In a world first, New Zealand lawmakers announced this week that the country will be introducing a law that will require banks, insurers and investment managers to report the impacts of climate change on their business. While we aren’t quite there yet in South Africa, our commitment to responsible investing is growing and we would all do well to brush up on our sustainability jargon.
According to the most recent Schroders’ Global Investor Study – an annual survey that canvassed the views of more than 23,000 wealth investors from 32 locations around the world – almost three-quarters (73%) of local investors refuse to compromise on their personal beliefs when investing, even if higher returns were on offer.
“The results support the growing trends that returns are not the only aspect that influences our investment decisions. People want their values reflected in the way they invest, and are increasingly looking to contribute to a more sustainable society through their investments,” says Ebeth Van Heerden, Schroders Head of Intermediary South Africa.
But even if the principles are fairly simple, Van Heerden recognises that the field has become a sea of acronyms and technical terms, which can leave investors confused. “That’s where we can help. We’ve pulled together the 10 key terms every sustainable investor, or anyone new to the topic, needs to know,” says Van Heerden.
2°C limit or “2 degrees”:
It is widely agreed that limiting the average rise in global temperatures to less than 2°C above pre-industrial levels by the end of this century may help stave off the worst of the natural disasters associated with global warming. Although there is some disagreement as to whether this limit is sufficient or even possible, the idea of restricting global warming to less than a 2°C rise has consistently been a major part of the debate. “Schroders has been tracking progress being made to limit the rise in global temperatures to 2°C with its Climate Change Progress Dashboard tool,” says Van Heerden.
“Actively exercising your shareholder rights, such as general meeting voting rights, and engaging with investee companies to encourage responsible corporate behaviour and improve long-term shareholder value. This applies to both individual investors and fund managers,” says Van Heerden.
The cost of emitting carbon dioxide, or CO2, into the atmosphere, either in the form of a fee per tonne of CO2 emitted, or an incentive (money) that’s offered for emitting less. Putting an economic cost on emissions is usually said to be the best way to encourage polluters to reduce what they release into the atmosphere.
“South Africa is the world’s 14th-largest emitter of greenhouse gases, thanks largely to its heavy reliance on coal. In an attempt to meet our commitment to the Paris Climate Accord, the government has created a framework for the transition to a low-carbon economy. The Carbon Tax Act came into effect on 1 June 2019 and compels carbon emitters to pay for their man-made greenhouse gas (GHG) emissions – the deadline for the carbon tax returns is the end of June 2021,” says Van Heerden.
“Environmental, social and governance (ESG) factors are the sustainability considerations a lot of us are very passionate about, and they’re relevant to the ongoing performance of companies we’re invested in too,” says Van Heerden.
She explains that ESG integration is an investment approach that takes into account ESG-related risks and opportunities in addition to traditional financial analysis.
Broadly speaking, while environmental issues are self-explanatory, social factors could be about treatment of workers or community relations, and governance factors are things such as the composition of the board and its performance.
Schroders announced earlier this year that it fully integrates ESG into financial analysis of all its investments. “Schroders’ investors are now integrating ESG factors into their decision-making across all investments the firm manages, fulfilling our intention announced in November 2019,” says Van Heerden.
“An investment strategy where you invest in line with your ethical principles and exclude (or you might hear some people say “screen out”) companies that you consider unethical,” says Van Heerden.
Investments that are made with the primary goal of achieving specific, positive social benefits while also delivering a financial return. “Impact investments create a direct link between portfolio investment and socially beneficial activities, and historically most of the examples of impact investing have been in unlisted assets (i.e. privately not publicly-owned, as firms listed on a stock market are),” says Van Heerden.
Schroders recently announced that it has joined the influential Global Impact Investing Network (GIIN), a leading non-profit organisation dedicated to increasing the scale and effectiveness of impact investing. “This is a further step in our commitment to building a leading position in sustainability and impact investing,” says Van Heerden.
GIIN focuses on reducing barriers to impact investment to enable more capital to be directed to fund solutions in this space. It has 350 members globally, including impact investment pioneer BlueOrchard, part of the Schroders Group, which has generated lasting positive impact for communities and the environment across the globe, while providing attractive returns to investors since 2001.
Physical risks of climate change:
The risk posed by climate change on a company’s physical assets such as equipment, its supply chain, operations, markets and customers. “Schroders analyses what businesses would have to pay to insure their physical assets against hazards caused by rising global temperatures and weather disruption, for example flooding, “explains Van Heerden.
An ongoing dialogue between shareholders and boards that aims to make sure a company’s long-term strategy and day-to-day management are effective and aligned with shareholders’ interests. “This means monitoring a company’s practices and performance, engaging on areas of concern and voting on shares held to ensure management is acting in the long-term best interests of its shareholders. Good stewardship should help to enhance and protect the value of investments,” says Van Heerden.
An investment approach in which a company’s sustainability practices are paramount to the investment decision and in which ESG analysis forms a cornerstone of the investment process.
The financial risks that could result from significant policy, legal, technology and market changes as we move to a lower-carbon global economy and climate-resilient future. “This is especially relevant in developing nations such as South Africa, where the majority of our primarily poor population relies on jobs and communities centred on carbon-heavy industries such as coal production,” says Van Heerden.