As global warming and climate change accelerate, the need to ensure that human development is environmentally sustainable is an accepted imperative requiring fundamental change to the way we live — including how and what we consume, how we earn an income to fund our consumption and how we invest for the future.
The UN warned in its biennial assessment report in 2019 that increasingly complex risks from global warming to pollution, epidemics and climate change threaten human survival if left to escalate. It noted that the past can no longer be relied on as a guide to the future, with new risks emerging in ways not anticipated.
Against this background, individual and institutional investors now want to invest in a way that has a positive effect on the world. Surprisingly perhaps, they have found that investing with environmental, social and governance (ESG) considerations in mind can also produce superior returns.
Whereas historically financial markets were dominated by the profit maximisation approach, there is a growing support for consideration of ESG factors in investment decisions — hence the growing prevalence of words such as social return, impact investing, triple bottom line and sustainable development goals.
Market-driven efforts to invest in assets that have a positive effect are supported by initiatives led by multilateral organisations such as the UN and, in some countries, including SA, by legislation.
Principles for responsible investment
The UN enacted principles for responsible investment (PRI), a set of six principles providing global standards for responsible investing as it relates to ESG. Most big investment managers are signatories to these principles, while in SA regulation 28 of the Pension Funds Act (as amended) compels funds and boards of trustees to consider factors that may materially affect the sustainable long-term performance of assets, including but not limited to those of an ESG nature.
These factors have resulted in impact investing becoming a global trend across asset classes. This investment wave is causing fundamental economic shifts, affecting many companies, industries and economies — either detrimentally or beneficially, depending on their environmental footprint and investor appetite for investments with a positive social impact. For example, as investors shift away from heavy industry in favour of cleaner sectors, mining companies and fossil fuels companies are losing significant amounts in investments, raising the cost of capital and placing projects in jeopardy.
There is finally an understanding that environmentally-friendly companies, as well as socially impactful and well-governed businesses, enjoy enhanced access to capital.
Read the rest of Benedict Mongalo article at Business Day
