DISREGARDING environmental, social and governance (ESG) issues at the expense of short-term profit maximisation may impede a company’s ability to generate medium to long-term profits, according to Henry Munzara, head of research at Stanlib.
He says Stanlib tries to ensure that the companies it engages with are appropriately balancing ESG needs to ensure that their profits are sustainable over the long term.
However, Stanlib does not draw a direct or explicit link between ESG and financial market performance.
"The direct link between ESG and financial market performance is a difficult one and in our opinion the wrong one to focus on. Rather, the issue should be can companies afford to ignore ESG, and if they do what does that mean for the sustainability of profits over the medium to long term?
"We believe that ESG then becomes implicitly tied to sustainability as ignoring social or environmental issues, for example, may impede a company’s ability to generate or grow profits over the long term," says Mr Munzara.
He contends that while the amendment to Regulation 28 under the Pension Funds Act, 1956, has added to the responsible investing impetus in South Africa, this needs to be viewed in the context of other initiatives such as the United Nations-supported Principles for Responsible Investment, Code for Responsible Investing in South Africa (Crisa) and the lead taken by the Government Employees Pension Fund on this topic. Viewed collectively, the Regulation 28 amendment is part of a series of events that created the momentum.
"Stanlib is a signatory to both the Principles for Responsible Investment and the Code for Responsible Investing in South Africa and recognises that the investment industry has a crucial role to play given the influence that asset owners and managers have over the companies they are invested in.
"As the companies that the industry is invested in are usually large corporates in a given country of jurisdiction, it naturally follows that the more these large companies take heed of the principles in both codes and look to balance the sometimes competing needs between short-term profit maximisation and investment in governance, environmental and social needs, the more equitable and sustainable the financial system is likely to be," says Mr Munzara.
According to Ben Kodisang, MD Stanlib Asset Management, sustainability considerations are actively and meaningfully integrated into the Stanlib research process and methodology to keep the companies it invests in honest in relation to ESG.
"Our belief is sustainability and ESG management is the right thing to do to ensure a future for all," says Mr Kodisang.
Mr Munzara says there is a growing recognition by both asset owners and managers that ESG is an important topic for sustainable company performance. However, the interest appears to be more in understanding how asset managers incorporate ESG into investment processes and engage with companies they are invested in, rather than having niche products or vehicles that only talk to ESG.
"ESG principles are therefore becoming more mainstream than niche, which in our opinion is positive as it makes for wider investment industry participation and reach," says Mr Munzara.
"As asset owners and managers have significant influence on the companies they are invested in, the snowball effect that results is effective.
"In addition, ESG has become topical, with most large asset managers incorporating its principles into their investment process, though it’s fair to say that in most instances asset managers are largely using ESG as an engagement tool as opposed to using it to actually preclude investment."
Nevertheless, Mr Munzara believes there are an increasing number of institutional investors keen to influence the companies in which they buy shares to act responsibly when it comes to sustainability issues and particularly when it comes to ESG matters.
"Increasingly there is recognition that ignoring ESG issues impacts the ability of companies to generate and grow profits over time, which is an important consideration for investors as it impacts financial valuations.
"The listed property sector for instance has many examples of an increased number of ‘green buildings’ within their portfolios in direct response to climate change considerations and with it demand for more efficient buildings from tenants.
"The investment industry has realised the importance of ESG issues and has collectively taken steps over the past few years to ensure that it is incorporated into investment processes," says Mr Munzara.