According to estimates by Bloomberg, investments managed on ESG (environment, social, governance) principles are expected to reach $53-trillion by 2025. However, there is a real risk that this money will bypass emerging markets as global investors choose to avoid these markets on criteria such as corruption perceptions, press freedom and labour standards.
In addition, emerging market companies tend to be smaller and less resourced for investor communications resulting in data gaps which can, in turn, lead to fewer inclusions of emerging markets issuers in ESG investment portfolios.
For a country such as SA, which requires considerable investment to finance the just transition of its economy from mainly fossil-based sources of energy to renewable energy, this might mean that those companies with plans to improve their ESG performance may be starved of capital precisely when they are attempting to invest in change-making initiatives.
There is a lack of understanding in SA of the investment needs of companies and people requiring ESG linked finance, says Abel Sakhau, chief sustainability officer at Sanlam.
“The ESG financial products that we have in the market are not structured to attract real impact initiatives that will significantly drive the transition to a low carbon economy,” he says.
Sakhau says climate change, for example, poses significant risks to SA’s agricultural sector and as such there should be more investment flowing to climate smart or regenerative agricultural practices, but this has not been the case.
SA companies can achieve better ESG outcomes by attracting investors who seek additionality, he says. These investors choose to allocate capital toward firms that are working to improve their ESG performance. Such capital may finance specific projects that improve environmental or social outcomes, or may be allocated to companies as a whole where it is clear that they are investing to improve their ESG performance.
While SA businesses can become more attractive for foreign investors by effectively implementing ESG in business strategy, organisations need to demonstrate to investors how their actions go beyond ESG risk management.
In a first for SA the Sanlam ESG Barometer, researched by Intellidex and published in partnership with Business Day, provides an assessment of the activities initiated by JSE-listed companies to improve environmental and social outcomes in society.
Sakhau says he hopes the research presented in the report will provide an opportunity for companies to engage in conversations about how they can create partnerships with a focus on ESG impact investment with clear, measurable outcomes.
“Ratings and rankings are important but we need to have a conversation with our peers on what really matters more – is it having the highest rating or rather being able to demonstrate sustainable impact?”
In SA this might mean that when companies support educational initiatives, they don’t just issue bursaries and learnership opportunities to the few, but also take into account that most marginalised learners who qualify for these bursaries will also need to be supported with school based nutrition, have access to adequate school digital infrastructure and access to mentorship programmes.
Effective ESG investing can make a real difference in SA, says Sakhau.
“If effort is directed towards education, supporting entrepreneurship, social infrastructure such as health and public transport, and supporting the energy transition it will kick start sustainable economic growth and give our people dignity. However, this should be done in partnership as the task is insurmountable for companies to go at it alone.”
At the inaugural launch of the Sanlam ESG Barometer experts will discuss topics such as how SA is perceived by international investors; how local companies can attract global investors on the grounds of additionality rather than status quo ESG features; and the attitude of local investors towards ESG.
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