Two studies, in particular, highlight ESG’s contribution to investment results. Morningstar research into the performance of sustainable funds versus traditional funds over a 10-year period found that ‘58.8% of sustainable funds outperformed their traditional peers’. Meanwhile, the NYU Stern Center for Sustainable Business research aggregated findings from 1,000 research papers authored between 2015 and 2020 and found a positive relationship between ESG and financial performance in 58% of the corporate studies.


Not all asset managers are ESG sceptics or guilty of greenwashing.


Still, there are asset managers who are not truly committed to unlocking the benefits of incorporating ESG in their investment processes, and greenwashing does exist. However, it is not accurate to generalise that these are common occurrences across the entire industry. 


Many asset managers do take ESG seriously. At Prescient Investment Management (PIM), we have long championed integrating ESG factors into our investment processes because for ESG to be effective, it must be rooted in rigorous, evidence-based methodologies. Thus, our ESG strategy is not a superficial add-on but a deeply integrated component of our investment process. Our systematic approach, supported by extensive data analysis, ensures that ESG considerations are genuinely embedded in our decision-making. 

 

ESG as a sustainability framework is working


While there may be challenges in standardising and implementing ESG criteria, dismissing the entire framework ignores the significant strides made in this area. Research consistently shows that ESG integration leads to better risk management and long-term financial performance, as long investment processes ensure non-financial risks are identified and managed effectively within an ESG framework. 


We believe ESG is not a mere vehicle for 'saving the world,' which has contributed to its waning popularity, but a fundamental pillar of a comprehensive investment strategy. The positive strides we’ve seen include the growing adoption of ESG criteria across multiple asset classes, the development of innovative ESG-linked financial products, and the increasing collaboration between investors and companies to drive meaningful change. 


These advancements underscore the enduring value of ESG in the investment landscape and highlight its potential to enhance both financial performance and societal impact.


ESG regulations will continue to evolve
Given the complexity of the world's ESG challenges, ESG regulation must continue to evolve. Globally, there has been broad support for the International Sustainability Standards Board’s (ISSB’s) first two Sustainability Disclosure Standards, International Financial Reporting Standards (IFRS 1 and IFRS 2). These aim to consolidate the multiple sustainability-related disclosure standards across global jurisdictions into standardised measurement and reporting guidelines, enabling comparability and consistency. 


To date, several countries, including Brazil, Nigeria and Australia, have agreed to either adopt or integrate these regulatory standards in their sustainability frameworks and the EU has aligned its Corporate Sustainability Standards with the ISSB Standards. South Africa has also taken the first steps towards embracing these standards. In June 2023, the South African Institute of Chartered Accountants (SAICA) and the JSE participated in the global launch of the two Sustainability Disclosure Standards, hosting an event in South Africa. Dr Suresh Kana , trustee of the International Financial Reporting Standards Foundation (IFRS) and deputy chairman of the JSE, said the worldwide launch aimed to create “a transparent, robust, global baseline of sustainability-related disclosures for the capital markets” and would enable companies “to tell their stories about risks, opportunities, and metrics in line with governance.”


Incorporating these global standards into South African ESG practices would have profound implications for corporates and asset managers. However, they present a significant opportunity to align our ESG framework with global best practices, enhancing the comparability of South African companies with their international peers and making them more attractive to global investors who increasingly prioritise ESG factors in their decision-making.


From an asset management perspective, it is crucial to anticipate and respond to these shifts, ensuring that we are compliant and strategically positioned to leverage the opportunities that come with enhanced ESG transparency.


Politics may affect the discourse, but ESG will remain a powerful risk management tool


Given political agendas and the diverse views surrounding sustainability, ESG will remain subject to heated debate. US political stances informed by climate change and ESG naysayers will likely influence the global discourse around ESG in the years ahead. However, ESG should not become a politically motivated concept. It’s a critical aspect of modern risk management, with the evolution of ESG investment practices leading to more sophisticated risk assessment models, enhanced corporate transparency, and closer alignment of investment portfolios with long-term sustainability goals. 


Regulation 28 of the Pension Funds Act ensures ESG is taken seriously by mandating that fiduciary investors consider quantitative and qualitative risks, including ESG factors, in their decision-making processes. This regulatory requirement underscores the importance of ESG as a fiduciary duty and a crucial non-financial risk assessment. 


Thus, the investment industry should focus solely on the objective benefits of ESG integration, such as enhanced risk management, improved corporate governance, and sustainable long-term returns. At PIM, we remain committed to ESG integration, independent of external influences, because we believe it is essential for achieving superior, risk-adjusted returns for our clients. It provides a deeper understanding of potential risks and opportunities and ensures that clients' portfolios are resilient and positioned for sustainable growth in the long term. 


Through our systematic and holistic approach, combining quantitative analysis derived from vast amounts of data with qualitative insights, we are committed to remaining a forerunner in the industry. ESG factors will always inform our investment decisions, ensuring that our clients' capital can withstand growing climate change risks, ever-present societal challenges and corporate governance transgressions.

 

Disclaimer:

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