By Kuhle Sojola, ESG Engagement specialist – Sanlam Investments
Environmental, Social and Governance (ESG) factors have evolved from being a peripheral concern to becoming central to investment strategies. This shift is not merely about compliance or ethical considerations, it reflects a fundamental change in how value is perceived and created. Stewardship is at the heart of this transformation, offering a pathway to sustainable growth that benefits investors, clients and society at large.
The Financial Imperative of ESG Stewardship in Asset Management
Asset managers are increasingly recognising that companies with strong ESG practices are better equipped to navigate risks and seize opportunities. This realisation has led to the integration of ESG factors into portfolio management, not as a box-ticking exercise but as a crucial element of financial analysis.
Stewardship – where asset managers engage with companies through participating at AGMs, meetings and correspondence, to improve their ESG performance – has proven to be a powerful tool in enhancing long-term returns for clients. By encouraging companies to adopt sustainable practices, asset managers can mitigate risks related to environmental degradation, social instability and governance failures. For instance, companies that proactively manage their carbon footprint are less likely to face regulatory penalties or reputational harm, which in turn protects the value of the assets under management.
The 2022 floods in KwaZulu-Natal (KZN) serve as a stark reminder of the financial implications of environmental risk. The devastating impact of these floods on local businesses and infrastructure highlighted the vulnerability of companies unprepared for climate-related events. Asset managers who prioritise ESG considerations are better positioned to identify such risks and engage with companies to improve their resilience against future environmental shocks.
Beyond Compliance: Strengthening Corporate Governance
Stewardship in asset management goes beyond influencing a company’s environmental and social practices. It plays a crucial role in strengthening corporate governance. Strong governance is the foundation of sustainable business practices, ensuring that companies are run transparently and with accountability to all stakeholders, not just shareholders.
Through active engagement and voting at AGMs, asset managers can drive governance reforms that lead to better decision-making and oversight. This might include advocating for greater board diversity, pushing for executive remuneration that aligns with long-term performance or demanding more rigorous disclosure of ESG risks and strategies to mitigate those risks.
In recent years, shareholder activism within the asset management industry has led to significant changes in how companies approach governance. High-profile campaigns have resulted in the restructuring of boards, the adoption of more stringent energy management initiatives, and the dismissal of underperforming executives. Asset managers are increasingly using their influence to address some of the most pressing issues of our time, from climate change to human rights abuses. These changes not only enhance corporate performance but also contribute to a more stable and equitable economy, aligning the interests of investors with broader societal goals.
The Future of ESG Stewardship in Asset Management
As ESG factors become increasingly integrated into the fabric of the asset management industry, the role of stewardship will only grow in importance.
Asset managers are no longer passive custodians of capital; they are active participants in shaping the future of the companies in which they invest.
This shift reflects a broader understanding that long-term value creation is inextricably linked to the well-being of society and the planet.
For South African asset managers, particularly those focused on development and inclusivity, stewardship offers a unique opportunity to drive positive change not only in the corporate world but also in the communities that rely on it. By championing sustainable practices and holding companies accountable, asset managers can ensure that their investments contribute to a more equitable and resilient future.
In essence, stewardship in asset management is not just about protecting investments – it’s about shaping a better country and a better world, one engagement at a time.
Disclaimer: Sanlam Investments consists of authorised financial services providers in terms of FAIS and can be viewed on www.sanlaminvestments.com”
Click here to download the 2024 Sanlam ESG Barometer Report https://sanlamesgbarometer.co.za/report-2024/
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