Big Book of sustainable investing

Sustainable investing: picking companies with a future

The increasing presence of the term ‘sustainable investing’ hints that anyone in the business of managing wealth may shortly be tasked with doing things differently. When you dig down into the purpose of sustainable investing, it quickly becomes clear that it’s not only about shaping a better world for future generations; it’s also about making sure that the companies you’re investing in will be around for the lifespan of your portfolio.

Sustainable investing is about picking the companies that can adapt to new, greener technology, which can innovate their product range away from what we now widely acknowledge as harmful products (e.g. tobacco), that understand the benefits of diversity and inclusion among their staff and boards, and do the right thing socially not only to avoid litigation (that’s important too) but also so the communities in which they operate (and which often form their markets) can prosper.

Sustainable investing does not mean performance sacrifice

Sustainable investing is subject to some myths. Perhaps the most common is the belief that performance is sacrificed to achieve its goals. But there’s mounting evidence to debunk that notion. On the contrary, businesses that integrate environmental, social and governance (ESG) factors into their operational and strategic fabric are increasingly outperforming those that don’t.

But you needn’t believe that sustainable investing leads to superior investment returns in order to take it seriously; you just need to agree that avoiding big losses through better risk management is key to generating wealth. At the very least, that’s what investing sustainably should help to achieve.

We are facing many challenges like climate change, income inequality, resource scarcity, and poor working conditions. At first glance, it might seem impossible to connect such complex risks with something like portfolio construction. But with the right partner and resources, we can help you do just that.

The Big Book of sustainable investing

‘We recognise that it’s no longer good enough to just talk about sustainability.’

It was that sentiment, voiced by our CEO, Nersan Naidoo, that underpinned Sanlam Investments’ decision to partner with Robeco, an internationally acclaimed asset manager that specialises in sustainable investing.

As evidence of their expertise in the space, and the value they will add to our business, we are launching a special edition of their Big Book of sustainable investing. Inside, you will find simple yet insightful guidance on several important questions, such as:

• What is sustainable investing?
• What role does it play and how should I approach it?
• How does ESG integration work?
• What impact does it have on fund performance?

These are not the only topics covered in what is a comprehensive manual. Its contents frame why Sanlam Investments is taking sustainable investing so seriously. It’ll also give you the knowledge needed to make a valuable contribution to any conversation about sustainable investing, the likes of which are becoming more commonplace.

The task is not to read the book cover to cover. Rather, keep it somewhere accessible and use it as a reference as and when you need it.

What you need to know about sustainable investing right now

The deadline for the 17 Sustainable Development Goals (SDGs), adopted by all members of the United Nations, is set at the year 2030. Trillions of dollars of capital are being mobilised to meet those goals. In Europe, Australia, and New Zealand more than half of all assets under management are already subject to the principles of sustainable investing.

Lab-grown diamonds, rainforest-friendly tea, and a sustainable meal prep company called Love the Wild form part of Leonardo DiCaprio’s investment portfolio, to name one example.

It’s clear that the trend towards sustainable investing is established and accelerating in developed markets. That means we should expect the strategy to gain further momentum in emerging markets like ours where it has a foothold but isn’t yet entrenched.

Understanding the different sustainable investing strategies in use, what their benefits and downsides are, and who they suit best, is the foundation needed to start taking advantage of the better risk management and investment outcomes on offer.

When considering a fund for potential inclusion in your client portfolios, there are four different strategies you’ll likely come across:

1. Financial-only: Investment decisions are based purely on financial data with no regard for the risk inherent in ESG factors. The primary benefit here is an unconstrained investment universe, but no focus on sustainability means weaker risk management. This strategy is only suitable for investors who believe that ESG factors don’t pose a risk to business sustainability. Expect this group to shrink over time.
2. Exclusions: Certain companies, sectors, or even countries are excluded from the investment universe for ethical reasons. The primary benefit with this strategy is a clear separation from contentious ethical issues, but a smaller investment universe may limit opportunity and the ability to diversify. Also, when companies are excluded, it’s not possible to positively influence their boards or vote against contentious practices. Mitigation against reputational risk is the dominant motivation for investors using this strategy.
3. Integration: ESG criteria are sown into the manager’s investment process the same way that fundamental criteria are. The primary benefit is a more holistic approach to risk management across the investment universe, but it can be difficult to assess how much weight ESG factors are being given. It’s suitable for investors who want ESG information relevant to an investment to form part of the manager’s decision-making, without them making outright exclusions. Expect most funds to follow this strategy.
4. Impact: The manager makes investments that are required to generate a measurable environmental or societal impact, alongside a financial return. The primary benefit is the association with positive change, but the underlying investments tend to be concentrated and illiquid. This strategy is appropriate for investors with a higher risk appetite, who want their capital to make a positive social or environmental impact.

By familiarising yourself with these strategies – consult The Big Book of sustainable investing – you’ll be able to ask better questions of the fund managers you engage with around their sustainable investing practices. And the depth and coherence of their answers should subsequently help to reveal how seriously they are taking the risks associated with ESG factors.

Change may be afoot. But rather than making your job more difficult, adopting a sustainable approach to investing promises more comprehensive risk management as a bare minimum, a realistic and rising probability of superior investment returns, and a future where our children will have the same opportunities we have today.

Download Big Book