Asset managers globally have become the lightning rod for rapidly shifting populist views in Western countries, where the investment conversation is now dominated by environment, social and governance (ESG) factors.
These are being used to measure the sustainability and ethical impact of an investment in a company, based on its sustainability and ethical practices, attendees at the Joburg Indaba heard in September. CHANTELLE KOTZE reports.
The rapid evolution towards a global respect for ESG factors by investors and investment companies alike as well as the effect that this is having on different commodities, was explored by a panel which focused on the shifting investor perceptions of the mining industry chaired by Rothschild senior mining team adviser Fiona Perrott-Humphrey.
The panel also included Blackrock’s global head of thematic and sector investing Evy Hambro, Investec Asset Management portfolio manager George Cheveley, Allan Gray portfolio manager Sandy McGregor and Metal Industries Benefit Funds Administrators portfolio manager Myuran Rajaratnam.
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According to Hambro, who manages a combined US$11.9 billion investment across several funds, ESG is having an impact on the way fund managers allocate funds in the mining sector – firstly as a result of the increased relevance of ESG but also because of how these factors will impact on commodity prices and therefore value within the market.
“While we have for many years now incorporated ESG into our investment process we have recently been asked by our clients to go into detail about how we use them, what we use them for and the output of that.
"I believe that that the next phase of this is likely to be reporting to our clients on the impact that the companies we are invested in are having on the environment, society and every other stakeholder that is impacted by their activities.”
With a global client base, Hambro says the highest areas of interest in ESG today comes from Europe, followed closely by Asia and the US – “which indicates to us that ESG is a global trend which requires us to adapt the way we allocate capital in response to these needs.”
Meanwhile Cheveley, who has been involved in developing ESG-compliant mining portfolios, such as the Global Environment Fund, explains that this particular fund, which incorporates ESG in the way it looks at companies, is an impact fund in that it pursues decarbonisation by taking advantage of the growing need for investment in decarbonisation due to climate change.
“We are basically looking at companies with a carbon-negative footprint throughout their entire lifecycle,” he adds.
When asked where ESG box-ticking by global passive investors left investment in South African mining stocks, Rajaratnam said that South Africa is still a good investment destination in the long-term, with an 8% real return over 100 years.
This is because the rule of law is always obeyed within the country, having commodity stocks in a portfolio provides for good portfolio balance against inflation and the limited capital inflow into South Africa makes for high capital returns.
When asked to comment on the social aspect of ESG, specifically on the social implications on developing coal mining countries in developed countries where coal mining is seen as being climate-negative, McGregor raised the point of needing to weigh up the cost of a carbon-free future where developing countries are faced with a trade-off – either being carbon-free or face high social consequences, such as poverty.
“There is a danger that environmental policies cloud out social policies in developing countries, with major social concerns,” he says adding that inefficient capital allocation can affect the poor if too much capital is invested into environmental portfolios.
Hambro’s view on this is that climate change must be costed so that it can better reflect the cost of the impact, as he believes that the cost of the weather events we are experiencing, the quality of air we are breathing and the quality of water we are drinking has a much greater cost on society than paying more for renewable energy as opposed to cheaper coal power.
Cheveley added that the cost of investing in and producing renewable energy has fallen rapidly in the past few years, and in some countries, companies were overtaking governments in decision making on investments in solar and wind power.
“We need to ensure a just transition from carbon to a decarbonised economy so that people don’t get left behind, as we have seen this happen in the past,” he says.