Numerous debates about the value of ESG to investors and in marketing, abound. Do we currently get a true picture of a particular company’s ESG strengths and failings? Are we measuring the right things? Environmental, social, and governance (ESG) investing is used to screen investments based on corporate policies and to encourage companies to act responsibly.
According to Investopedia, adopting ESG principles means that corporate strategy focuses on the three pillars of the environment, social, and governance: “This means taking measures to lower pollution, CO2 output, and reduce waste. It also means having a diverse and inclusive workforce, at the entry-level and all the way up to the board of directors. ESG may be costly and time-consuming to undertake but can also be rewarding into the future for those that carry it through.” The majority of people – in particular those not tasked with making the decision about where to invest funds – see ESG as a guide to doing the right thing with their money. We asked Brondwyn Douglas, ESG officer, Spear Capital, about how ESG can have a significant positive impact for brands and organisations; while also meeting necessary ESG targets and objectives; and what the difference is in the current debate around ESG investing as regards emerging markets vs developed economies.
Why are fund managers and investors sceptical about how ESG is being applied when making investment decisions?
In May this year, Stuart Kirk, the then head of responsible investment at HSBC Bank, set the cat among the pigeons, when he stated in public that policymakers and fund managers had overstated the risks of climate change when making investment decisions. He went on to criticise policymakers for “using scare tactics in relation to finances and climate”. Beyond the controversy caused by the speech, it is clear that there is uncertainty regarding how investors are approaching target companies in an era when they are expected to use an ESG lens. As a result, there is ongoing debate about whether the goals of ESG investing are in fact being met.
Do ESG arguments in the developed world really matter in emerging markets?
In emerging markets, for instance, the sort of tools that are used to assess a business for its ESG credentials – whether accurately or not – are mostly just not available, and so these firms have been left out of the picture. However, there are other ways of using ESG for investment guidance in emerging markets, in particular in Africa. Investments made using these tools can generate profits for investors, while also having a significant positive impact – in other words, meeting ESG objectives in the truest sense. In Africa, for instance, there is so much need for a positive impact on society and on the reduction of poverty, that the current debate matters little.
How do we develop other ways to encourage ESG investors in Africa?
Those in the industry looking for investment opportunities in developed markets, such as in Europe, the UK and the USA, make extensive use of ratings agencies to get a picture of the opportunity, especially in terms of judgement relating to elements of ESG. This is not the same for investment professionals working in the emerging market space, however, since the reliance on ratings agencies is far more limited and since the business world in these regions is less advanced in its knowledge of ESG. This all means that in Southern Africa, companies such as ours have developed other ways of making decisions about investing the funds we look after for investors from Europe. Most significant in this regard is that we apply a ‘boots on the ground’ approach – we have a physical presence in the countries where prospective investee businesses are located. In practical terms, this means that we employ staff from the country, who are based in the country – as is the case in particular with our investments in Zimbabwe and South Africa.
What is the most significant difference for investment companies operating in emerging markets?
These are people who wear two hats: they have local knowledge of the country and of the environment; they also have professional financial knowledge and experience akin to their counterparts working in the developed world. As such, their assessment of a company’s actual performance and potential ESG performance is solid – in fact, possibly more solid than the data any ratings agency could supply. Using their knowledge of the environment and of the company that we are looking to invest in – which involves them visiting the company regularly and getting to know its management team – we are able to make a far more informed assessment of a business as regards to how ethically it operates and what the business is like in terms of its ‘green’ focus or the sustainable assets it uses. Another feature is that we believe in fully integrating ESG into the investment lifecycle. This means that it’s not enough to look at the ESG credentials of prospective investee companies at the time of making the decision whether or not to invest; rather, we should constantly be looking at ways to improve the business from an environmental, social and governance perspective throughout the period of our investment. We walk the journey with the company to deliver a positive impact.
Main image credit: Pixabay.com.
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