It will be a difficult task for investors to navigate the Environmental, Social, and Governance (“ESG”) landscape in 2022. Although it appears that everyone is embracing ESG principles and addressing long-term sustainability challenges, there is still a long way to go for the asset management sector and investee organizations.
Making sustainable decisions in our daily lives is becoming more and more important, such as recycling household waste and moving to
more brands and goods that are socially and environmentally conscientious. Big-name companies are also participating, like Formula 1.
has committed to achieve a net-zero carbon impact by 2030 and adopted laws to assist sustainable fuel.
Investors naturally consider ways in which their investments might have a positive impact, therefore this push toward sustainability is affecting investing decisions. Although it’s simple to get giddy and join the ESG bandwagon, it’s crucial for investors to make wise choices before investing their money.The crucial question is: How can you, as an investor, confirm that you are investing in genuine ESG investments and not funds just masquerading as “ESG friendly”? Greenwashing is an ever-present concern, and corporations are under increasing pressure to follow emerging ESG trends and expectations.
Investors must comprehend the many ESG investing options accessible as well as the long-term sustainable outcomes that they seek to accomplish in order to be able to respond to this question.
Impact Investing
Impact investment seeks to improve society in a quantifiable way. Included in this would be infrastructure or renewable energy projects that invest in developing solar farms, wind turbines, schools, hospitals, and homes, to mention a few. At Prescient, we’ve created funds that offer debt finance for infrastructure and clean energy projects in South Africa. We have the chance to provide communities with a proactive, quantifiable, and long-lasting contribution thanks to these Funds. The influence of the Funds on the community is seen in the number of jobs generated, community spending, sponsored projects, and grid power additions.
Impact measurement—in the form of reporting and disclosure—is a crucial factor to take into account before selecting an ESG Fund in order to ascertain whether the investment seeks to produce favorable environmental, social, and governance results.
ESG analysis
In addition to impact investing, investors can employ an ESG screening approach, which assigns an ESG score after identifying ESG risks in investee firms based on predetermined criteria. Investors are able to make knowledgeable choices based on these scores for
Whether to grow, decrease, or exclude exposure to investments that exhibit rising risks.
This makes sense from the standpoint of financial risk – a well-managed business that follows environmental, social, and
Less litigation and more expensive management and disposal costs are connected with governance regulations.
To mention a few, there are regulatory fines, hazardous waste, and labor unrest. Using an ESG grading technique has the advantage that
Investors can easily include ESG into their complete investment process thanks to it.
Some ESG elements, like carbon emissions, may be more timely or simpler to evaluate, which could lead to a propensity to ignore other factors, like governance or social effect. Conflicting ESG priorities can be managed by having a holistic approach to companies and equally considering the E, S, and G elements.
Take into account a business that has a stronger impact on the environment, is subject to environmental restrictions, and so rates highly on the “E” factor. There may still be “S” or “G” hazards with the same company. Therefore, in order to analyze potential risks and shortcomings and make wise investment decisions based on the overall ESG evaluation, it is crucial for investors to take into account all three elements.
We, at Prescient, have implemented a systematic strategy to ensure that ESG screening is done without biases through our internal ESG-scoring technology because we are a leading source of trusted, excellent investment knowledge. The Prescient ESG scorecard takes industry materiality and company size biases into account and is quantitative and data-driven. This gives us an in-depth evaluation of each pillar and enables us to incorporate ESG throughout our whole investment process. For instance, we can include ESG into our credit process by modifying company credit ratings depending on the generated ESG score.
The impact of “greenwashing”
Asset managers may overamplify their ESG practices through marketing and PR strategies in an effort to draw investors since they are under pressure to match the demand for ESG products. Investors may run the risk of investing in businesses that do not meet their ESG objectives or expectations as a result of this “greenwashing,” whether it is intentional or not. As a best practice, businesses should be open about revealing ESG practices that directly influence their investment philosophies and procedures.
Companies must also demonstrate how the approach fits with their unique financial and ESG objectives. Investors can evaluate how much a company is disclosing its progress and holding itself accountable in this way.
Currently-existing ESG roadblocks
The absence of international regulations for ESG investing continues to be a major obstacle for the asset management sector. Eliminating greenwashing and resolving competing ESG agendas become difficult without uniform and consistent disclosures across investee firms. As part of our strategy at Prescient, we interact with industry groups and decision-makers to promote more uniform disclosure and more transparency, which will enhance the financial markets and enable investors to make better investment decisions.
Through the implementation of official ESG policies and the facilitation of internal and external awareness training for staff and stakeholders, businesses can internally create their own ESG standards or “regulations.” Companies can publicly declare their support for and use of recognized, well-recognized frameworks that offer instructions for integrating sustainable investment practices.
The United Nations Principles for Responsible Investment is one example of a document that encourages the adoption of ESG considerations into ownership practices and decision-making in order to better align business goals with those of society and the environment.
The Task Force on Climate-Related Disclosures is another entity that focuses on regulating climate change and makes suggestions about disclosures related to climate change.
For the time being, these frameworks are optional, and a “one-size-fits-all” strategy could not provide the best disclosure for some businesses or industries. However, global sustainability policy is quickly developing, and investors will substantially profit from the improved openness that is eventually attained. Investors should safeguard their interests up to that point by remaining knowledgeable and carefully considering any potential investment opportunities.
Prescient will continue to work to protect our clients’ money by using it in a way that encourages sustainability and satisfies our objective of achieving superior risk-adjusted returns. We are consistent and open in our evidence-based approach.
We see ESG integration as a fundamental component of the investment process, and we feel that this gives us a unique opportunity to significantly influence the ESG landscape in our nation. We are always looking for methods to increase our total ESG effect, and we feel that by adding ESG principles into our approach, we can both properly complement our tried-and-true method and actively contribute to the wider sustainable finance objectives.
DISCLAIMER:
- Prescient Investment Management (Pty) Ltd is an authorised financial services provider (FSP 612).
- The value of investments may go up as well as down, and past performance is not necessarily a guide to future performance.
- There are risks involved in buying or selling a financial product.
- This document is for information purposes only and does not constitute or form part of any offer to issue or sell or any solicitation of any offer to subscribe for or purchase any particular investments. Opinions expressed in this document may be changed without notice at any time after publication. We therefore disclaim any liability for any loss, liability, damage (whether direct or consequential) or expense of any nature whatsoever which may be suffered as a result of or which may be attributable directly or indirectly to the use of or reliance upon the information.
Author: Natalie Anderson, Business Development and ESG committee member at Prescient Investment Management.
