High-profile cases of corporate sin have boosted ESG awareness

Globally, investing that takes into account environmental, social and governance (ESG) factors has increased exponentially over the past decade, and although Africa is lagging behind the curve, it is catching up quickly. This is the view of Martina Macpherson, the head of sustainability indices at S&P Dow Jones Indices, who gave presentations to the investment industry in Johannesburg and Cape Town this week.

Macpherson says the concept of ethical investing goes back many years, but ESG investing in its more clearly defined sense has come into its own only since the early 2000s.

And whereas the ideas driving ESG thinking were originally theoretical, there is now enough accumulated evidence to show that, in practice, ESG issues can no longer be ignored by businesses and investors alike.

This comes against the background of global threats, such as climate change, land degradation, extreme weather events, large-scale migrations, water scarcity, and increasing wealth disparity among the world’s peoples.

One indicator of the growing commitment to ESG issues globally is the number of signatories to the United Nations’s Principles for Responsible Investment, which have grown from about 100 institutional investors in 2006 to about 1 500 in April 2016, with corresponding assets under management rising from about US$6 trillion to about $60 trillion.

In Africa, awareness of ESG investing is growing, as can be seen from the accompanying graph, which shows the results of a survey conducted in 2012 among African institutional investors.

Macpherson drew her audience’s attention to three high-profile cases in which large companies have been found wanting, with huge impacts to their bottom lines, and which perhaps have boosted global (and local) awareness of ESG issues:

1. Environment. The Volkswagen emissions scandal of 2015, in which governance failure led to reputational risk, business risk and cost to capital. After the emission-cheating devices were discovered in VW cars, investors raised serious concerns about governance and VW’s share price dropped 40 percent. The company had to spent 6.5 billion euros to correct the issue.

2. Social. The Lonmin labour unrest and resulting Marikana massacre, in which poor labour practices led to tragic human loss, output losses, business risk and cost to capital. In August 2012, 3 000 miners went on a wage-related strike that turned deadly: 34 miners were killed. After the enquiry results were published, 70 000 miners at Lonmin, Anglo American Platinum and Impala Platinum went on strike for a 50-percent pay increase. In the end, 20 percent was granted, but the companies reported a US$2-billion loss in annual output.

3. Governance: The MTN Group has been involved in multiple ESG controversies, Macpherson says. Poor governance and a poor human rights record, as well as numerous bribery, money-laundering and tax-evasion scandals, have led to operational failures, business risk and cost to capital. Ventures in Syria and Iran resulted in human rights violations, and in 2016 MTN was fined US$5.2 billion (reduced to $1.7 billion) by the Nigerian government for issuing unregistered SIM cards. – Martin Hesse