Should you be concerned about the ethics of your investments?

Published on 6th April, 2021 at 04:10 pm

Many investors are no longer just looking at a company’s value and their performance on stock markets; they’re also considering the long-term impact companies have on society, the environment, and how they govern themselves. But why, and should you be doing the same?

What is an ESG fund?

Funds that cater to this trend are known as ESG funds, which stands for ‘environmental’, ‘social’ and ‘governance’. The trend is also referred to as ‘sustainable investing’. Investors are asking if companies have a record for polluting the environment, treating their staff poorly or mismanaging the way they offer services and products to people. Many are also aligning their investment philosophy with their beliefs or religion (for example, Shari’ah-compliant investments).

Francis Marais, head of research at Glacier by Sanlam, explains: “A company is not a living thing. It’s something that society gives licence to for existing and can revoke that licence. People are more cognisant of society and the environment. Environment, inequality, discrimination and corruption have come together and brought it all to the fore in investors’ minds.”

Does it help your returns to invest in ESG funds?

Not embracing ESG principles may have an impact on the bottom line (the income and profits companies make).

Companies that sell tobacco or deal in oil, for example, may have spikes of short-term success, but they could also be prone to major losses if they do wrong. Catastrophes like oil spills, major fines for non-compliance, and changes in laws can have a detrimental impact on long-term performance.

‘Doing good’, however, may prove to be beneficial over the long term for investors’ portfolios. Studies show that companies that exhibit characteristics of resilience have focused on things like job satisfaction, strength of consumer relations or effectiveness of the company’s board.

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Can you ‘measure’ good?

It’s possible to measure each ESG element. For example, environmental metrics cover themes such as climate risks, natural resources scarcity, pollution and waste, and environmental opportunities.

Social metrics include labour issues and product liability, risks such as data security, and stakeholder opposition. Governance encompasses items relating to corporate governance and behaviour such as board quality, diversity and effectiveness. Another way of assessing the behaviour of a business is to see if it aligns with the United Nations’ Sustainable Development Goals (SDGs).

The goals include aims such as poverty eradication, quality education and ensuring clean water and sanitation for all. Kingsley Williams, chief investment officer of Satrix, adds: “Funds managed according to an ethical or ESG approach would need to comply with specific investment guidelines and may even need to report to an independent board to confirm compliance with its mandate.”

Where can you start?

Sanlam has a variety of ESG funds to choose from, including these:
Glacier
Glacier offers access to the Prescient Living Planet Fund. “Ultimately we would like to see ESG as a part of all investment processes,” says Marais.
Satrix
Satrix has listed two new ESG ETFs: the Satrix MSCI World ESG ETF will track the MSCI World ESG Enhanced Focus Index, while the Satrix MSCI Emerging Markets ESG ETF will track the MSCI Emerging Markets ESG Enhanced Focus Index. Both exclude weapons and tobacco companies, and aim to invest in companies working to reduce greenhouse gas emissions.

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Pros and cons of ESG investments

Some studies show that ESG companies tend to outperform their peers in the long term, but there are some downsides to ESG investments to consider. These may include sacrificing some initial returns, and a reduction in choice. Williams explains: “Tobacco or gambling companies may deliver excellent or stable profits, which ESG investors wouldn’t benefit from if they screen them out.”

If investors are seeking ‘pure’ ESG funds they will have their choice restricted further. Williams explains: “It’s all about how you apply the ESG approach in your portfolio. You could exclude companies outright, but you could also underweight them, meaning you could still have exposure to companies that do well that don’t embrace all ESG principles.”

A qualified financial planner is best positioned to help you make investment decisions, including those related to ethical investing. Book a meeting with one today.