A STRONG CASE FOR GREEN INVESTMENT
Profitable and good for the planet – green investment is a financial commitment to a sustainable future for us all, writes
Green investment, the practice of financially supporting businesses’ practices with a positive impact on the environment, is no longer a nice-to-have. It is a “life-or-death situation”, says Misha Joshi, senior project manager of the Bertha Centre for Social Innovation and Entrepreneurship, part of the University of Cape Town’s Graduate School of Business.
“Risks to our economies and livelihoods will go unmitigated in the face of the fast-approaching climate change disaster. There is enough money to solve these environmental and social challenges; it just needs to be redirected through innovative financial solutions to businesses that are solving them.”
Although not as prolific as is seen internationally, responsible investment (RI) is a growth sector in South Africa, largely being driven by millennials intent on protecting the planet, says Giles Maynard, senior financial advisor and regional manager at Carrick Wealth. This means more capital is expected to flow towards environmental, social and governance (ESG) projects. Several of South Africa’s largest institutional investors already use ESG metrics in screening potential investments.
GREEN BONDS
According to a report by the Stockholm Sustainable Finance Centre, South Africa has the most developed financial market and green bond market in Africa. As the country also has an opportunity to be the first coal-based economy in Southern Africa to make the transition to low carbon, green bonds will be vital in creating interest in investments with green impacts, notes the Climate Bonds Initiative.
The JSE’s green bonds are appropriate for institutional, professional and individual investors alike. Momentum Investments strategist Professor Evan Gilbert says green-related dimensions are being integrated into bonds being issued by traditional borrowers.
Joshi says Nedbank has been the most frequent issuer with three bonds to date. She adds that one of the advantages of green bonds is their tight yields resulting from high demands. As of February 2022, the cities of Cape Town and Johannesburg’s bonds had coupon rates (the annual income an investor can receive) of over 10 per cent, and over 5 per cent for the majority of other green bonds on the JSE.
Aside from the financial return, green bonds also allow issuers to tap into a deeper investment pool and diversify their investor bases, explains Joshi. “This means that they are more competitive than some traditional investments during times of crisis.”
“RESPONSIBLE INVESTMENT IS A GROWTH SECTOR IN SOUTH AFRICA, LARGELY BEING DRIVEN BY MILLENNIALS INTENT ON PROTECTING THE PLANET.” – GILES MAYNARD
EXCHANGE-TRADED NOTES AND FUNDS
Joshi says FNB offers ESG-focused exchange-traded notes (commonly known as ETNs) or debt-based instruments that provide exposure for as little as R10. These are used to fund clean-energy and water-related companies, and those with low carbon emissions.
Given the concentration of South Africa’s equity market and the low number of equities listed, there is limited scope for exchange-traded funds (ETFs) to be built exclusively on green principles, says Gilbert. He notes that green index funds, another version of ETFs, follow market capitalisation-based indices.
Joshi says some ETFs have slightly higher management costs because of the due diligence required. “If the investee companies are smaller or more volatile, the fund will also need to rebalance its portfolio more frequently.”
MUTUAL FUNDS
Gilbert reiterates that in the South African equity market there is “very limited space” for a “pure” green equity unit trust. “What investment management companies have done is build ESG and RI principles into their traditional decision-making processes.” He adds that asset managers are also actively engaging with the management teams of companies on green-related issues. “The final innovation in this space is the introduction of impact funds, which are unit trusts that have a very specific mandate.” This could be to invest in renewable energy or to develop student housing. Gilbert says such funds are normally quite specialised in their focus and their ability to diversify risk, so tend to be seen as an alternative asset rather than a core investment.
RISK AND RETURN
There is a misconception that the returns on green investment will not match those of traditional investments, says Melanie Janse van Vuuren, Investec’s group lead for climate and sustainable finance. “You don’t have to take a reduction in margins or profits. The reward may either be the same or it may be better. In addition, there is a big impact – with nonfinancial type indicators – that you need to try and monetise.”
Maynard argues that statistically in the past three to five years, ESG investments have not performed nearly as well as traditional investments. “However, we are seeing that gap narrow and become almost insignificant on the back of technology and the rise of renewable energies. In many cases, these green funds are probably less risky than some other funds out there,” he adds.
Joshi adds that green investments’ financial performance should not be the only consideration when compared with traditional assets. “Do above-average financial returns matter if we cannot breathe clean air or retire in a stable society?” Also, traditional financiers evaluate green opportunities using frameworks that do not consider the environmental impact as part of their risk-reward assessment, she says. “We encourage a shift in mindset by reiterating that an impact (or green) investor sees opportunity where traditional financiers seek risk.”
CHALLENGES OF GREEN INVESTMENT
Shaw Mabuto, ESG officer and partner at Spear Capital, says there is no standardised ESG rating or assessment tool that can substantiate a company’s claim to being green, so it’s often left to companies to disclose their green outcomes, or to investors to do their own due diligence.
The Green Outcome Fund, a partnership between GreenCape, the Bertha Centre and WWF South Africa, offers financial incentives to fund managers to adapt their investment criteria and support services to enable lending and investment into green small, micro and medium enterprises.
FUTURE-FORWARD
Mabuto says that, with 40 per cent of venture capital and private equity firms working on improving ESG standards within their portfolios and more companies introducing ESG into their strategies, this sort of investment will continue to gain momentum.
Green investment is becoming increasingly relevant as investors and corporates understand the interconnectedness of their actions with people and the planet, says Joshi. “The market is in its infancy, but is growing fast in tandem with related trends such as ESG reporting and sustainability initiatives.
So it is not a question of if, but when the impact-investing train leaves the station.”