Increased reporting by public companies has created the potential for more standardisation. Indexing makes markets more accessible, credible, and structured for investors. Environmental, Social and Governance (ESG) indexes are becoming essential building blocks of asset allocations for institutional, wealth management, and personal investors. As benchmarks, ESG indexes help define both the ESG and market structure around sustainable investing. But what is ‘sustainable investing’. I recently had the privilege of facilitating a webinar where the Johannesburg Stock Exchange (JSE) Chief Sustainability Officer, Shameela Soobramoney made a presentation on this topic. Shameela referred to the Principles of Responsible Investment (www.unpri.org) definition of responsible investment as the strategy and practice of incorporating ESG factors in investment decisions.
Sustainable investing falls into two broad categories: “Avoid” and “Advance”. Avoid is about eliminating exposures to companies or sectors that pose certain risks or violate the investor’s values (examples may be tobacco, firearms or fossil fuels) while advance means aligning capital with certain desired sustainable outcomes while pursuing financial returns. Advance style of sustainable investing can be in a number of ways: through ESG integration or the general use of ESG scores as an additional layer in the traditional investment process, thematic investing which focuses on capturing specific opportunities in areas such as low-carbon energy or impact investing which seeks tangible non-financial outcomes, such as promoting energy or water savings, in addition to returns.
Shameela quoted the recent “African Investment for Impact Barometer” report by Bertha Centre, which points to ESG integration as having scored around 70% weighting as a percentage of total assets in East, West and Southern Africa. This highlights the increasing importance of ESG indexing for African stock exchanges. Currently, on the continent, sustainable investing is the domain of active equity managers since there are a relatively small number of ESG indexes or index funds. This is likely to change as the momentum behind sustainable investing intersects with particular investors’ preferences for exchange-traded funds. The global trend is that ESG funds continue to outperform traditional funds particularly during the Covid-19 pandemic. Shameela cited BlackRock, one of the largest global investment corporations whose Global Head of Sustainable Investing said recently,
“Overall this period of economic uncertainty has reinforced our conviction that ESG characteristics indicate resilience during market downturns.”Brian Deese, Global Head of Sustainable Investing, BlackRock
Shameela concluded her presentation with a case study of JSE’s evolving hybrid approach to sustainability. In 2004, the JSE introduced the Sustainability Reporting (SRI) index; the first exchange-sponsored responsible investments index in the world. This was followed in 2010, by the requirement for reporting in line with King III Code of Corporate Governance and the recommendation for integrated reporting by JSE listed companies. The SRI Index was replaced with the FTSE/JSE Responsible Investment Index series in 2015. The JSE launched a green bond segment in 2017 and in July this year it expanded this segment to include social and sustainability bonds. As South Africa continues to be a pace setter in providing sustainable investment market instruments, the rest of the continent is following in this trend as companies across Africa realise the link between their performance and their ESG strategy.
