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ESG looms large for SA investment advisors and asset managers

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ESG looms large for SA investment advisors and asset managers

By Hortense Bioy, Director, Passive Strategies and Sustainability Research, EMEA, Morningstar

How do publicly-listed companies deal with environmental issues and climate change? How do they manage carbon risk? How do they treat their workers, and do they have effective health and safety policies? Do they manage their supply chains in a sustainable way? Do they have a corporate culture that builds trust and fosters innovation?

These are the types of questions increasingly being asked by South African investors as part of a growing trend towards sustainable investing, where investors and institutions look for strong ESG (environmental, social and governance) credentials as a key part of their decision-making.

In South Africa, ESG investing is still in its early days. But there’s no doubt that it’s here to stay and is only going to grow in importance. Globally, it’s estimated that ESG investing has more than $23 trillion in assets under management (AUM) – or around a quarter of all professionally managed assets around the world.

This is being driven by several factors. In many important markets, including the U.S. and the EU, ESG integration is increasingly seen as part of fiduciary duty. There’s also a growing body of research which suggests that good environmental, social and governance practices translate into good business results, and lead to more sustainable markets and better outcomes for societies. A company with good ESG credentials is a company that’s well-positioned to deal with the challenges of the future.

Climate change is real, and it’s a serious challenge for investors who want to balance their desire for high returns with a commitment to a positive environmental impact. This means investors will need to be more precise than ever in analysing their portfolio exposures to ensure they meet the realities of a carbon-constrained future.

To help them gear up for this new reality, South African investment advisors and asset managers are going to have to raise their ESG capabilities. This is getting easier all the time, with several resources available to help investors determine ESG factors, like the potential carbon exposure in markets.

One example is the Dutch company Sustainalytics’ Carbon Risk Ratings, which take a holistic view of a company’s exposure and how it manages material carbon vulnerability. These ratings offer potential investors deeper insights that go beyond carbon footprinting and reflect a focus on risk and financial materiality.

Also available to advisors is Morningstar’s own Portfolio Carbon Risk Score, which helps investors identify portfolios that support sustainable goals, such as the environmental benchmarks supported by the Paris agreement. We base our scores on Sustainalytics’ ratings, which are evaluated on a quarterly basis for any fund that has 67 percent or greater of its portfolio assets covered by Sustainalytics company-wide carbon-risk assessments.

Ultimately, though, it doesn’t matter which tool you use. The bottom line is that ESG is coming, and local investment advisors and asset managers should make sure they’re up to speed. We’re already seeing instances in Europe and the US where institutions give their business exclusively to asset managers with ESG credentials and capabilities. This is not a boat we want to miss.

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