ESG investing is a form of socially responsible investing. Sustainable investing means looking beyond "just profits" and into how future-proof a company is. As in will it be around in 30 years' time? ESG investing is means of investing sustainably by considering the impact that companies have on the world around them (the environment and social impact) and how it is being managed (governance).
For example, for a South African mining company to be considered an ESG investment it should pactice good corporate governance and protect its shareholders, it must be known that it is not polluting water resources close to its operations, has a rehabilitation programme in mind for when operations reach end of life, and employs and empowers women and historically disadvantaged individuals. Will the mine make the lives of people living in surrounding communities better by bringing employment, infrastructure and sustainable growth to the area ... or will it bring migrant labour, a ruined environment, and long-term community health issues?
Am I giving up on performance?
It has been shown that companies considering the E, the S, and the G tend to do better than companies that do not. In South Africa, ESG strategies have outperformed the JSE over the past decade.
Let's look at the mine example again. If the company is focussed on ESG issues, odds are it will avoid major industry pitfalls.
The mine will also be more likely to maintain its mining licence or be granted exploration permits and new mining rights if it takes these issues into account - ensuring that it is around for many more years into the future.
At worst, taking these factors seriously may not see your investors perform better than the market but could help you avoid "bad" investments. Here, major public lapses on the ESG front could have offered some red flags to investors in the past. Take Steinhoff as an example - a very low tax rate is a major warning sign that something is a cookin', but because this meant that the company was showing higher profits, even professional investors largely glanced over it.
Where to start?
It is a difficult and onerous process to self-identify companies that have a strong ESG focus and, equally important, a track record of implementation. Investing in exchange-traded funds (ETFs) provides a simple solution.
Internationally, there are many listed ETFs and exchange-traded notes (ETNs) that focus collectively or individually on the E, S or G. On the JSE the options are still limited but thankfully growing. These ETFs and ETNs will provide exposure to companies that have been carefully selected based on how well they are executing on the E, the S and the G.
Another more direct route to incorporating the E, S and G into your portfolio is to look at companies, ETNs or ETFs that are actively investing in industries of the future. This includes companies engaging in environmentally conscious industries such as water and renewable energy, and in areas such as infrastructure, which is a social good.
