The asset management industry is coming under increasing scrutiny for investments made in carbon-intensive companies, a phenomenon that is driving trustees of large retirement funds to demand that the sector takes more proactive steps to promote decarbonisation and sustainability.
This is happening at a time when consumers are demanding higher returns and lower fees as more cost-effective passive investment solutions increasingly win over disgruntled clients from active asset managers.
In SA this has been further compounded by the growing interest in offshore investing as a means of hedging against SA-specific sociopolitical risks.
Ninety One portfolio manager Hannes van den Berg sat down with Business Day to discuss how the asset manager, which was spun out of Investec just as the Covid-19 pandemic hit in March 2020, is handling the rapidly evolving investment landscape.
Ninety One was the first SA signatory to the Net Zero Asset Managers Initiative, which supports investing aligned with achieving net-zero carbon emissions by 2050 or sooner. How and why is this relevant to ordinary savers?
Our motivation to join the initiative was to help effect a transition towards net zero that would work for the whole world, not just the developed nations. There are many US and European asset owners and managers, policymakers and organisations arguing right now that the path to net zero lies in a quick reduction of so-called portfolio carbon or reported carbon intensity. Before a binding consensus forms, it is important that SA realises the risks of being isolated and fights for what is fair. Most developing markets would argue for a fair transition that provides us and other carbon-intensive emerging-market economies with the time, encouragement, finance and other resources needed to transition to a lower-carbon environment.
A narrow focus on reducing portfolio carbon, or reported carbon intensity, and a rush by developed-market countries and asset allocators to make such reductions could suck capital out of SA and other emerging markets. For example, there is a growing move by some developed countries to implement carbon tariffs on imports from high carbon emission zones. This would negatively impact the cost competitiveness of SA to export goods into the relevant jurisdictions. Europe seems to be furthest advanced on this issue — and they are SA’s largest trading partner. There could be divestments from assets of every kind, including stocks and bonds. Foreign capital could become scarce and borrowing costs could increase. This would clearly have dire consequences for the savings of South Africans.
Does the average consumer really care about environmental, social and governance (ESG) and achieving net zero? Surely this is something being driven more by governments and regulators, which means the pressure is being exerted on asset managers at the institutional level rather than the retail level?
We are potentially entering a new era for investing. It is more than just performance that matters. Clients, individuals and institutions want to see a “better world” that leads to responsible and impact investing. Money managers need to represent their client as a stakeholder and clients hold them accountable for a sustainable focus and future.
To date the pressure has largely been driven by the institutional market and large asset allocators. This is evident in the number of ESG/sustainable solutions recently launched globally. ESG credentials significantly influence how pension funds select asset managers, but retail investors — particularly the younger generation — are increasingly starting to ask the questions.
Given that a decent understanding of ESG and sustainability provides insight into the risks that a company faces, it plays a key role in our investment decision-making in terms of pricing fundamentals and risk, and ultimately picking what we hope to be companies that will exceed expectations in our portfolios.
As an active asset manager, how does Ninety One make a case for itself in a world that is increasingly embracing passive investment strategies? What proposition can you offer that passive can’t?
As we have previously stated, the active versus passive debate is made too simplistic. Even in passive investing by choosing an index, there is an active decision. We believe there is a great deal of outperformance hidden in bottom-up selection.
Active investors can be patient in deploying their capital and are sensitive to the prices they pay for the fundamentals that they see. Passive funds have little discretion on whether and at what price to buy; they must buy if they have inflows. Perversely, passive funds’ demand for a stock generally grows as the price increases because the weighting of the stock in the indices they track increases. So long as such funds have inflows, they remain net buyers and do not sell.
Economies without rational capital markets and professionally managed long-term savings are much weaker than those that have active oversight. Recent concerns are that mega indexers are starting to control big shareholder votes globally, driven by market cap investing more than impact investing and ESG considerations. Better investing for a better world, with market-beating outcomes, requires rational active oversight and accountability.
A lot of SA asset managers were saying earlier in 2021 that they were repatriating their offshore investments to make greater allocations to SA equities, which were regarded as undervalued. Have the July riots upended this thesis or is there still a case for allocating greater capital to SA?
The unfortunate July riots did set SA back a little in terms of the momentum that was starting to build. However, because it was region-specific and localised, we found that the impact on the earnings of many of the companies was not that material. In addition, insurance claims for damages and sales time lost will help to cushion the blow for the corporates hit by the events. Emerging markets such as SA often have to deal with unrest, strikes and disruption — global investors see this as risks when investing in emerging economies.
As things stand, the global backdrop remains supportive with growth expected to be at or above trend over the next few months, though we can expect a bit more volatility as we transition into the mid-cycle stage. Overall, we remain constructive on the backdrop for SA risk assets.
What sectors or themes offer the best excess return opportunities in SA over the next five to 10 years in your view?
At the moment “local is lekker”. We are finding a lot of SA opportunities where fundamentals and sentiment are improving off very depressed levels. These can be seen in the returns of greater than 20% and 30% in the SA banks and retail sectors.
The SA listed equity space always gives you somewhere to go to. We remain constructive on resource companies and still believe SA Inc is a good place to allocate capital towards. As most market cycles go, there will be another growth scare and looming recession down the line. At that point, more defensive rand hedge stocks will be a good place to protect and hide, but we don’t think we are there yet.
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