Going green is hard for SA investors

Johannesburg - Investors in the UK and US are spoilt for choice if they want to appease their environmentally friendly values because they can invest in many funds that reflect them. For instance, if they want to invest in funds that avoid backing tobacco firms, casinos or nuclear power stations, they can.

Unfortunately, in South Africa, retail investors don’t have the luxury of such choice, because we are lagging behind in this space.

Traditionally, ethical funds adopt a process called negative screening to exclude companies with questionable practices, such as the ones that manufacture weapons or promote gambling. However, there is an increase in the number of funds and indices that are investing in companies that make a positive ESG (environmental, social and governance) contribution by having good human rights, labour rights and equality records.

Encouragingly, South Africa is making some progress when it comes to supporting ESG practices. However, it is the institutional investors that have better access to funds that embrace ESG philosophies, while retail investors will struggle to find such exposure. This is mainly because some institutional investors are bound by law to consider them, while retail investors have yet to show an appetite for them.

Pension funds, for example, are obligated to embrace ESG principles, thanks to regulation 28 of the Pensions Fund Act of 2011 which says: “Prudent investing should give appropriate consideration to any factor which may materially affect the sustainable performance of a fund’s assets, including factors of an environmental, social and governance character.”

If you personally want to invest in green companies or funds that embrace positive ESG principles, it is possible, but you will have to become more proactive. Here is what you can do:

1. Grill your fund management company about their ESG credentials

“There are asset managers that have responsible investing credentials, so you could ask them ... to show you how these issues are considered in their research, evaluation and portfolio construction process. For the buyer that wants to impose some ethical constraint, you could say ‘I am looking for a fund that excludes tobacco, alcohol and gambling’,” says Jon Duncan, head of responsible investment at Old Mutual Investment Group.

2. Consider the FTSE/JSE responsible investment index series

Consider funds that track or have exposure to the FTSE/JSE Responsible Investment index series. It was launched in October 2015 by the JSE to promote its corporate sustainability practices, in partnership with FTSE Russell. The new index series replaced the JSE’s Socially Responsible Investment (SRI) Index after questions were raised about its selection criteria and performance.

3. Change your share portfolio to reflect your values

This is a good thing to do as it could reduce your risk, says Gray Maguire, an independent financial management consultant. “Companies that manage their environmental and social impacts better are less likely to have share price volatility from changes in environmental legislation, social unrest or disasters – think VW emissions scandal, BP Deepwater Horizon, Lonmin,” he says.

Simply sell your shares and invest your money elsewhere if you have exposure to a company, whose philosophy and governance practices you do not agree with.

If you find your fund manager or investment house invests in companies that have questionable practices and values, you can get advice about switching those too.

4. Invest in sharia funds

Sharia funds are investments governed by guidelines under Islamic law. According to sharia law, non-permissible investments include those made into businesses which offer interest-based money-lending transactions; conventional insurance; embryonic or stem cell research and cloning; gambling; non-halaal meat; and nightclubs.

These values may be in line with your own, and the good news is that you generally do not have to be Muslim to invest in these funds.

5. Consider alternative investments

Some renewable energy companies may not be listed on the JSE, so investing in them could prove difficult. If you have the collateral, you could consider alternative investment funds.

“Debt, through bonds or fixed-income project finance, or private equity may be the only way to gain exposure to renewable energy companies,” says Duncan.

6. Make sure your pension fund is embracing ESG principles

You do not have to sit idly by and let the trustees make all the decisions when it comes to your pension fund. Grill the trustee of your pension fund about how ESG issues are considered in their investment mandates.

Old Mutual, for example, launched the first responsible investment MSCI equity fund in South Africa, and there are bound to be more asset management houses following suit and creating similar products for pension funds to consider.

So, should you let your beliefs guide your investment decisions?

Maguire says that, besides reducing your risk, investors should look at impact investing because they can improve performance and have become more socially acceptable. “International share price experience shows us that firms that have the best social and environmental governance practices also tend to manage their businesses best, manage their workforce better and out-perform other less responsive firms,” he adds.

ESG values will be something that will need to be embraced in the future, particularly considering the fact that we live in a country where water is scarce, electricity is unreliable and climate change is real. “In an environment where the investor can get a competitive return while also doing good, the social acceptability of investing solely for returns is rapidly drying up,” says Maguire.