Integrating ESG principles as a core pillar of a company’s value proposition has become essential rather than a nice-to-have. However, such efforts have barely scratched the surface. The United Nations, which introduced 17 Sustainable Development Goals (SDGs) as a global call to eradicate poverty, protect the planet and safeguard our overall ecosystem, notes that advancements towards achieving these goals remain rather slow. It is high time businesses got deliberate about ESG – environmental, social and governance – while pursuing shareholder value.
Historically, there has been a global disconnect between the attention paid to environmental and governance initiatives and the work done on social initiatives. The former has always been the centre of attention. Climate and governance achievements typically are more tangible and therefore easier to quantify and track. However, more than half of the SDGs focus on social factors. These goals include No Poverty, Zero Hunger, Good Health and Well-being, Quality Education, Clean Water and Sanitation, Affordable and Clean Energy, Decent Work and Economic Growth, Reduced Inequalities, and Sustainable Cities and Communities. As South Africa is a developing nation, these social SDGs are key to remedying the historic social ills our nation has endured. Particularly, different histories translate to different priorities.
ESG investing in South Africa
Three questions emerge from this. What activities are already in place to address social issues? Which social challenges do they target for redress? And are they robust enough to achieve their goals? Looking at existing initiatives, Sureka Asbury, Head of Advanced Research & Insights Lab at Discovery Specialised Investment Services, says that private equity has probably been the most popular vehicle for channelling funds towards the advancement of environmental and social goals in South Africa, and that this has largely been driven by impact investment funds and broader development finance organisations.
Impact investing is a beacon among the existing forces for good. This is an investment philosophy with twin benefits – doing good by doing well. Such investments are channelled towards the advancement of an ESG goal, usually derived from the SDGs, while ensuring that financial returns are not compromised. Importantly, numerous institutions have already laid the foundation for such investments that offer asset owners viable investment vehicles. For instance, Innovation Edge found that these impact investments directed funds towards combating some of the most pressing social issues in the country. These include food security, housing, education, inequality, unemployment, and financial inclusion.
We are, of course, barely out of the starting blocks of a marathon that will last many decades. However, waiting decades to see real change isn’t feasible. This calls for asset owners to be more deliberate and prudent about how they allocate capital. It further places an even greater responsibility on companies and the broader business sector to create opportunities. If asset managers continue to apply pressure, companies will be forced to address these challenges.
The sceptic may ask, what’s in it for me? Fair enough. The answer lies in the interconnectedness of the economy and society as a whole. Just a few dysfunctional communities, pockets of environmental destruction, and areas where bad governance thrives are enough to cause damage to everyone. Likewise, when things improve in one area, positive externalities spread. Better educated children in rural schools means more capable employees in the skyscrapers of Sandton. Cleaner air in my town contributes to cleaner air in yours. One municipality with good governance makes prosperity in the next municipality that much easier.
This will require deliberate work by a multitude of stakeholders. These include corporates who need to find (and create) the right mix of initiatives to serve communities, while generating returns for shareholders and investors. Asset managers play a pivotal role too. The way we allocate capital generates real change. As economists remind us, people respond to incentives. If asset managers create the right incentives, businesses will respond. In short, we know the issues to target. We have important ways to do that. But we aren’t doing enough. Yet.