Social progress scores can help local firms attract ESG investing

The flow of capital to sustainable investing is gaining pace, which could place emerging market players at a disadvantage.

SA stands out, albeit not in a good way, in some of the screening models used by fund managers to assess environmental, social and governance (ESG) scoring, and to decide whether to exclude certain companies from their funds, as outliers on carbon emissions.

“SA is an emerging market that looks very much like a developed market that is exploiting fossil fuels,” said Stuart Theobald, chair of Intellidex.

He was speaking at the recent launch of the Sanlam ESG Barometer, a report compiled in partnership with Intellidex and Business Day which assesses how SA companies are changing their businesses to deliver improved ESG outcomes.

Its overwhelming reliance on fossil fuels was one of the metrics that negatively affected SA as a country in the minds of investors, creating the risk that international capital will down weigh SA exposure in their portfolios, Theobald said.

There were also many indicators weighing negatively on SA’s broad governance environment such as its poor ranking in the Corruption Perceptions Index (in 2022 SA got a score of 43 on a scale from 0, “highly corrupt”, to 100, “very clean”) and the recent greylisting by the Financial Action Task Force — an indicator fund managers can use to show that the rule of law and governance in SA is relatively weak, Theobald said.

Even though indicators such as greylisting and SA’s continued reliance on fossil fuels could be classified as “sovereign level factors” in practice, he said, investors could argue that even if there were companies that are “doing great things” they can still be affected by operating in an environment “where corruption is rife”.

Despite high levels of unemployment and inequality, the performance of SA companies in social metrics does offer a more compelling investment case, according to David Aserkoff, JPMorgan’s equity strategist for the Central and Eastern Europe, Middle East and Africa region.

Also speaking at the launch he said investors had largely “got past the hurdle” of looking at ESG scores in isolation when judging investment opportunities in emerging markets.

“Nothing draws investors [more strongly] than good returns. If emerging markets offer good returns money will come,” he said.

In addition, according to Aserkoff, investors are realising the value not necessarily of investing in “good ESG companies”, but rather in “improving ESG companies”.

“When you invest in ESG improvement you outperform the market and ultimately that will be very favourable for emerging markets,” he said.

One of the selling points for SA, when compared with other emerging markets, was that local companies have been thinking about ESG for a long time through the implementation of employment equity policies, for example. This, said Aserkoff, was part of the progress made in the country in the 1990s when SA became a democracy. “Companies [in SA] have already gone a long way towards adopting social goals and no-one takes the social element of ESG more seriously than SA-based companies. SA should do a better job of shouting that from the rooftops.

“On the corporate side SA has done a lot of positive things in the ESG space, but there are things at government level that can change and improve to draw more money in,” he said.

One of the areas investors want to see improvement in is a faster move towards the just energy transitions. The slow progress to date has left equity investors frustrated, said Aserkoff.

In the survey of 21 of the top 40 companies on the JSE included as part of the barometer, respondents identified social aspects of ESG such as maintaining good employee relations and finding ethical suppliers to be the most relevant in their overall corporate ESG strategies. Environmental factors such as climate risk, greenhouse gas emissions and responsible water use were the next most relevant set of ESG risks for these companies.