Sustainable Investing | i3 Summit Event 2020

As we leap into the next decade, it is important to consider which trends will transform the asset management industry. Sustainable investing is becoming a mainstream discipline and a key trend in the 20’s. Regulators across the world are setting expectations for the industry’s players with requirements of greater transparency, investment process integration and reporting. Sustainability factors have also shown evidence of enhancing performance and the ability to avoid certain risks that might not have been avoided otherwise, further benefiting investors.

There are currently several different approaches in the market

With impact investing gaining momentum, experts are attempting to reach a consensus on the overarching requirements and best approach to impact investing.

“Active ownership is key!”

As a result, several approaches for implementing a sustainable investing framework have emerged and investors can benefit from a better understanding of each of these:

Negative screening: Investors purposefully filter out the companies/entities that they deem to have a negative effect on society. This approach often excludes industries involved in tobacco, thermal coal, arms or gambling. Norms-based screening is related in approach but excludes companies that break international conventions.
ESG integration: Traditional investment analysis and decision making at an individual asset level is amplified with ESG (environmental, social and governance) performance indicators. Another related approach, the “best-in-class” ESG overlay, tilts towards specific ESG scores relative to the overall market or industry peers within a quantitative or index approach. This approach is the most commonly used.
Thematic investing: As the name suggests, a specific sustainability theme is selected, such as climate, housing or water, based on a financial/economic motive or a client’s need to align the portfolio with their specific values.
Impact investing: This approach places money with entities that intentionally target measurable social or environmental projects with direct impact.

Over the next few years leading asset managers will help develop an authentic and credible approach to impact investing which incorporates many of the above trends. Evidence-based proof of the integration into their investment philosophy will support their credibility and investors should be encouraged to ask for this. Active ownership is key – and engagement, intervention and proxy voting often act as the voice of investors. Comprehensive proxy voting guidelines and policies are the table stakes, but influence over the decision making of the company’s board in order to enhance sustainability is the ultimate desired outcome.

Sustainable investing can change the face of SA

The much-publicised failure of corporate governance in certain South African companies has led to significant and impaired losses shared by investors. The improved and focused lens of a disciplined sustainability framework can limit the likelihood of similar experiences in future. As members of the financial services industry, we should take a proactive stance in our commitment to investors and help you better achieve sustainable impact investing objectives.

Suggested reading

The rise of sustainable investing by Iman Ghosh

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