Opportune time to explore your ESG investment options

By Chantal Marx, Head of Investment Research at FNB Wealth and Investments

The incorporation of environmental, social and governance (ESG) factors into investment decision-making has grown in importance among institutional investors over the last decade, with retail investors starting to take note. But what exactly does ESG investing involve? And where do you start?

ESG investing is a form of social and sustainable investing, means looking beyond “just profits” and “how future-proof a company is” in 30 years’ time? ESG investing is a means of investing sustainably by considering the impact that companies have on the world around them (the environment and social impact) and how they are being managed (governance) and investing in companies that take ESG factors into account. ESG investing is investing in socially responsible businesses.

Some common ESG factors to consider

For example, for a South African mining company to be considered an ESG investment it should practice good corporate governance and protect its shareholders, not pollute water resources, ensuring it is not a source of water pollution, have plans for a rehabilitation programme for when operations reach end of life, and employ and empower women and historically disadvantaged individuals. 

Will the mine make the lives of people living in surrounding communities better by bringing employment, infrastructure and sustainable growth to the area … or will it bring migrant labour, a ruined environment, and long-term community health issues? 

Am I giving up on performance with an ESG investment?

It has been shown that companies considering the E, the S, and the G tend to do better than companies that do not. In South Africa, ESG strategies have outperformed the JSE over the past decade.

MSCI South Africa ESG Leaders Index versus the JSE All Share Index (total return)

Source: Bloomberg, FNB Wealth and Investments

Let’s look at the mine example again. If the company is focused on ESG issues, odds are it will avoid major industry pitfalls. 

• E: Renewable, self-generation of electricity will result in a reduced carbon footprint, lower electricity costs in the long term, and fewer disruptions, thereby improving production, sales, and profitability. 
• S:  A good relationship with labour communities on and surrounding the mine will mean that the probability of wage strikes and communities targeting the mine during times of unrest declines. Again, resulting in fewer production delays.
• G: A well-balanced board following best governance practice will ensure proper oversight, ethical operations, and ensure shareholders are protected. This will result in strategy being well considered, which may see the mining company avoid bad investments or miss improprieties that could lead to financial loss.

The mine will also be more likely to maintain its mining licence or be granted exploration permits and new mining rights if it takes these issues into account – ensuring that it is around for many more years into the future.

At worst, taking these factors seriously may not see your investors perform better than the market but could help you avoid “bad” investments. Here, major public lapses on the ESG front could have offered some red flags to investors in the past. Take Steinhoff as an example – a very low tax rate is a major warning sign that something is cooking, but because this meant that the company was showing higher profits, even professional investors largely glanced over it.

Where to start?

It is a difficult and onerous process to self-identify companies that have a strong ESG focus and, equally important, a track record of implementation. Investing in exchange-traded funds (ETFs) provides a simple solution.

Internationally, there are many listed ETFs and exchange-traded notes (ETNs) that focus collectively or individually on the E, S and G. On the JSE the options are still limited but thankfully growing. These ETFs and ETNs will provide exposure to companies that have been carefully selected based on how well they are executing on the E, the S and the G.

• Satrix recently listed its Inclusion & Diversity ETF, which ultimately tracks JSE-listed companies that meet a specific set of ESG criteria including diversity, inclusion, people development, and news and controversies. 
• The Sygnia Itrix S&P Global 1200 ESG ETF invests in global securities meeting S&P sustainability criteria. Satrix also has ETFs listed on the JSE that track global and/or emerging market companies with good ESG scores. 
• The FNB Social Responsibility ETN provides exposure to the MSCI World SRI Low Carbon Select 5% Issuer Capped Index. The index invests in global companies that have low carbon exposure and high ESG performance.

Another more direct route to incorporating ESG into your portfolio is to look at companies, ETNs or ETFs that are actively investing in industries of the future. This includes companies engaging in environmentally conscious industries such as water and renewable energy, and in areas such as infrastructure, a social good.

• The Satrix Infrastructure ETF listed last year. It tracks the FTSE Global Core Infrastructure Index, offering investors exposure to worldwide listed companies involved in “core” infrastructure activities. 
• Sygnia’s Itrix 4th Industrial Revolution Global Equity ETF tracks the performance of companies set to become the behemoths of the future. 
• The FNB Global Water ETN (WWETNC/WWETNQ) tracks the iShares Global Water UCITS ETF. 
• The FNB Clean Energy ETN (EGETNC/EGETNQ) tracks the iShares Global Clean Energy UCITS ETF.

Chantal Marx is currently the Head of Research at FNB Wealth and Investments.  She joined FNB in August 2012 and helped launch the in-house research and insights platform at FNB Wealth and Investments. Chantal holds a Bachelor of Science Degree (Mathematics and Economics), a Bachelor of Commerce Honours Degree (Investment Management), and a master’s in finance from the University of Johannesburg (UJ). She is also a CFA Charterholder.