ESG investing: A win-win for investors and the planet

6 Dec 2018
In its recent Living Planet Report 2018, the World Wildlife Fund made it clear that unless collective action is taken today, society will not be able to halt or reverse the damage being done to the environment.

This report came out shortly before Old Mutual launched its first environmental, social and governance (ESG) unit trust – an index tracker fund that replicates the performance of top international companies who show the highest commitment to protecting people and the planet – to South African retail investors.

According to the report, green finance – investment flows that specifically target and protect environmental resources – will play an important role in the transition to a net carbon-neutral society. Elize Botha, Managing Director of Old Mutual Unit Trusts, says, “Thanks to innovation in asset management, which relies on the use of both financial and non-financial indicators such as ESG scores to inform investment decisions, it is now possible for investors to align their personal philosophy with their financial goals”.

“Responsible investing has evolved as a response to the megatrend towards sustainability. By allocating capital to companies with higher ESG scores, investors can be assured that they are not only investing in companies that have a larger positive impact on the world over the long term, but that these companies are more likely to generate superior investment performance,” says Botha.

Jon Duncan, Head of Responsible Investment at Old Mutual, says that one of the leading misconceptions held by investors in relation to responsible investment is that investing with an ESG lens comes at the cost of lower returns.

He says nothing could be further from the truth. “According to a Merrill Lynch report, the top 20% of companies rated highest on ESG ratings between 2005 and 2010 experienced the lowest volatility (32%) in earnings per share in the subsequent five-year period. By contrast, companies with lower ESG records averaged 92% volatility.

“In a separate piece of research in 2012, a review by Deutsche Bank Group found that 89% of studies on ESG show global companies with high ESG ratings show market-based outperformance, while 85% of the studies show accounting-based outperformance,” he says.

It should therefore come as no surprise that companies with high ESG scores outperform in the local landscape, says Duncan. “Businesses that respond to the ESG challenge earlier than their peers show stronger resource efficiency, lower cost of capital, better staff retention, a more robust social license to operate, and better labour relations. These factors combine to produce a stronger competitive advantage, and consequently, higher valuations in the market.”

It is for this reason that Botha believes that sustainable investment is no longer a nice-to-have, it is an essential component of every investor's portfolio. “Our world is changing every day; from environmental changes such as water and food scarcity to the rise in political and social instability. A rapidly transforming world makes responsible investment an imperative, as having a long-term investment view is an essential part of ensuring a sustainable future,” concludes Botha.