Environmental, Social and Governance (ESG) concerns are becoming increasingly important to SA investment firms with Coronation, Ninety One and Alexander Forbes all saying in recent months that they will take a stronger stance on these issues before making investments. However, much scepticism remains around ESG, with some critics saying companies are merely paying lip service to the concept for marketing purposes.
Tanya dos Santos, Investec’s global head of sustainability, chats to Business Day about why ESG should matter to all of us.
Q: Tell us a bit about your role at Investec and what it entails on a day-to-day basis. What are the rewarding parts of the job and what are the challenges?
A: I took on the responsibility for sustainability at Investec about 10 years ago. At the time there was minimal focus on integrating ESG into the organisation. It appealed to me because I could combine my passion for business strategy — which is based on long-term resilience — and my desire to have an impact far greater than just my sphere of influence. The most rewarding parts of the job come in those moments when I see a leader who has not understood or appreciated the essence of sustainability — some would say climate denialists but it’s not just about climate — and then they have their ‘aha’ moment. They become our most valuable champions. But there are still many people who struggle to link the spirit of sustainability with creating true value for society in a way that is also creating business value. That is one of our biggest challenges. The other is to simplify what sustainability is so we can equip everyone in the organisation to understand what it means and what role they play in living sustainably.
Q: How would you explain ESG to the average South African and, more importantly, why it is important?
A: ESG is fundamental to our survival as a species. Everyone wants clean air to breathe, fresh water to drink, healthy food to eat, a roof over their head, access to power to cook or keep warm, and so on In order to secure these ‘basic human rights’ on an ongoing basis, we need to ensure we are managing our natural resources appropriately, and then it’s about making good choices and balancing those choices. For example, you need energy to warm your home in winter but if the source of your electricity is coming from a fossil fuel then you are impacting your desire to have clean air. ESG is about incorporating environmental, social and governance factors into our daily lives to ensure we are making better decisions for the future. From a business perspective, it’s about incorporating these factors into investment and financing decisions to prevent short-termism and to anchor the world on a more sustainable trajectory.
Q: Ninety One, Coronation and Alexander Forbes have all come out recently to say they will use ESG metrics to screen potential investments, particularly in things such as fossil fuel projects. Do you notice a sea-change in the SA corporate landscape in terms of how serious ESG is being taken?
A: There is definitely a sea of change, one that could possibly be building to a decent-sized wave at this point. Asset managers are under pressure to show that they are integrating ESG considerations into their investment approaches. They are also under pressure from clients wanting responsible investments. The South African asset management industry is no different. I care about nature and conservation, so I want to know that my pension fund is not investing my money in activities that are destroying our local biodiversity. As individuals realise that every cent spent on their behalf involves these intricate balancing decisions, they are becoming more proactive in engaging with their fund managers to understand how they are making these decisions.
Q: How far behind is SA in terms of adopting ESG frameworks into the investment industry?
A: I’m not convinced we are that far behind in SA. The Banking Association of South Africa (Basa) introduced a policy on environmental and social risks in lending and investing activities in about 2011. At the same time, the Code for Responsible Investing in South Africa (CRISA) was launched — predominantly focusing on the ‘G’ of ESG — and has recently been revised to bring it in line with global and local developments. We have also had a strong focus on transformation in SA which is part of the ‘S’ element of ESG. So it’s mainly the environmental aspect that has picked up massive momentum in SA and around the world in the past few years as we realise the dire consequences for our future if we don’t take urgent action. The big banks and asset managers have all been focused on integrating ESG into their investing and financing processes for several years and the focus is now on reporting how effectively it is working.
Q: Ninety One’s chief commercial officer, John Green, said recently that SA runs the risk of incurring carbon taxes on its exports due to the carbon intensity of its electricity system. How much of a risk is that to the country’s exports?
A: There is certainly an element of risk to SA’s exports that needs to be considered. The European Union is introducing a new carbon tax on imports to help them meet their net-zero commitments. SA exports to the EU will need to purchase permits for the carbon emissions that are produced in the production process. That extra cost will raise the price of the product — intentionally, because they want to encourage companies to reduce their emissions — but it also makes that product less competitive and SA exports could lose out to other lower–cost jurisdictions.
Q: How do you respond to criticism that ESG is all about marketing and that companies are merely using it to make themselves look good in the public eye while behind the scenes they are far less committed than they purport to be?
