions, diversity and inclusion, and corporate governance. Examples of such platforms include ESGNow, ESGo!, FI ESG tool and Proof platform.
These platforms typically use an interactive ESG dashboard which allows investors to compare their portfolios against local and global peers. Additionally, they offer in-depth analysis of an investment portfolio’s current ESG rating and the underlying drivers. The platforms identify ESG laggards and leaders, assist investors to detect red flags in their portfolio, and provide monthly and quarterly reports.
This data is generally sourced from publicly available information disclosed by companies. In some instances, companies are also surveyed on their ESG practices.
Through these ESG or sustainability tools asset managers and investors have access to the latest data, enabling them to select and invest in domestic or international companies that align with their sustainable investment goals.
As sustainability gains traction, the ESG score of your investments will become crucial. Who’s helping you to future-proof your investments?
Further reading
RMB
How sustainable is your custodian bank?
Sources
Capgemini: A world in balance: heightened sustainability awareness yet lagging actions
RMB: RMB launches ESG risk-measuring platforms to support sustainable investing
South African Reserve Bank: Characteristics of the South African retirement fund industry
Summit Africa: Sustainable Investing: Not a One-Size-Fits-All Strategy
World Economic Forum: Why 2024 is the year sustainability develops a credible business case
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