“We do not inherit the earth from our ancestors; we borrow it from our children.” This Native American saying is one of many that investors are taking to heart at the moment. There is a palpable shift toward a more sustainable, responsible way of investing all over the world and it is something we all have to start considering. You will hear people referring to the ESG score of a company, meaning the Environmental, Social and Governance score. So, if a company is a big polluter of the enviroment; treats its staff badly; and its management indulges in dodgy financial accounting; it will have a low ESG score and will be excluded from funds tracking these criteria. It must be said, however, that one has to be a bit careful of investing in these funds with a high ESG score right now if your aim is to purely maximise returns. Although the drive towards a more environmentally friendly way of life is here to stay, it is not necessarily profitable in the shorter term.
We only have to look at the big drive towards investment in Africa that a lot of fund managers adhered to a few years ago. These “Africa Equity” funds talked about how Africa was the new China and how the opportunities were “mouth-watering”. Looking at one of these funds, we see a 5-year return of -1.21%, 7-year return -5.36% and 10-year return 0.89%. If we take into consideration that inflation in SA is around 5% per year, one can see the wealth destruction caused by this type of investment strategy.
On the ESG front there are some investment options. The Satrix MSCI World ESG Enhanced ETF is designed to maximise exposure to positive environmental, social and governance (ESG) metrics. Investors who are evaluating the need for developed market equity, combined with a desire to invest responsibly, can use this fund amongst others. It might be prudent to take note of the fact that the EU is set to become the largest economic bloc to completely ban the sale of combustion engine cars by 2035. Most of the large oil companies are also set to be carbon neutral by at least 2050. It is clear that in future clients will demand a high ESG score, regulators will enforce them and investors will reward them.
The important thing to remember is that everybody can contribute to the health of our planet by just doing the small things right. Switch off the lights when you are not in the room; close the tap while you are brushing your teeth; insist on using bio-degradable products where possible. Most of these conscientious efforts will not only increase your own ESG score, it will also save you money!
