Institutional investors who invest on behalf of others are increasingly considering environmental conservation and safe working conditions as investment criteria.
Sustainable investment has gained momentum in the last 20 years as asset managers – people who manage the day-to-day activities of institutional investors – have accepted the need to include sustainability criteria in their decision-making. In particular environmental, social and governance factors.
A study done in 2023 in North America, Europe and Asia reported that 80% of asset managers had sustainable investment policies. Five years earlier it was only 20%.
In South Africa, this trend has been particularly marked since 2011 following changes to pension fund legislation. The amendments require pension funds to take environmental, social and governance issues into account in their investment decisions.
Nevertheless, the momentum of investment decisions based on sustainability criteria has been slower in South Africa compared with other countries.
As part of my PhD research, I investigated the views of 26 asset managers about sustainable investing. I asked them to define what corporate social responsibility meant to them.
They identified specific corporate social responsibility practices they focus on. Human rights and stakeholder relationships were the most prominent. Most interviewees (15 of the 26) believed that the companies they invest in should have sound sustainability practices.
The research also highlighted a number of barriers to asset managers applying sustainability criteria. These included the fact that the South African equity market is quite small, and shrinking as the number of companies delisting from the Johannesburg Stock Exchange grows. There are therefore fewer companies to invest in. There is also limited client demand for such investments.
These barriers make it harder for investors to make a significant social investment impact.
Sustainable investment matters because asset managers control vast amounts of capital. In the absence of suitable impact-oriented investment opportunities, capital can’t be directed to solving pressing problems. These include poverty, inequality and climate change.
The barriers
The interviewees said it was challenging to integrate corporate social responsibility practices into institutional investment decision-making. They listed a number of reasons.
Seven commented that the local equity market was too small to make a significant social investment impact.
One interviewee said that if, for example, an asset manager wanted to build a fund with only environmental performers, it was not possible, since
you are not exactly spoiled for choice.
The already limited local investable market continues to shrink. Companies are delisting at a disconcerting rate. This means that there are limited sustainability-focused investment opportunities in the country.
Another challenge is low client demand for sustainable investment products. The interviewees mentioned that a limited number of asset owners and beneficiaries are requesting such products.
In addition, many companies don’t provide sufficient data on their sustainability practices. This makes it difficult for corporate role-players to make informed decisions.
Another complicating factor is that there isn’t consistency among data providers on how sustainability performance of companies should be measured. In South Africa this is further complicated by unique aspects of the country’s laws. For example, interviewees mentioned that popular global environmental, social and governance databases didn’t take into account broad-based black economic empowerment legislation. This was introduced after the end of apartheid to improve economic transformation and inclusion.
What needs to happen
Education is key to ensure real impact. Fund managers and their clients should thus be better informed about sustainable investing.
Here the Association for Savings and Investment South Africa could play an important role. This association aims to ensure that savings and investment in the country remain relevant and sustainable. Workshops and resources are provided to various role-players in the investment process.
In addition, having consistent, country-specific metrics for sustainability would make it easier to evaluate and compare companies. Some of the interviewees thought that the Johannesburg Stock Exchange 2022 Sustainability Disclosure Guidance was a step in the right direction. The document provides a step-by-step guide to get companies going in their sustainability reporting. It’s also designed to help locally listed companies clarify current global best practices. An example is climate-related disclosures.
Reporting standards put out in 2023 by the International Sustainability Standards Board have been another important development. These include requirements for sustainability-related financial information and climate-related initiatives.
The standards encourage more consistent, complete, comparable and verifiable information about sustainability-related risks and opportunities.
Another useful intervention would be the development of a social impact metric. This could include country-specific social considerations. A local example would be including broad-based black economic empowerment when measuring social impact.
In our view the focus for South African asset managers should be on investments that align with sustainable development. These include investing in infrastructure projects that address pressing challenges. Unemployment is one example.
Fund managers should also take advantage of tools like the Responsible Investment and Ownership guide. This provides actionable steps to improve responsible investment practices.
These resources can help asset managers integrate corporate sustainability into their decision-making. They can also be used to educate clients on the benefits of sustainable investing.
Kara Nel was supported by a doctoral scholarship from Stellenbosch University' Graduate School of Economic and Management Sciences (GEM) as well as partial funding from the Banking Sector Education and Training Authority (Bankseta). The funders had no role in the study design, data collection and analysis.
Nadia Mans-Kemp is a Y-rated researcher that received funding from the National Research Foundation (2021-2026).
Pierre Erasmus received funding from the NRF (2011-2017).
