Focusing on the ‘S’ of ESG investing in SA
Crises tend to accelerate trends and in 2020, COVID-19 and the Black Lives Matter movement have certainly propelled environmental, social, and governance (ESG) investing further into the mainstream. ESG-focused assets are growing and the connection between ESG and risk is strengthening.
There is growing consensus that integrating material ESG factors into your investment decision correlates to long-term financial returns and can help generate alpha. Data published by Morningstar has examined the long-term performance of a sample of 745 European-based sustainable funds. The results showed that most strategies have outperformed non-ESG funds over one, three, five and ten years.
ESG factors tend to differ between countries and in the context of South Africa, when it comes to ESG investing we need to hone in on the
‘S’ − focusing on job creation and transformation – key ingredients to South Africa’s future prosperity.
Unemployment has been a long-lasting problem for South Africa and COVID-19 has resulted in a further 2,2 million jobs lost. We are now at the point where the economically inactive (20,6 million) outweigh the labour force (18,4 million).
The solution sits in the small and medium-sized enterprise (SME) sector − SMEs are responsible for the majority of new job creation, accounting for more than two-thirds of all jobs worldwide. South Africa is no different − the National Development Plan projects that by 2030, no fewer than 90% of new jobs will be created in small and expanding firms.
The SMEs referred to above are predominately unlisted, therefore placing the private equity industry at the forefront to drive the agenda of job creation through SME investments. Investment managers need to not only bring ESG factors into the investment decision but also consider the job creation that the investment will yield as it rolls out its business plan. Using a more calculated approach, parameters for measuring job creation need to be set pre-investment, and benchmarked against it, in order to hold investee companies accountable.
Financial returns can no longer be the only measurement of success. It can be argued that in the long term, this approach can enhance returns. As jobs are created, discretionary income increases and in turn affects consumption. On average, private consumption in South Africa makes up approximately 60% of GDP, hence the large effect job creation has on GDP growth.
It has been 26 years of the new South Africa and although government has introduced B-BBEE initiates over this time, in reality the inequality experienced on the ground is not changing quickly enough. South Africa needs more investment managers to take an active approach and use their leverage to transform their network of companies to represent the demographics of the country. Here again, a disciplined and measurable approach is required. Well-executed transformation strategies can have a far-reaching multiplier effect throughout the country.
As ESG investing continues to gain traction throughout the world, in South Africa we need to specifically focus on job creation and transformation (JCT) − having a JCT investing approach. At ThembiSA Equity Investment (Pty) Ltd, this is our investment philosophy: incorporating JCT factors into our investment decision process with the ultimate vision of effectively contributing to a prosperous South Africa.