As a Discretionary Fund manager (DFM), ESG investing is an important component of our research process through our in-depth manager due diligence processes, which culminate in our rating of a manager.  Once an underlying manager is appointed, our portfolio managers and manager research analysts continuously assess whether that manager’s investment decisions align with their purported policies and processes, including ESG.

In 2020, we conducted our inaugural survey, which focused on the integration of ESG factors into the investment processes of South African investment managers. This year, we again requested that managers complete the survey to assess whether the integration of ESG had evolved over time.

Methodology

The survey had 56 investment managers respond, representing a 95% response rate. Compared to the previous survey conducted in 2020, there was an increase of 17% in the number of respondents, an increase of 17% in the number of respondents, and a 63% overlap between the respondents in the two surveys.

This allows for meaningful comparisons between the surveys. Participants represented asset management firms across the size spectrum.

To better align our asset class perspective with the UN Principles for Responsible Investment (PRI) Manager Selection, Appointment, and Monitoring (SAM) reporting model, we classified the asset class coverage for equity, fixed income, and property into active and passive management capabilities.

It should be noted, however, that none of the participants are solely focused on passive investing, and, unsurprisingly, from a South African investment standpoint, active capabilities far outnumber passive counterparts.

Key finding

Integration into the investment process

73% of respondents said the responsibility for ensuring investment activities were aligned with established firm policies on ESG resided within the investment team—portfolio managers and the research team.

Surprisingly, regardless of the equity sector or asset class capability, social issues were ranked as the least important (and, in the case of the financials sector, zero) in importance. Not surprisingly, environmental issues had the highest ranking in terms of importance for the resource sector. Governance was rated highly in almost all sectors.

In contrast to the 2020 survey, we split the E, S, and G factors to see whether the decision to invest was different based on the issue considered. The difference in responses per category indicated it was not.

ESG research is viewed as part of the regular investment process by 96% of respondents and not as a separate, specialized process. This aligns with our findings from the previous survey (100% of respondents), indicating the continued importance of ESG consideration and integration within the investment process.

The primary motivation provided by managers for integrating ESG into the investment process was to use it as a risk management tool. This is consistent with the previous survey, where superior risk-adjusted returns received the most responses.

91% of respondents said it was the responsibility of all analysts. This aligns with the results of the previous survey.

Some of the reasons given for not considering ESG in the management of fixed-income investments were that they were managed passively or that ESG analysis and engagement fell under the purview of the equity team. One respondent said ESG was more applicable to equity management, and other respondents also said they did not consider ESG as the fixed interest exposure was through SA Government Bonds.

With regards to how ESG is accounted for in the valuation process, most respondents said it was incorporated into the discount rate and formed part of scenario analysis.

ESG consideration and integration are therefore key tools in mitigating investment risk. The majority of respondents (>60%) indicated that the decision to invest in a company with environmental, social, or governance risk would be influenced by the materiality of the risk’s materiality. This was aligned with the previous survey response.

The majority of respondents do not use ESG analysis as a screening tool, positive or negative, but rather incorporate it into portfolio construction and valuation processes. We think that this is a prudent approach given the size of the SA market.

All respondents who do not consider ESG in the management of their passive capabilities stated that the strategy does not require it. We think this is partly true, as the objective of passive funds is to track the reference index as closely as possible, which requires matching most of the index’s underlying holdings. However, this does not mean that passive managers cannot be active owners and exercise the rights afforded them through stock ownership. Given that the survey respondents were predominantly active asset management houses, we believe it is a fair assessment that active engagement does occur but is driven by the active investment teams.

Adoption of policies

We inquired as to whether managers had implemented ESG and sustainable investing policies.

ESG:

We are pleased that all but one said they had a policy in the process of getting it signed off.

Proxy voting:

Again, all but one said they had a policy in place, and the one respondent was in the process of getting it signed off. This was aligned with the previous survey results.

Environmental impact:

50% of respondents said they did not have an environmental impact policy in place, and 16% said they were in the process of formulating one.

Social impact:

57% of respondents said they did not have a social impact policy in place and  14%  said they were in the process of formulating one.

Separate sustainability policy:

50% of respondents said they did not have a separate sustainability policy in place, and 20% said they were in the process of formulating one. 77% of respondents said policies were subject to an annual review, which is good.

Adoption of relevant codes:

CRISA

The Code for Responsible Investing in South Africa (CRISA) is supported by 90% of South African respondents. Those respondents who indicated that they do not endorse CRISA said they were following the principles espoused by CRISA, and some were on the path to formally endorsing the code.

Unpri

68% of respondents said they were signatories to the United Nations Code for Responsible Investment (UN PRI). 24% of those who were not signatories said they were in the process of becoming signatories, and a similar percentage said the cost was the reason they were not signatories. The majority of respondents (54%) did not measure their investment activities relative to the 17 Sustainable Development Goals. Even if they did not have specific goals in mind, most managers considered the principles of the UN Sustainable Development Goals. Goal 3: Good Health and Well-Being, Goal 13: Climate Action, and Goal 7: Affordable and Clean Energy were the top three goals specifically targeted.

Examples of shareholder activism

Environmental perspective

Sasol and its plan to reduce carbon emissions and achieve net zero by 2050 was by far the most common example cited by managers of shareholder activism or engagement from an environmental perspective.

Social perspective

Board diversity was a common example cited by managers, as were the safety practices of mining companies. Santam and its payout of lock-down claims were also highlighted.

Governance perspective

Engagement issues centered on board composition and remuneration. A number of respondents also mentioned the Naspers/Prosus share exchange as well as managers’ involvement in the industry’s collaborative stakeholder approach.