There used to be a time when actions that delivered a social or environmental return came with an accepted financial trade-off. Do good for people and planet, and get a smaller – if any – financial return. Those days are gone as sustainable investing starts to deliver serious results for savvy financial investors.
A 2019 report by BOA Merrill Lynch shows that US companies with high Environmental, Social and Governance (ESG) rankings in the S&P 500 index have outperformed their counterparts with lower ESG rankings every year for the past five years. Not surprisingly, the amount poured into ESG-focused funds by US investors quadrupled in 2019 – with the majority of responsible investors citing performance as their main motivation.
South African investment specialist and writer Warren Ingram agrees saying he now routinely looks for fund managers who focus on sustainability and are concerned about environmental issues, social and gender inequality, and governance, rather than chasing short-term profits. Why? Because these investments, quite simply, deliver better returns in the long run.
As traditional bets like oil and gas lose their appeal – ethically and financially – knowing where to put your money for solid returns is becoming more difficult. Investing for impact offers the promise of better value precisely because investors are more likely to look beyond the financial data alone. By taking a more holistic view of the companies they invest in – Are they well run? Do they treat workers fairly? What is their environmental footprint? – they are putting money into the kinds of companies that plan for long-term success.
Anyone expecting this to be a temporary blip rather than a long-term trend need only look at the data around the next generation of investors to realise otherwise. Studies are showing, again and again, that millennials want their investments to focus not only on making a financial return, but to provide positive returns for society and the planet.
A 2020 global survey found that nearly eight out of 10 millennials cite ESG investing as their top priority when considering investment opportunities. Morgan Stanley found that millennial investors in the US are twice as likely as the overall pool to invest in companies or funds that target social or environmental outcomes. It also found that 86 percent of millennials are interested in sustainable investing. A whopping 90 percent of millennials indicated an interest in pursuing sustainable investments as an option in their retirement funds.
What millennials are doing with their money matters. By 2030, millennials will hold five times as much wealth as they have today. In what is being called the biggest wealth transfer in human history, millennials are expected to inherit over $68 trillion over the next decade or so from their baby boomer parents – widely considered to be the wealthiest generation in history. To put that into context, that’s around 200 times the GDP of South Africa. This could signal a massive wealth transfer into companies and funds that have solid sustainability credentials.
Early signs suggest South African millennials are just as ethically driven as their international peers. In its inaugural 2019 survey, Sustainability Africa found that 72 percent of South African millennials said that a company’s environmental and/or social reputation influences their decision to invest. Despite the small sample size, it’s an indicator that what we’re seeing in other countries could soon shape the investment landscape here too.
While South Africa may be a couple of years behind Europe and the US, the local retail impact investing market is gaining quiet momentum. Investec recently launched an innovative Environmental World Index Autocall, which offers access to companies with the highest environmental rating. FedGroup’s Impact Farming app allows users to directly invest in small-scale agriculture and solar, while also monitoring the impact of investments, including CO2 emissions avoided, jobs created, and water saved.
With study after study showing that incorporating sustainability into investment decisions is more than just a feel-good exercise, these funds and services are designed to win over more than just millennial investors. This is not just another form of philanthropy – as investing for good was often framed when it was first mooted. Impact investments are now sound financial decisions in their own right – and they deliver more than just financial value.
With Africa’s myriad social and environmental challenges – and the impact of both COVID-19 and climate change expected to hit the continent hard – impact investing is a win-win with exciting possibilities. Financial investors and asset managers that embrace this opportunity can feel good about doing good – for society, for the environment, and for their clients’ pockets.
Natasha Dinham co-convenes the Impact Investing in Africa specialised short course offered by the Bertha Centre for Social Innovation and Entrepreneurship at the UCT Graduate School of Business, where teaching and learning focuses on sustainable impact in African business and society.