ENSURING ESG IS IMPLEMENTED ISN’T SO SIMPLE
Who’s got the power to drive sustainable principles? SA policymakers must address the economic disparities of the past while keeping an eye on the future
As a child growing up in the Eastern Cape, August became imprinted in my mind as the month of the first rains. You were guaranteed a cold, wet school uniform. Today I live and write from a rainy Joburg that is a far cry from the
Eastern Cape in many ways — except that now weather patterns throughout SA have become crazily unpredictable. God help our farmers!
Walking home decades ago, I could not have imagined that issues concerning the environment, society and governance (ESG) would be something that would consume my everyday life. Yet it affects what I pay for food and if I have electricity, transportation or any kind of government service. Gone are the days when “sustainability” and “climate change” were just buzz words from an activist fringe.
Perhaps we as trustees do not all use the lingo, but as Deloitte’s Kristen Sullivan and Veronica
Poole put it: “Increasingly empowered consumers and more activism-oriented investors are pushing organisations to address ESG issues concretely and transparently. They are looking for organisations to put purpose at the core of their operations, caring for the issues that concern their employees, communities, industries and the world at large. They are fuelled by the transparency afforded to them in the digital age and they are increasingly putting their money where their values are.”
While the term ESG was only coined in 2006 in a report by the UN Principles for Responsible Investment (UNPRI), the concept of ESG investing goes back to the 1950s, when electrical and mining industry trade unions began investing their pension contributions into affordable housing and health facilities.
Today, the UNPRI has become the voice of responsible investing, with 3,826 signatories and $121-trillion in assets under management by March 2021. At the same time, there is a growing sense of urgency around ESG principles, which has put pressure on policymakers and regulators to act.
So, who has the power to drive sustainable principles and regulations related to ESG?
Though regulation is a powerful tool, getting it right is a balancing act. Policymakers must set regulations that aren’t too prescriptive. And in doing so, they must be aware of two possible challenges: first, creating unintended consequences; and second, introducing unviable cost increases to the overall investment process. But regulators also know that if market forces aren’t enough to force adjustments, they need to have the power to do more than simply nudge.
Here in SA, policymakers have additional challenges. For a start, they must address the social and economic disparities of the past while keeping a keen eye on the future. If the loudest voices are focused on climate change but our policymakers act on this alone without considering the broader imperatives, we may simply exacerbate existing economic problems.
This is where ESG is particularly important.
The role of asset owners is essential to driving better outcomes for themselves and for creating a more sustainable economy and better life for those they represent. Asset owners can send signals to the market on what is important and what is not. For example, they can send:
Direct investment signals around the weight given to responsible investment and ESG, as well as around the appointment of investment consultants and managers, and the conditions included in mandates;
Indirect investment signals, through the adoption of investment principles, policies and statements that let the market know what really matters; and
Policy signals. Where, for example, does the market need more than a “nudge”?
So, in the final analysis, who has the power to drive sustainability principles and ESG regulation?
The short answer is those with the resources — but not in isolation. As a collective, asset owners have the power to influence change. But their impact would just be one element in a complex array of interacting agents in the financial ecosystem.
Today, in my capacity as a trustee, I have files in front of me outlining the problems facing a number of mostly emerging black farmers. These files detail how these farmers could not repay loans, as the crops that provided the loan surety had failed. If I read between the lines, it often boils down to unpredictable weather and the inability to afford crop insurance.
Most of them will have one or two shots to make this “farming thing” happen. Though this is fundamentally a commercial transaction, this does not take away from the fact that this is also partially an opportunity for social redress and securing a more food-secure and sustainable future for all of us.
Do you now see the challenge I face as a responsible investor?
Their impact would just be one element in a complex array of interacting agents in the financial ecosystem