Responsible investment can impact share value

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CAPE TOWN – There is a disconnect between the relative lack of responsible investment (RI) factors being included in the valuation of shares by fund and asset managers, and the fact that RI can have a big or material impact on the market value of those shares.

This was one of the findings of an RI research report that was conducted by Nedgroup Investments, among its fund and asset-management partners globally and in South Africa. They launched the research report on Friday.

Responsible investment, incorporating also environmental and social impacts on investing, are becoming increasingly important measures in the investment world. Nedgroup Investments’ parent Nedbank took a big step towards climate change policy recently in that it became the first company in South Africa to voluntarily table climate change financing resolutions in accordance with the Paris Agreement, which is an agreement within the UN Framework Convention on Climate Change, dealing with greenhouse-gas-emissions mitigation, adaptation, and finance, and which was signed in 2016.

Nedgroup head of investments, Rob Johnson, said in an online presentation last week that during the research, their engagements with fund and asset management companies varied, with some far advanced with RI procedures and policies, while others were less advanced.

Large asset and fund management firms often had an RI or an environmental, social and governance (ESG) specialist working for them, some had teams or staff dedicated to RI, some outsourced the function, while in many of the firms, RI or ESG was incorporated in the work of market-sector analysts, he said.

Nedgroup’s engagements with their fund managers had led to some of them improving their RI policies and procedures. “We weren’t being prescriptive in our engagements But I often joked that it felt like we were consultants,” said Johnson.

He said the research showed that ESG had become among the forefront of issues among fund and asset managers in Europe, with South Africa possibly becoming a “laggard” in this regard.

Corporate governance was an issue that was identified as important for the South African fund managers, and many local analysts gave their share valuations a discount or premium based on their assumptions of corporate governance in the company. Corporate governance was also identified as an issue that could materially affect share prices.

However, there was from the research limited evidence among some managers of environmental and social aspects of companies being included in the share valuation processes.

Johnson said the research also showed growing ESG disclosure among particularly the larger listed companies, but there was a shortfall among small and mid-capitalisation companies in this regard.

Johnson said in all their engagements, they found that all the fund managers were as willing to acknowledge their shortcomings as their progress on RI, and that in fact, there had been a competitive spirit among them to improve their ESG performance.

South African fund managers also scored highly in the research in terms of their engagement with companies they had invested in on behalf of clients, and in terms of using their proxy votes at annual general meetings in affecting governance changes such as on remuneration and on aspects of board membership.

Johnson said shareholders, and some civic organisations were increasingly putting pressure on listed companies to address their ESG issues and policies.

Longer term ESG targets were also increasingly becoming part of executive remuneration policies, such as health and safety targets in the executive pay policies of some mining groups, and emissions targets for some cement companies.

It wasn’t just a matter of headline earnings per share or shareholder return targets.

Companies which embrace sustainability show outperformance over the long term, he said.


By Edward West


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