A: Unfortunately, there is a lot of lip service when it comes to ESG. Personally, I find it quite disheartening because there is also an immense amount of positive, valuable ESG work being done which ends up being disregarded. Corporates are under pressure to demonstrate their ESG commitments. From my perspective, I look to see if you are putting your money where your mouth is. For example, Investec Wealth & Investment believes we have a responsibility to preserve and grow — not only wealth but also worth. Accordingly, they are launching a Global Sustainable Equity Fund which focuses on making money and doing good. I will be one of the first to invest in it! Look past the heartfelt adverts and glossy magazines and spend some time looking at the integrity of the ESG offerings and depth of reporting.
Q: Has the ‘G’ [governance] in ESG gotten lost amid all the focus on environmental and sustainability concerns?
A: The sheer number of private-sector corporate scandals over the past decade means we have lost our way in terms of ethics and governance, and this is an immense concern for overall sustainability. Governance speaks to how we behave and conduct our activities. It will impact on the environmental and social if we don’t ensure that we operate in a responsible manner. When it comes to valuations, equity analysts and ratings agencies still place the highest materiality factor on the ‘G’ elements of a financial company. That is starting to shift as they recognise that ‘E’ and ‘S’ are just as important and need to be constantly balanced. Nevertheless, we have a lot of work to do in this country to build trust and restore integrity in corporate SA.
Q: How practical is it to expect a developing country like SA, in which much of the population is far more worried about the sustainability of their employment or even securing a job at all, to be concerned about such things as climate change?
A: Unfortunately, you can’t separate them. We have to do both. But we don’t have to follow the same evolution that the developed world did in terms of greening our energy system. There is an opportunity for SA and other developing economies to ‘leapfrog’ the previous energy transition and switch faster to renewables. We have seen this in the telecommunications industry where landlines have been bypassed as consumers went straight to mobile technology. Focusing on renewables not only provides employment opportunities, but there is also a higher degree of specialist skills required, which means a greater emphasis on ‘decent’ work which is a critical element of job creation. I do, however, feel that the developed world has a tangible role to play in supporting the developing world to make this shift and realise what is called ‘the just energy transition’.
Q: How many ESG reporting standards are there and which ones are most suitable to the SA context?
Wow, too many! Various ESG reporting standards have developed over the past 20 years or more. They all focus on different aspects of ESG but there are a few that focus on all elements of sustainability. There is the Integrated Reporting Framework which focuses on the creation of value over time. Investec also reports in terms of the Global Reporting Initiative (GRI) which is a very comprehensive view of all sustainability impacts. More recently, reporting in terms of the Sustainability Accounting Standards Board (SASB) has become popular as it also incorporates the world’s impacts on the company with a broader stakeholder perspective. Then there is CDP, CDSB, TCFD, UN Global Compact, UNEP FI, UN PRB, UN PRI, UN SDGs, EP and I’m sure many more in the insurance space that I may not even know about. The key is to focus on materiality: what do your stakeholders care about and what do you want your stakeholders to know. Then choose the best standard to meet those requirements. We are fortunate in that we have been reporting on ESG for 20 years so we have evolved our reporting with the various standards. I do empathise with companies that are starting from scratch and would certainly advise keeping it simple and locally relevant to start and then building on that foundation.
Q: Magda Wierzycka, the executive chair of Sygnia, recently stated that she feels impact investing is a better way to make a difference and achieve real change as it is more than just a screening tool and actually allows investors to enact real at the board level. How do you respond to this?
A: I would absolutely agree. ESG screening is just a hygiene factor. Everyone should be doing it. But it doesn’t necessarily show how you are adding value beyond financial return. Impact investing, on the other hand, focuses on risks, returns and impacts. Financial returns are just as important as the positive social or environmental impacts. Impact investing can also be more deliberate in its outcomes. For example, building a gender-impact fund would require applying an explicit gender lens to the investment; that is, the funds are specifically supporting the empowerment of women. Or it could be a renewables fund where you know the investment will be used to generate clean and renewable energy. The financial returns are market-related and the social and environmental impacts are measurable and reported. I would just caution that you need to do both. You can’t do impact investing and not be doing ESG screening. That would be ‘greenwashing’ in my opinion. Live sustainably within your operations, policies and processes and then promote sustainability through your products and services. That is how we are going to create a more sustainable world.
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