Sustainability is becoming an increasingly important issue for asset managers, but there has been a clear evolution in how we think about non-financial or environmental, social and governance (ESG) factors when analysing company performance.

Taking these factors into account was previously done to mitigate risk and avoid business disruption. These days, however, ESG is integral to the way in which companies make decisions, which helps to increase the stability and resilience not only of businesses but the broader market as a whole.

It’s fair to say that ESG is now an integral part of prudent investing, rather than a niche, impact-focused activity undertaken grudgingly.

This may be because the investment climate is vastly different from how it was a couple of decades ago. One only has to look at the number of signatories to the United Nations’ Principles for Responsible Investment (PRI), and the fact that ESG is now a standard agenda item in investment committee meetings and not a sidenote. The way we think about the issue, as investors, has been completely transformed over the past few years.

More than half of global institutional investments are overseen by asset managers committed to integrating ESG into their decision-making. This is particularly notable when it comes to climate-related investment or the transition to more sustainable, inclusive economies.

Why asset managers can help to solve social and environmental problems

Asset managers can play a major role in solving some of our most pressing issues, particularly through stewardship.

As powerful as ESG is when it comes to helping asset managers and big investors to decide where to invest, it is even more so when it comes to stewarding assets. Asset managers are increasingly working with the companies in which they invest to improve their practices, to be more inclusive and to think more intently about their sustainability.

The PRI definition of stewardship is: ‘the use of influence by institutional investors to maximise overall long-term value including the value of common economic, social and environmental assets, on which returns and clients’ and beneficiaries’ interests depend’.

As asset managers, we can make a significant impact by seeking out ESG-related opportunities. Apart from the fact that we can mitigate portfolio risk, we can also capitalise on a new venture or strategy we may not have considered if we weren’t thinking about ESG holistically.

At Old Mutual Investment Group, our most significant opportunity is in the stewardship space. Not only are we stewarding our own managed assets, but we also have a standalone listed equity stewardship service for other asset owners. By guiding companies towards outcomes that are more ‘net positive’, we can be catalysts for change at a systemic level and make a meaningful economic impact.

In this way, we can solve some societal problems directly, even if we are not impact investors.

Investors should be shareholder activists

Shareholder activism has played a significant role in the South African market, raising awareness about the most material ESG risks we face, as well as advocating for the disclosure of important data used in decision-making.

Sasol’s shareholder resolution is a good example, which proposes that Sasol improve and expand on its disclosures relating to its strategy, specifically its transition to low-carbon, climate-resilient operations. The resolution was proposed by shareholder activist group JustShare and peers in the asset management industry, including Old Mutual Investment Group.

I would argue that to be a responsible investor is to be a shareholder activist. If you own part of a company, you need to draw attention to what is material to not only the financial viability of a business but the stability of the market as a whole. Companies should take a position on this and address the issue appropriately.

Read ‘The Imperfect Science of Corporate Stakeholder Inclusion’ in MiNDSPACE magazine on employees’ place as stakeholders.

There have been calls for an end to shareholder capitalism and prioritising stakeholder capitalism. However, I think there is a place for shareholder capitalism if we consider that what is best for us, as shareholders, is about so much more than just a financial return on investment.

As institutional investors, we have to invest in the best interests of our clients, and this should include the longevity and sustainability of financial returns. If we’re investing in a way that destroys long-term value, we’re destroying the potential for achieving any value at all.

This is why I believe shareholder and stakeholder value should not be seen as mutually exclusive. Our approach is to maximise a risk-adjusted return, and to do that, we need to think beyond financial metrics.

It is our responsibility to understand the interconnectedness of everything, including complex systems, so that we can make informed decisions that ultimately benefit society as a whole. If you’re focusing on shareholder return at the expense of everything else, that’s simply bad investing. To be a responsible investor, and live up to your fiduciary duty, you have to be able to think beyond one metric.

Addressing the backlash against ESG investing

In some quarters, there has been a backlash against ESG, largely by companies that are not willing to evolve, or are self-interested, or who think in the short term only. This is understandable if your idea of long-term investment is your three-year-bonus cycle.

However, it’s short-sighted to try to find loopholes and resist integrating ESG into your business operations. You may benefit in the short term, but investing unabated in destructive activities will cost you in terms of potential future returns, not to mention the well-being or sustainability of your company.

Thinking 20, 30 or 40 years ahead is very different to considering what returns you can generate now, and what is often missing is the reconciliation of these two perspectives. If you’re myopically focusing on the short term, you will understandably fight against an ESG approach – but you’ll be doing your company a disservice.

What does the future of sustainable investing look like?

I would like to see asset managers thinking more holistically with solutions and real-world impact in mind. We need to make sound investments, not view them as trades.

A core component of sustainable investing I’d like to see is a market full of active owners, not absentee landlords that set up automatic voting or appear at an AGM and never engage with a company again. This type of behaviour should be strongly discouraged. Companies that are not being stewarded are unlikely to make a smooth transition to our ‘new normal’ and returns will be sacrificed.

As asset managers, we have a crucial role to play in integrating ESG into the way we allocate and steward capital. In terms of sustainability and stewardship it would be helpful for asset managers to start thinking of themselves as providers of transition finance. That would mean not looking at companies for what they are today, but for what they could become by 2030 or beyond – and to provide guidance in that regard.

Read the investment policy statement for Old Mutual SuperFund, the leading group umbrella fund in South Africa.