Companies developing new technologies that will enable the world to reduce its reliance on fossil fuels will emerge as the main drivers of investment returns over the next 15 years as environmental, social and governance (ESG) concerns become a key determinant of where institutional capital is deployed.
That is the view of John Green, chief commercial officer of Ninety One, SA’s biggest listed asset manager, who says ESG should be viewed as an investible idea and not just a marketing exercise. In fact, Green says ESG-focused equities could provide the same opportunity as Facebook, Amazon, Netflix and Alphabet (formerly Google) — the so-called FAANGs — which have rewarded investors with stellar returns in the past two decades.
“Fifteen years ago if you said the theme for the next decade or so is going to be digitisation, you would’ve backed those companies that became the FAANGS,” Green said in an interview. “Decarbonisation is going to be one of the most meaningful drivers of returns for the next 15 years.”
SA fund managers including Coronation, Alexander Forbes and Ninety One have all come out strongly in favour of ESG investing this year, saying they will screen future investments according to their commitment to achieving more sustainable business models.
Ninety One’s global environment fund already has about $835m (R11.8bn) invested in companies such as Waste Management, Nextera Energy, Voltronic Power Technology and Infineon Technologies. While the Luxembourg-based fund has returned more than 31% since its launch in February 2019, it is heavily focused on developed markets such as the US, Europe and the UK. That is because SA’s resource-dependent economy simply does not have the same number of ESG-orientated stocks of sufficient scale.
Even so, that has not stopped Old Mutual from launching SA’s first actively managed ESG equity fund in June last year. The Old Mutual ESG equity fund is still in its infancy with about R165m in assets roughly one year after its launch.
Still small, it is very much aimed at retail investors, though returns since inception are a respectable 33%. By contrast, the Allan Gray balanced fund’s latest one-year return is 22.4%.
Portfolio manager Fawaz Fakier says ESG principles will become critical to companies’ long-term sustainability as investors favour companies with stronger sustainability commitments, resulting in cheaper debt and equity funding. Companies that do not embrace ESG are also likely to come under greater regulatory and societal scrutiny.
“If you don’t take into account ESG factors, the threat of companies as a going concern is a very real one,” Fakier said in an interview. “Companies that don’t transition are going to get left behind. We see it as an only option.”
Old Mutual’s ESG equity fund places a premium on companies with better ESG scores, which the firm assesses using third-party data coupled with its own in-house screening and scoring methodology. The fund aims for its underlying investments to have a combined carbon footprint that is at a minimum 40% smaller than its benchmark, the Capped Swix All-Share Index.
Among the fund’s biggest holdings are Naspers, Prosus, MTN, Standard Bank and Mondi. Interestingly, it also has sizeable allocations towards Impala Platinum and Anglo American Platinum, which Fakier says is motivated by the precious metal’s use in emission-reducing catalytic converters and hydrogen fuel cell technology.
“We’re not a Denmark or a Norway. We can’t just cut out our entire resources sector as it would completely change the risk dynamic for investors,” says Fakier. “We’ll hold mining companies but we’ll try to balance that by allocating more money to more companies with better ESG profiles within each sector.”
Fakier says running an ESG fund in a smaller market such as SA means one has to necessarily focus on companies’ transition plans towards a more sustainable future as well as their social and governance efforts. So while the fund does hold at least one obvious ESG counter in the form of Montauk Energy, it also has exposure to shares such as Spar, Clicks, Motus and Textainer.
“There’s a compelling investment case for companies with positive ESG attributes,” says Fakier. “Business models have clearly shifted towards pleasing all stakeholders rather than just maximising shareholder wealth.”
theunisseng@businesslive.co.za
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