ESG and Impact – Sanlam Investments’ Perspective on Impact

By Lindiwe Mtshali, ESG and Impact Analyst at Sanlam Investments

Investment managers are taking a risk-management approach to embed environmental, social and governance (ESG) factors into their processes1. However, SA’s social challenges and history, such as inequality, employment and load shedding, require taking this focus even further to ensure that investments are also impact-led.

The International Finance Corporation (IFC) defines impact investing as investing to make a positive contribution to society and the environment2. Although this means there is still a financial return element to impact investments, they also need to deliver tangible, measurable and positive social and environmental returns. These non-financial returns are demanded by institutions, regulators and investors. In SA, economic growth through job creation is vital, since the country’s unemployment rate is among the highest in the world3.

Investing for sustainability and social impact goals is at the forefront of Sanlam Investments’ approach. Our goal for the R14.8 billion of assets we manage in SA is to invest for a financial return that positively contributes to people’s lives and the environment. The Alternatives business, supported by the ESG and Impact team, applies intent, contribution and measurement to impact investment. We intentionally choose investments with a clearly-defined return objective while setting tangible and measurable impact KPIs. Impact measurements and projections form a large part of the due diligence processes that influence our investment selection.

How are environmental and social impact KPIs defined?
Sanlam Investments actively aims to fulfil the United Nations’ (UN) Sustainable Development Goals (SDGs) as part of its impact KPIs.

We also subscribe to the requirements of impact investing institutions such as the IFC and the UN Principles for Responsible Investment (UN PRI). This requires us to go beyond understanding ESG risks and opportunities in our investments.

Sanlam Investments’ impact perspective

Three key strategic pillars underpin our approach to impact:

1. Job creation: We want our investments to support the creation and preservation of direct and indirect jobs and improve livelihoods.
2. Reduced inequality: We aim to contribute to racial and gender equality through economic empowerment and enable previously underserved people to access basic services.
3. Improved climate conditions: We are committed to mitigation and adaptation actions that will help to address climate change.

Job Creation

Employment means more than job creation to us: it means ensuring decent employment through inclusivity and improved job quality. Our funds look for businesses that are creating sustainable employment opportunities, particularly for previously under-represented groups. These borrowers may be SMEs with a strong focus on job creation. We have designed frameworks to understand the quality of the jobs that we create through our investments. This includes monitoring whether the jobs are direct or indirect, temporary or permanent, as well as working conditions.

Reduced inequality

Racial, gender and financial inequality looms large in SA, given its history. Previously-marginalised individuals face several challenges. To ensure we make an impact in this area, we prioritise financial inclusion and transformation in our investments. We invest in businesses that support SMMEs and are committed to the mandate and requirements of Broad-Based Black Economic Empowerment (B-BBEE). We have developed the following frameworks to evaluate B-BBEE and inclusion as part of the due diligence process before we invest:
B-BBEE Framework
Inclusion Framework

Climate Change

Climate change poses a great danger to society and the environment2. Sanlam Investments’ policy is to invest in projects that have climate change mitigation and adaptation measures. We also invest in projects that tackle the issues presented by climate change. We view impact as a measurable reduced contribution to carbon emissions by the businesses in which we invest and link this to financial performance indicators. Other key indicators important to us include reductions in the use of electricity, water, paper and the amount of landfill waste.

invest and link this to financial performance indicators. Other key indicators important to us

include reductions in the use of electricity, water, paper and the amount of landfill waste.

Different investment classes

The Sanlam Investments Alternatives business aims to deliver commercially-viable returns to investors and address social and environmental impact through investment in different asset classes: private debt and private equity, infrastructure, real estate and strategic partnerships. Within these classes, we have created impact funds where the focus is not solely on returns but also on providing solutions to problems ranging from job creation to job quality, financial inclusion, education, affordable housing and climate change. To tackle climate change issues, we have formed a strategic co-partnership with FMO, the Dutch development bank, through Climate Fund Managers (CFM).

Impact Funds Overview

Private Equity Fund
SDGs

Our private equity funds are invested in Cavalier Group, Absolute Pets and Q-Link. Each of these investments fulfils the mandate of dual returns (impact and profit).  Cavalier Group, a supplier of premium red meat, meets Sanlam Investments’ requirement for impact and transformation by employing over 40% local women. It also empowers its local community through several projects. Absolute Pets has created more than 80 new jobs and opened an additional 25 stores since we invested in May 2021. In Q Link, a specialised company which provides payment application software, 47% of employees are females, 30% of whom are from historically-disadvantaged backgrounds.

Private Debt
SDGs:

Core to the private debt impact mandate is ensuring SMMEs are able to access finance, which facilitates job creation and addresses social inequality5. The social impact themes for this class are access to affordable/middle-income housing, SME financing, financial inclusion, education and renewable energy. Impact is defined and measured by factors such as SME loans granted, number of people employed, students educated, affordable houses built and solar PV systems installed. We have enabled SMEs and previously-disadvantaged individuals to own trucks and businesses in the trucking industry through investing in a management business called Willbrink. Willbrink has assisted blue chip companies to develop and manage their own Owner-Driver (OD) schemes aimed at empowering black ODs and promoting operational efficiencies in their supply chains. Willbrink provides financing to these ODs which they use to acquire the trucks they drive.

SA Sustainable Infrastructure Fund
SDGs:

The Sustainable Infrastructure Fund has an impact focus on positive, sustainable economic growth. It prioritises the energy, water and waste, transport and communication sectors. The fund invests in South African infrastructure projects that drive economic growth, market development and job growth, with an emphasis on environmental sustainability. Recently, the business concluded an energy and circular economy investment in Alien Fuel Group. Alien Fuels offers an alternative (biomass) solution to fossil fuels used by medium-sized manufacturing enterprises. The project redirects organic landfill waste to a carbon-neutral energy source (wood pellets) and replaces fossil fuels in industrial burner boilers to generate steam. Not only will the project create 68 permanent jobs for the local community, but it is also expected to mitigate CO2 emissions both by diverting organic waste from landfills and by replacing fossil fuels in burners.

Climate Fund Managers (CFM) (Partnership with FMO, the Dutch development bank)
SDGs:

For Sanlam Investments, impact on climate change means investing in funds that invest in climate-related solutions and respond to the impacts of climate change. This partnership enables Sanlam Investments to tackle climate-related issues through CFM’s expertise and practical ideas. As a climate expert, CFM uses blended finance methods to create positive climate change mitigation and adaption solutions in developing markets. It has a long-term focus on climate-related factors such as energy, water, landscapes and cities.

Impact Measurement and monitoring

It is important to us not only to understand our impact, but also to monitor and report on it. Periodic reporting of ESG and impact data is already mandatory for most of our funds. The Sanlam Investments Alternatives business has started to implement a monitoring and reporting resource called I-Level. It will enable us to collect, store and report on both ESG and impact data to track our funds’ social and sustainability impacts. Not only is this a game changer in helping us to meet increasing regulatory requirements, but it is also a good platform to help us to recognise trends and will provide consistent information to influence decision-making for impact improvement.

Conclusion

ESG challenges are part of our investment landscape. Companies that incorporate impact outcomes in these ESG factors tend to be more successful2. The Sanlam Investments Alternatives business is fully committed to delivering tangible social and environmental results. Through our funds we can deliver value for South African communities while achieving commercial returns.