ESG investments – what’s all the fuss about?

Behind your investments - whether unit trusts, for example, or retirement annuities - are a series of assets. These assets are chosen by asset managers, based on their ability to deliver returns over time.

At the same time, we as consumers are increasingly concerned about the impact companies have on society and the planet. This is known as a company’s environmental, social and governance (ESG) performance.

This article outlines how ESG investing works, and the questions you should ask your investment professional.

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What does ESG investing mean?

Consumers are concerned about how companies treat their staff, customers and the environment, says Stephan Bernard, an investment analyst at Allan Gray. Asset managers, he notes, increasingly respond to this.

However, rather than disinvest from companies that are imperfect, many asset managers try to influence companies to perform with more integrity.

“We value ESG ‘leaders’ as well as ‘improvers’,” Barnard says. “If you only invest in leaders, you may lose the opportunity to help a company improve through your efforts as an active investor.”

Although we could think of ESG investment as excluding “offenders”, such as oil or tobacco companies, the reality is that trade-offs must be considered.

“How do you evaluate a mining company that has a harmful environmental impact, but mines metals that enable the production of cleaner energy, and provides substantial employment?” Bernard says.

Do ESG investments deliver better returns?

Asset managers traditionally look at performance in terms of risk and return. However, the expected return from ESG investing may not be seen in the short term, since it takes time to improve societal and environmental performance.

An assessment of Morningstar data from 2017 to 2022 shows that a global sample of 113 ESG funds did not perform any worse than other funds – but nor did they perform much better, notes Jennifer Henry, head of strategic investments and manager of research at Inn8 Invest. However, this could change over time.

“Companies with sustainable ESG characteristics are likely to display lower risk,” Henry says.

Renewable energy projects, she suggests, will be a good investment in the long term, and these are becoming available to South African investors.

What questions should you ask your adviser?

As an investor, you may be able to play a proactive role in steering your adviser towards choices that are a match to your ethics.

By doing so, you can help to “mainstream” ESG-focused investment policies, according to Dawid de Villiers, a partner at Webber Wentzel. He says you can start by asking to what extent ESG considerations influence your adviser’s investment approach.

“Ask them to provide specific examples of ESG investment opportunities, and request solid evidence of their ESG experience and expertise,” he says.

Your adviser should outline what it will mean to your investment goals if you choose to invest in an ESG fund. Henry notes, for example, “If resource-type stocks (which can have an environmental impact) are doing well, then ESG funds may miss this opportunity in the market.”  

She says you should also ask your adviser whether ESG is equally important for short-term savings goals, such as saving for education or a home.

Are you getting value for money?

“If you have a good understanding of the risk a company faces, you can form a more realistic view of the value of that business, and the price you should pay for it,” Bernard says.

“Investing at the right share price is critical. A brilliantly managed company can be a poor investment if you pay too much.”

Henry points out that some ESG funds may charge higher fees than their peers. Your financial adviser should understand what is driving this and evaluate whether the higher fees are worth it.

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