EXPLAINER | Can I use my investments to make the world a better place?

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  • Sustainable businesses produce goods and services to meet our current needs without compromising future generations. They do not harm the environment or society.
  • You can choose to invest only in businesses involved in sustainable practices.
  • Investing with an environmental, social and governance (ESG) focus makes money available for businesses to transition away from environmentally and socially harmful practices to more sustainable ones and to improve their corporate governance. 
  • This article was first published on SmartAboutMoney.co.za, an initiative by the Association for Savings and Investment South Africa (ASISA).

As an individual investor it may seem that you have little influence over the way money is allocated and used.

Although you can choose where to invest, the amount you have to invest is a drop in the ocean in comparison to all the money invested in a country or around the world.

But with increasing awareness of problems facing the world – climate and other environmental challenges as well as social problems such as poverty and inequality – there is a move to more sustainable business and investment practices.

As an individual investor in shares, you can choose to invest in companies engaged in sustainable practices. And you are entitled to go to the annual general meeting and vote on company resolutions.

You can channel your own funds and make your voice heard, but it may still be a small influence and you will need to do a lot of research to determine what is and isn’t sustainable.

Larger groups of investors have more influence

If you are investing in a unit trust fund or retirement fund, your funds are pooled with those of other investors and managed by a fund manager.

You can be one of a growing number of investors demanding your investments be used for sustainable investing.

Sustainable investing spans a spectrum of investment decisions aimed at not only earning returns but also making a difference to the environment and society and the way that companies and other entities are governed.

Selecting and measuring the impact of these investments is known as responsible investing and factors used to select and measure are environmental, social and governance (ESG) ones.

READ | What is ESG?

Increasing consumer demand for sustainable investing translates into growing demand from financial advisers, large institutional investors and pension funds.

This in turn focusses investment managers on these investments and is fuelling a major investment trend.

More money being used for good

The Covid pandemic has accelerated the trend to sustainable investing with record amounts being invested around the world into funds on the basis of an ESG framework.

Although currently the amount of investor funds allocated to ESG is small, it is expected that within a few years one third of money managed by asset managers around the world will have an ESG focus.

GROWTH IN THE ESG FOCUS

$53 trillion: How much money managed with an ESG focus will grow by 2025

One-third: The value of the projected $140 trillion of assets under management that will have an ESG focus by 2025

Source: Bloomberg

There has also been an increase in the number of asset managers that have incorporated ESG monitoring into their investment practices.

Some investment industry experts are predicting that ESG considerations will in future become the norm for managing money.  

Is this really a new trend?

Ethical and socially responsible investing have been around for many years, so this is not a new trend.

In the past, however, there has been a focus on excluding the shares or bonds of companies involved in harmful goods or practices – such as those involved in tobacco or gambling. This is known as screening out investments involved in harmful practices.

But the sustainable investment thinking has moved on to acknowledge that:

  • Many businesses, government and state owned enterprises are involved in practices that are harmful to the environment and society and need to transition to more sustainable practices.
  • Business, government and state-owned enterprises need capital to change their harmful practices into more environmentally and socially friendly practices.
  • Refusing to invest in businesses that are currently involved in, but willing to minimise harmful practices, may have negative consequences. For example, not investing in a coal mine could increase unemployment and energy problems for countries that cannot immediately transition to cleaner energy.  
  • Investing in the shares of businesses willing to transition from harmful practices to more sustainable ones, provides cheaper capital for them to do so and allows shareholders to engage with these businesses.
  • Long-term investors, such as pension funds, can make capital available for unlisted projects that have a positive impact on the environment or sector of society but may take time to show a financial return.In South Africa, these projects are often focussed on infrastructure. A new hospital in an underserved community can have a social impact, while a clean energy project can help solve power shortages and environmental issues.

How to make a difference

  • Invest with, or ask your financial adviser or discretionary investment manager, to select asset managers who are committed to investing with an ESG focus and which have hired experts to focus on this complex topic.
  • Check your manager has signed the UN Principles of Responsible Investment (UNPRI), which commit them to including ESG considerations in their investment decision making.
  • Managers who sign the UN principles also commit to exercising their rights as shareholders on ESG issues – ask them to disclose how they vote at company meetings and on which issues they have engaged company management.If your manager has signed the UN Global Compact & Climate Disclosure Project this may also be an indication of its commitment to ESG.
  • Check your South African manager follows the Code for Responsible Investing South Africa (CRISA) and discloses how it is achieving this.
  • Ask for proof of how your manager has engaged with companies to bring about positive changes and the timelines for that change.
  • Ask your retirement fund trustees how they have considered ESG factors when investing your retirement savings. Retirement funds are obliged in terms of regulation 28 of the Pension Funds Act to consider ESG factors before investing members’ money. The Financial Sector Conduct Authority has issued a guidance note on how retirement funds should comply with this requirement, although funds are not obliged to report on their ESG decisions. Retirement funds should also follow the CRISA code and you can ask your trustees about this.
  • If your retirement fund offers you a choice of underlying investments, check if there are any options with an ESG focus or options managed by investment managers that follow the UNPRI or CRISA. If there aren’t any or if you think the managers are not doing enough, address this with the trustees of your fund.
  • If you are invested through an investment platform look which funds the platform has selected to include in its buy list as its ESG choices or funds managed by investment managers that follow the UNPRI or CRISA.

If your platform uses ratings that include an ESG score, read up about how that score is determined and consider the score before you invest.


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