Big Book of sustainable investing

Sustainable investing: a fiduciary duty

We all worry about change, particularly when it threatens to disrupt areas central to our lives.

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. That might be difficult to stomach – the profession is already complex.

But when you dig down into the purpose of sustainable investing, its chief concern quickly becomes clear: risk management. That practice is the bedrock of fiduciary duty and something that investors have been concerned with for centuries.

When the Quakers refused to invest in the slave trade, they were taking a moral stand, sure. The same could be said for international businesses who shunned South Africa during the apartheid years.

But those decisions were also self-serving; ties with either of those oppressive regimes could have caused their organisations severe reputational and financial damage.

A simple way to think about sustainable investing

Sustainable investing is subject to more myths than any other investment style. Perhaps the most common is the belief that performance is sacrificed to achieve its goals. It’s beyond the scope of this piece, 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.

So, instead of thinking of sustainable investing as another layer of complexity, understand that it’s simply a framework that improves transparency around risk.

By educating ourselves and our clients about the purpose of sustainable investing, and integrating its principles across our business, we are communicating an important message: our fiduciary duty to protect the wealth of the people we serve is a priority that deserves substantial investment and ongoing thought.

The institutions of slavery and apartheid have, mercifully, fallen. But in their place, we face 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 three important questions:

• What is sustainable investing?
• What role does it play and how should I approach it?
• How does ESG integration work and 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. By consulting its pages on a regular basis, you’ll cement the knowledge you need to become the go-to person on sustainable investing.

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.

For institutional investors and financial advisers, 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, or modest return expectations, 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. Together, we can handle that.

Download Big Book