How will impact investing change the way we invest in SA?

_{By: Sonja Saunderson, CIO of Momentum Investments}

One of the lasting effects that COVID-19 is likely to have is the continuation of the heightened sense of how we invest, what the effect of the investments on the society and the environment is, and how to be more responsible when we invest. Increasingly investors are, along with the return of those investments, questioning the purpose of their investments.

But what is impact investing and environmental, social and governance (ESG) factors, and does it come at the expense of optimal returns?

We use the three ESG factors to evaluate companies (and any other investment) on how far advanced they are with sustainability. Once enough data has been gathered on these three factors, they can then be integrated into the investment decision-making process to decide whether to invest or divest.

This also affords us the ability to evaluate, vote and influence ESG aspects of businesses we invest in.
But is it enough to only influence business and society on a secondary basis?

As sustainable practices have evolved, investors want to see a more direct and a real effect of their investments on society and the environment and have greater control over the true effect of their investments.

Consequently, we are likely to see several trends in the future but there are two that I’d like to highlight.

Firstly, there will be a greater line of sight on ESG matters and how it’s implemented within portfolios. Secondly, the interest and demand for alternative asset classes that move us away from the traditional asset class space, in general, and real asset classes, specifically, will increase.

Demand for alternative asset classes
Real assets are a unique investment asset class and it covers an array of physical assets, including real estate, energy, solar, mining and agriculture, and infrastructure opportunities such as transportation and telecommunication infrastructure.

There is a big focus on infrastructure in South Africa, given the number of years of under-investment in this area, and it’s therefore also one of the cornerstones of the presidential prerogative to restart and kick-start our economy after COVID-19. Not only will infrastructure development have a societal and economic benefit but there’s also real return benefits for a portfolio by virtue of the diversification nature of this asset class, the uncorrelated nature to other asset classes, the inflation protection it provides, as well as favourable tax treatments.

No longer a trade-off between doing well and doing good
The Rockefeller Foundation defines impact investing as “investments intended to create positive impact beyond financial returns”. This definition explains impact investing as the application of working capital with a very explicit and focused intent to generate a social or environmental impact, and it goes far beyond the traditional financial returns that you would expect of any investment.

In the past the focus has been on the justification of the trade-off between generating returns and trying to do good. But it doesn’t have to be a trade-off, and this myth has now long since been debunked. Close to two-thirds of all research on this topic globally now find that there’s a positive relationship between financial performance and sustainable investing practices.

And fortunately, the consumer has also spoken.

Globally the uptake of ESG investing has been tremendous (see figure 1). These figures are from the Forum for Sustainable and Responsible Investment, but other studies support a similar trend.

_{Figure 1: Growth in ESG assets}

In South Africa, however, we are a bit behind that curve, but we certainly have seen a similar trend in terms of the demand and want for ESG and sustainable investing practices.

If you combine the consumer-driven demand with where regulations are likely to take us, as well as the presidential push in South Africa for infrastructure themes and investments, then this particular trend is likely to stay with us and also become a local phenomenon.

Three critical components of impact investing
Our experience is that it’s critical, before even venturing into the impact investing space, to have a sense of the measurability thereof. Our global partners at Robeco, who are world-renowned in the ESG and sustainable investing space, highlight three critical components of impact investing.

Firstly, the intentionality thereof. Secondly, the return, and then thirdly, the measurability.

You need to be able to measure and monitor the benefits of ESG and impact investing for it to become real and tangible. ‘Impact washing’ is way too common in the industry, where investment managers make claims about their ‘impact investments’, although it’s a secondary outcome and not the main focus and intentional outcome.

Therefore, measurability and monitoring over time is extremely important, to monitor and evaluate how well you are doing in terms of your sustainability practices.

How do we then decide where to focus and what the right investment opportunities are from an impact perspective?

We believe there will be a bigger focus on what you are trying to achieve, how you are trying to achieve it and how to get there, and therefore it is good to have a guide.

Blueprint for a better and more sustainable future for all
The United Nations have 17 interlinked Sustainable Development Goals (SDGs) designed to be a “blueprint to achieve a better and more sustainable future for all”.

Globally there’s a convergence happening towards these goals, and it creates a sense of unity, purpose and focus that helps drive sustainable practices at a much larger scale. It is important, however, to decide which of these goals you want to target, how you want to target it, and then balance it with the risk in return on behalf of investors. What we are focusing on from an impact perspective is good quality education, affordable and clean energy, decent work and economic growth, and industry innovation and infrastructure.

We have committed to building and growing sustainable developments for all by constructing investment portfolios that not only deliver returns for our shareholders but also help build a future we can proudly hand to the next generation as the caretakers of our shared future.

Responsible investing practices have always resonated with our outcome-based investing philosophy and the alignment of our clients’ long-term goals to positively influence the world they will retire to. We realise ESG risk factors affect the sustainability of companies and therefore it is especially relevant to our investment decision making process.

We want investors to do well and do good and our clients to achieve their goals on their investment journey. We therefore support responsible investing to help create investments that are good for clients and the world we live in. Because when it comes to sustainable investment growth, for us it’s personal.

_{Momentum Investments is part of Momentum Metropolitan Life Limited, an authorised financial services (FSP6406) and registered credit (NCRCP173) provider.}