Nedgroup Investments releases 2019 Responsible Investing Research Report

Tracey Davies, Executive Director of Just Share NPC says in the foreword to the report: "This review identifies two key gaps in the South African responsible investment landscape: Firstly, limited understanding and integration of environmental and social factors into investment decision-making (i.e. the main focus is on corporate governance, or the “G” in ESG).

This limitation is reflected in the finding that “most responsible investment policies did not acknowledge the Paris Agreement nor hint at any goal to align portfolios with future climate change scenarios”. We can extrapolate from this gap that there is also a lack of understanding of the relationship between climate change and inequality, and the extent to which the climate crisis will act as a risk multiplier, further limiting the resilience and access to opportunities of the most vulnerable members of our society.

The second gap is the absence in South Africa of strong responsible investment bodies or forums with an active public presence. South African asset managers are kept perpetually busy with corporate governance issues. But it will become increasingly inexcusable, in a world where climate change and inequality will shape everything we do, if investors do not deepen and expand their understanding of environmental and social issues, and how they will impact the sustainability of companies."

Mike Brown, Chief Executive of Nedbank Group says: " We and our stakeholders continue to operate in a world that is volatile, uncertain, complex and ambiguous. This state was deepened by the tapestry of social and environmental challenges that have intensified recently, including the unprecedented impact of Covid-19. Bold and courageous leadership that embraces new ways of thinking and doing – and unites rather than polarises – is what is needed as we enter this new decade.

Responsible Investment (RI) or the application of ESG considerations in the investment process is key to addressing some of these enormous challenges as it allows investors to use their fiscal power to hold companies accountable for both positive and negative environmental and social impacts. The mainstreaming of RI continues globally with more than 1,200 asset managers from around the world- who collectively manage about 15 percent of the world’s total capital invested - committed to applying its principles to their investment decisions."

Ten key findings of the 2019 Responsible Investment Research review

In South Africa, the main pressure point for ESG adoption is not yet coming from individual investors, but from institutional asset owners or allocators.
Foreign asset managers are more likely to be signatories to the UNPRI, it is suggested that there is a higher level of expectancy from their client bases.
Non-SA fund managers outperformed local managers when it came to the level of participation in the broader RI space. We believe this was due to the availability of institutions and forums in the UK, US and Australia - and the current lack of similar bodies or asset manager collaboration in South Africa.
Larger SA asset managers have greater capacity for ESG specialists and as a result tend to outperform across the majority of our criteria.
Corporate governance is at the forefront of investment decisions and is utilized within managers’ risk frameworks.
Despite a belief in the impact on a share price, there appears limited evidence of adoption of environmental and social factors in the investment process. This could be due in part to an existing knowledge gap, analyst capacity constraints, the qualitative nature of information, and an assumed opaque relationship between E&S and the performance of a company’s share price.
There is a respectable level of subscription to third-party ESG service providers. However, evidence suggests a low correlation among these global service providers and their ESG rating results. For this reason and others, most active fund managers prefer to place greater emphasis on their own internal ESG evaluations.
Although reporting is not often audited, standardized, nor current, ESG disclosure among South African large cap companies meets the global standard. There however exists a shortfall in the mid and small cap space.
Responsible Investment policy documents, in general, allude to the principles outlined in UNPRI and CRISA, however few make reference to the Paris Accord and aligning portfolios with its climate change roadmap.
Asset managers are open to acknowledging their shortcomings and exploring a way forward. All managers were eager to receive feedback from this review and are happy for Nedgroup Investments to begin disclosing voting records in the public space.