Socially responsible investing (SRI) is a growing international trend, though many private individuals are still under the illusion that SRI constitutes a cost. In fact, research abounds to prove that it substantially enhances investment returns. Therefore it is both possible and logical that investors satisfy their personal social ideals without compromising returns by investing in those companies that share their values. For this reason SRI has become big business. Research estimates that globally SRI assets amount to US$4 trillion, for instance accounting in the US for nearly one out of every eight dollars under professional management.
Sustainability SA defines SRI as an investment strategy combining financial return and social good. Typically, investors would favour corporate practices that are environmentally responsible, support workplace diversity and health, and increase product safety and quality. Some also avoid businesses involved in alcohol, tobacco, gambling and weapons.
Currently there are over 20 South African signatories to the United Nations Principles for Responsible Investment. These include Investec, Investment Solutions, Cadiz, Stanlib, Prudential Portfolio Managers, Public Investment Corporation, Sanlam Investment and Coronation.
The JSE launched its SRI Index in 2004 – the first in any emerging market to do so. Companies are assessed against certain base requirements, and in 2004 51 listed companies met the stated criteria out of 74 entrants, growing to 109 companies by 2011. According to the JSE by 2012 over 70% of listed companies assessed met the criteria to join the SRI Index.
Yet a recent survey conducted by Unisa’s Centre for Corporate Citizenship demonstrates that this is not getting through to the retail investment advisory community.
The report states that while most market participants think responsible investment is important and has a material impact on how companies are valued, few financial institutions or investment advisers are promoting SRI assets. This is most likely because they retain a strong focus on ‘bottom line’ as the sole measure of value and wealth.
Deutsche Bank Climate Change Advisors in 2012 surveyed over 100 academic studies of sustainable investing from around the world. The resultant report concluded that ESG (environmental, social and governance) factors correlate with superior risk-adjusted returns: 100% of studies showed that companies with high ESG ratings have a lower cost of capital and 89% of studies examined showed that such companies enjoy share price outperformance.
I therefore recommend that investors reconcile ‘value’ as being more than just the rands and cents but something that matches your own values and ideals. ❐
Author: Mike Lledo