South Africans who want superior and sustainable long-term investment returns should consider the environmental, social and governance (ESG) performance of the companies in their investment portfolios, says Jon Duncan, head of responsible investment at Old Mutual Investment Group.
"How we invest today determines the quality of the retirement we all get. There is no point in saving now only to find that the cost of water is prohibitive when you retire and there is such social instability in the economy that you need to live behind three electric fences," Duncan said.
"Are you comfortable that the way your funds are being invested for your long-term future is not putting someone else’s or your own future at risk?"
The preamble to Regulation 28 of the Pension Funds Act, which regulates the way that retirement funds are to be invested, states that these funds have a fiduciary duty to invest responsibly. It says: "Prudent investing should give appropriate consideration to any factor which may materially affect
the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character."
Duncan said: "It is possible to get the same or better returns by applying an ESG lens to your investments."
On an annualised return basis, the MSCI World ESG index — which provides exposure to companies with high ESG performance relative to their sector peers — outperformed its parent, the MSCI World index (consisting of large and mid-cap companies in 23 developed markets) between September 2007 and September 2016.
From an asset manager’s perspective, the sustainability lens provided insight into companies’ long-term risks and valuations, said Duncan. This was particularly true today, where company value was derived largely from intangible rather than tangible assets, he said. The former included brand value, reputation, research and development pipeline, governance, environmental performance and customer satisfaction.
Old Mutual Multi Managers CEO Trevor Pascoe said the business would use an in-house tool to test the ESG performance of the stocks its clients were invested in and would use this data to engage with asset managers on their stock selections.
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