Invest in stocks that help the planet
ESG INVESTING: IT’S PENSION FUND LAW
A growing number of asset managers, pension funds and institutional investors are advocating responsible investing.
The real power to effect change lies with asset owners.
Responsible investing isn’t an option – it’s an obligation.
Will Day, fellow at the Cambridge Institute for Sustainability Leadership, who recently spoke at Old Mutual Investment Group’s responsible investment conference, says Earth Overshoot Day – the day we’d used up more resources than the planet could produce in a year – occurred on August 19, 2014, and will likely come earlier this year.
He also predicts most of Africa will face physical or economic water scarcity by 2025.
Fortunately, a growing number of asset managers, pension funds, life offices and institutional and retail investors advocate responsible investing.
Responsible investing as law
The Association for Savings and Investment South Africa (Asisa) defines responsible investment practices as those that build wealth sustainably to preserve long-term value, align investor objectives with broader societal needs and enhance long-term returns while reducing down-side risk.
Responsible investing takes into account environmental, social and governance (ESG) impact and is, in fact, part of pension fund law.
In the preamble to Regulation 28 of the Pension Funds Act, pension funds are said to have a fiduciary duty that adopts a prudent investment approach, which considers factors – including those of an ESG nature – that materially impact the sustainability of long-term returns on a fund’s assets.
“It’s more difficult to enforce a preamble,” says Sunette Mulder, Asisa senior policy adviser. “The new regulation is a mixture between rules and principles.”
Richard Foster, technical facilitator of the Institute of Directors in Southern Africa, says challenges include the need to balance short- and long-term investment considerations and a lack of accurate measurement of how companies are performing on sustainability metrics.
He regards positively the JSE’s partnership with FTSE Russell, which will align its ESG disclosure indicators and data collection methodology with more evolved global standards. This will replace the JSE’s Social Responsibility Index.
Asset owners hold the power
The real power to effect change lies with asset owners, says Mulder. “Asset managers don’t own assets. They only act under mandates on behalf of their clients. Insofar as trustees put in their investment mandates that ESG principles are binding, they can hold their asset managers accountable.”
Encouragingly, about 50 of South Africa’s pension funds, life insurers and asset managers are signatories of the United Nation’s Principles for Responsible Investment. Locally, Asisa and its members have endorsed the Code for Responsible Investing in South Africa (Crisa). Foster says Crisa’s most recent survey suggests the ESG investing approach is improving, but admits it’s not consistent among industry players.
Fortunately, growing research suggests ESG funds perform at least as well or better than their non-ESG peers, which will certainly help to promote the concept among the investing public.
Why not invest in stocks that are better for the planet if you’re going to get the same return?