As the private sector increasingly acknowledges that the world will not achieve the United Nations (UN) Paris Agreement of capping global warming at 1.5°C if it waits for governments to act, the urgency of adopting responsible investment strategies is mounting. The potential impact of investor action on achieving the greenhouse gas (GHG) emission reduction targets by 2050 via responsible investments will be discussed during an open online event hosted by the University of Cape Town (UCT) on Wednesday, 19 August.
Encouraging investors to drive positive change in companies and their broader investments by focusing on the long-term impact that they have on the environment and society, responsible investment is a strategy that integrates environmental, social and governance (ESG) factors into investment analysis and decisions.
The strategy, said chief executive of The Principles for Responsible Investment (PRI), Fiona Reynolds, is an opportunity to “harness the power of the finance sector to really incorporate environmental, social and government factors”. The PRI, an international investor partnership with the UN Environment Programme Finance Initiative and UN Global Compact, encourages investors to use responsible investment to enhance returns and better manage risks.
Environmental factors that have a bearing on responsible investment strategies include the impact that organisations have on climate change through GHG emissions, waste management and energy efficiency, among others.
High carbon intensity of our economies
Industrialisation has made most of the world’s economies carbon intensive, with primary energy sources being coal, crude oil and gas. South Africa is no different with most of the economy surviving off these energy sources and emitting all kinds of polluting gases into the atmosphere.
“This begs the question about how it might be possible to shift entire economies and the investments into these economies into more responsible behaviour and investments that will get us close to the ambitious Paris GHG emissions reductions targets and produce cleaner, healthier, productive environments for society,” said UCT’s director of environmental sustainability, Manfred Braune.
“Every country, including South Africa, needs a pathway towards a decarbonised economy – and investor behaviour is a key component of this pathway.”
“Every country, including South Africa, needs a pathway towards a decarbonised economy – and investor behaviour is a key component of this pathway. While governments continue to debate how developed countries must support developing countries in their fight for climate-change mitigation and who will pay for this, investors in the interim have a responsibility to allow their money to make a meaningful difference in society and have a positive impact – besides the financial returns that they expect. There are a variety of actions investors can take that will directly or indirectly impact these pathways towards decarbonised, cleaner economies.”
Divesting in fossil fuels
Divesting in fossil fuel companies is one of the options investors are taking. Fossil Free South Africa is an NGO that is pushing for change and divestment in fossil-fuel-based companies in South Africa and enjoying increasing support.
Earlier this year one of the world’s largest fund managers BlackRock joined investor initiative Climate Action 100+ and revealed new measures in its investment approach, including lowering its exposure to fossil fuel companies. In investor speak, this is a form of negative screening, where investors decide to no longer invest in certain types of companies.
BlackRock’s announcement followed the release of a report at the Financing the Future summit in Cape Town, which showed that the number of institutional investors committed to cutting fossil fuel stocks from their portfolios had risen from 180 in 2014 to more than 1 100 in 2019, with investors with US$11 trillion in assets pledging a shift from fossil fuels.
“Sadly, in many cases, other buyers are found for these shares, which means the problem is simply displaced. In some cases, however, it is becoming increasingly hard for organisations to find investors for certain fossil-fuel-based projects, such as … new coal-fired power stations. Such assets are thus becoming what’s termed ‘stranded assets’. But it remains unclear if this kind of action alone will get us to the Paris 2050 targets and how exactly economies will transition out of their dependency on these energy sources,” said Braune.
Low-carbon investment opportunities
The opposite of negative screening is positive screening, where investors actively look for low-carbon investments and channel funding into these. Unfortunately, South Africa is a high GHG emitter and, for local investors, opportunities to pursue low-carbon investments are largely limited to the unlisted market.
There are a few boutique investment products that have been developed through organisations such as the Old Mutual Alternative Investments and the Mergence ESG Equity Fund, but this market remains underdeveloped in South Africa and leaves investors with few choices.
The Just Transition project, which aims to find low-carbon and climate-resilient solutions for a just and equitable future for South Africa, supports the principles of responsible investment and indicates that low-carbon investment opportunities should increase.
Engaging as shareholders
Whereas sustainability agendas once ran counter to the wishes of shareholders, a Harvard Business Review article titled “The Investor Revolution” argues that ESG is now top of mind for investors. Shareholder activism is on the up and up in financial markets and investors are increasingly holding corporate leaders accountable for ESG performance. As such, executives are under pressure to make changes within their organisations, with investors influencing behaviour as shareholders of carbon-intensive companies through active engagement.
Braune explained: “This is done by proxy voting on proposals that support [the] decarbonising of the organisation’s operations, strategic decisions or governance issues. It can be a very effective way of bringing about radical change within organisations.”
“Executives are under pressure to make changes within their organisations, with investors influencing behaviour as shareholders of carbon-intensive companies through active engagement.”
Just Share is a South African NPO that is doing some groundbreaking work to influence shareholder behaviour and demonstrating the power of shareholder action. As a result of Just Share’s work, two conflicted Standard Bank board members (who were also directors of fossil fuel companies) recently resigned after pressure was applied by shareholders.
It is not always straightforward.
“One of the challenges is that investors are often not directly engaged with the companies they are invested in and do so via investment managers, asset managers or brokers,” explained Braune. “The role of these investment managers will thus become increasingly important in how they provide critical ESG-related information to their investor customers and how they act on behalf of their customers in responsibly directing their investments in ever more responsible ways.”
Awareness about responsible investments is growing.
Closer to home, largely through pressure from Fossil Free South Africa in 2017, UCT established the University Panel for Responsible Investment (UPRI) committee to oversee the institution’s approach to responsible investment as it relates to the university’s endowment fund. According to Braune, UPRI developed a draft policy this year for responsible investment, which will affect how UCT invests its endowment fund, and is expected to be shared shortly for comment by various stakeholders.
Another interesting development was the UCT Retirement Fund recently asking its members for their opinions on responsible investment issues and how contributors to their retirement fund felt about various issues of sustainability.
“This was the first time in my working career of about 22 years that a retirement fund manager asked me about what value the fund should place on ESG criteria – a sign that this space is changing,” said Braune.
Focusing on companies with higher sustainability performance than their peers in their sectors, the MSCI South Africa ESG Leaders Index shows that ESG leaders recorded 14.45% annualised gross returns over a 10-year period, compared with 9.75% for MSCI South Africa (which is an index tracking the performance of South African equities). This reflects the fact that investors are increasingly conscious of the social and environmental consequences of the decisions that organisations make and that there is a shift towards responsible investments.
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