Multiple factors are driving the trend towards greater Environmental, Social and Governance (ESG) integration into investment analysis and portfolio construction, but beyond regulatory and impact incentives, there is growing evidence that suggests a positive correlation between companies that exhibit better management from an ESG perspective and outperformance over the long term.
Rob Lewenson, Head of ESG Engagement, of the Old Mutual Investment Group Responsible Investment team, says that actively engaged shareholders can further drive this correlation, and that South Africa, in particular, has seen a significant uptick in the last six months in terms of shareholder activism.
“It is vital that shareholders continue to practise responsible ownership – whereby management teams of investee companies are held accountable for company performance and conduct – beyond just proxy voting.
“In a South African context, where ESG risks and opportunities is of high priority given the political history and socio-economic climate, a degree of active engagement can promote sound ESG management practises and responsible corporate behaviour, and enable shareholders to work towards outcomes that are in the best long-term interest of their investee companies, and ultimately the best interest of their clients.”
As there is no extensive record of ESG engagements by investors in the South African market over a long period, Lewenson points to the findings of a recent international academic report which analysed the engagement practises of a large institutional investor of corporate ESG engagements with US public companies from 1999 to 2009.
“The analysis produced a number of interesting results, such as that successful engagements are followed by positive abnormal returns. According to the report, ESG engagements generate a cumulative size-adjusted abnormal return of +2.3% over the year following initial engagement, with cumulative abnormal returns much higher for successful, successive engagements (+7.1%).
“These findings appear to hold true in the South African market,” adds Lewenson, “where companies with strong management of ESG risks and opportunities are more likely to establish correct governance policies and practices, empowering management to think strategically about the long term.”
Hywel George, Director of Investments at Old Mutual Investment Group, agrees that a long-term lens is needed to generate alpha. Speaking at the Old Mutual Investment Group TOMORROW event, which took place in Johannesburg today, he explained how a short-term focus by investors and issuers can be seen as problematic at a systemic level. “Primarily, short-termism undermines future economic growth due to the lack of long-term capital investment, which ultimately leads to slower GDP growth, higher unemployment levels and lower future investment returns for savers.”
He added, “Being a long-term investor is not just about understanding long-term trends, but being able to have a systemic view of the market and its connectivity to other social and biophysical systems. Seeing the world in this way results in a clearer appreciation of how long-standing ESG trends impact the stability and viability of markets.”
To test this thinking, George says that the global advocacy group Focusing Capital on the Long Term, in collaboration with McKinsey, undertook research on the performance of companies with a long-term value focus. “Published in the Harvard Business review, the research indicates that ‘companies that manage for long-term value creation have consistently outperformed their peers since 2001, across almost every financial metric that matters’.”
Lewenson concludes that Old Mutual Investment Group, as an institutional fiduciary, has integrated ESG considerations across its investment processes and believes that this commitment to responsible investing has served as an investment edge.