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ESG Investing: Wrap A Tree In Money

by James Twidale


Source: The Economic Times

The face of Greta Thunberg, a young climate activist, has become globally recognized seemingly overnight. She gave a very emotive speech at United Nations General Assembly about the dire impact on the environment caused by the perpetual pursuit of economic growth.


Climate change is a very topical discussion globally at the moment and many of the world’s economies are incentivizing more climate and environmentally friendly practices. The argument is being made that not enough is being done (not an argument many would disagree with) and that irreversible damage has already unfortunately taken place.


Greta may very well be someone you ignore because of her approach but the fact remains that many of us want to make an impact and encourage the right kind of economic activity without jeopardizing the environment and the ability for our and future generations to inhabit the earth.


The relevance of this narrative coincides very nicely with the rise in what is known as “ESG Investing” which like Greta, becoming a household name, and a cause that everyone wants to support. “ESG” stands for Environmental, Social and Governance investing (also known as sustainable investing). The idea here is that investors support businesses that are environmentally friendly, have a positive social impact and focus on governance issues.


ESG investments are scored on criteria around these three issues, but in essence, the idea is that investors are encouraging the correct behaviours from companies and therefore are happy to give them funding in order to continue their sustainable practices which have a knock-on effect on the world and its inhabitants.


Social and Governance issues are more focused around employees, hiring practices, sexual harassment prevention, ethical supply chains, executive compensation, board diversity and so on. All matters that we would probably agree are not only the “right thing” to do but also critically important to sustainable business practice which should lead to long term outperformance relative to businesses that don’t prioritize these matters (at least in theory).


It is, however, the Environmental aspect that gets the most attention from people looking into this category. We all want to enjoy the fruits of this beautiful planet and we also want many generations after us to enjoy the same benefits we enjoy today. In order to do that we all need to be conscious about the impact we have on our precious planet.


By way of example: If there are two companies that make widgets you are more likely to want to support the widget-maker that uses less electricity, emits less harmful gases like Carbon Dioxide and consumes less fresh potable water in the production process and has less harmful waste or byproducts. This, in a nutshell, is what ESG investing is all about. The theory is that in a world where money is limited, if we as an investing population provide more funding to businesses that are less harmful to the environment than the competition, then we promote the most sustainable business and the net effect is a healthier planet and better longevity and prosperity for all.


Ideally, the more sustainable business will attract more investment and with this increased investment outperform their competition, leading to outperformance in relation to the non-ESG focused alternatives.


For all the people that think it’s impossible to achieve better environmental outcomes while still achieving investment returns the evidence is starting to accumulate in favour of the “tree-huggers.” Morningstar did a study in March of 2019 which showed that 41 of the 56 available Morningstar ESG indexes outperformed their non-ESG equivalents since inception. That’s an incredible 73%! To add to this performance comparison, it also showed that companies included in ESG indexes tend to be less volatile, have better overall financial health, greater economic moats and possess stronger competitive advantages all of which are positive for investors.


In fact, a study quoted in a CFA institute Blog article shows that by going long the top 10% of companies in each factor and simultaneously shorting the bottom 10% of companies in the same sector showed outperformance between 2009-2018 across 4 major ESG subgroups, as illustrated below:


This may not yet be considered a full-blown factor in the factor pool that exists out there today and some jurisdictions do make a stronger case performance-wise for ESG than others. Yet the evidence shows that avoiding some of the “sin-tax” industries of old does, in fact, pay-off not only in terms of the immediate benefits of ESG focused entities but also in terms of investor returns.


Thematic investing is probably the camp that I would put this type of investing into at this point, but sustainable investing, environmental impacts, carbon footprints, social impacts and good corporate governance all seem to be trends/themes that will only get more attention in future. The question is, can you afford to ignore these themes not only for your children’s sake as many an environmental activist will tell you but perhaps for the sake of your portfolio as well?


MARKET UPDATE - SEPTEMBER 2019


by Oratile Tlhabane


Source: FactSet

The South African Reserve Bank (SARB) kept interest rates unchanged, despite central banks across the globe having recently reduced their interest rates. The JSE ALSI ended the month slightly higher, up 0.2%. Financials led the way in the month of September rising 3.5%.


Resources and Industrials fell 1.1% and 0.7%, respectively. Some signs of positive growth emerged with Small Caps rising 2.2%, despite business confidence dropping to levels last seen in 1999. The SA Property market reversed some of its recent decline, closing 0.3% higher.


SA bonds rose 0.5% for the month, with inflation linked bonds adding 0.4%. According to National Treasury data, foreign owners of SA government debt were net sellers at the end of August, ownership figures have dropped to 37% from 43% last year.


The Rand produced a mixed bag set of results, depreciating 1.0% against the British Pound but appreciating 1.1% against the Euro. It ended flat at 0.1% against the US Dollar. US Dollar Gold and Platinum prices declined 3.5% and 5.0%, respectively.


Emerging Markets posted a 1.9% dollar gain for the month, reversing some of the losses experienced throughout the year. Global Equities and Developed Markets both advanced 2.2% with Global Bonds down 1.0%. The US Fed dropped interest rates by 25bps, bringing the rate to its lowest level since before the Great Recession. The ECB cut its interest rate further into the negative.


The price of Brent Crude Oil rose 0.6% despite an attack by drones on an oil refinery in Saudi Arabia (a top five oil-producing nation), which made oil prices spike as much as 14.5% during the month of September.

An overarching theme for the month; of accommodative monetary policy being exercised by central banks, saw global markets rise. See below a graphical representation of market performance, showing the asset class returns for September (in ZAR):


Source: FactSet

The table below shows how the average fund in the different ASISA categories performed, indicative of the average South African investor:


Source: Morningstar. Returns longer than one year annualised

High Equity funds outperformed their lower risk asset counterparts in line with the overall positive performance of equities across jurisdictions through September. In a, short term, up-trending market and over the full investment cycle this is expected to be the case as investors are rewarded for exposure to higher risk investments, however over the past 24 months this risk and return dynamic has been inverted which has caused a large migration of investor assets from “balanced” Medium/High Equity mandates into more Income focused or Money Market alternatives.

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