Global and South African perspectives on ESG: Are we keeping pace locally?

Are South African investors taking ESG as seriously as our global peers?

While ESG investing has gained significant traction globally, the adoption in South Africa has been more gradual. However, there is a growing awareness and integration of ESG factors into domestic investment strategies. 

In South Africa, the integration of new sustainability standards into the regulatory regime presents a significant opportunity to align our ESG framework with global best practices. The South African government has started to incorporate these standards, which could enhance the appeal of South African companies relative to their international counterparts. For instance, the Companies and Intellectual Property Commission (CIPC) has introduced mandatory Environmental, Social, and Governance (ESG) reporting alongside XBRL filing, initially voluntary from Q4 of 2023 and transitioning to mandatory status from 2025 onwards. This framework aims to elevate transparency and accountability, providing vital support for internal decision-making processes and bolstering external stakeholder confidence.

As global investors increasingly focus on ESG factors in their decision-making, aligning with these standards can make South African companies more competitive and attractive to global investors. According to PwC’s Global Investor Survey 2022, investors see sustainability as a priority for companies, calling for financial discipline and greater transparency. The International Sustainability Standards Board (ISSB) is also working to unify various sustainability disclosure rules worldwide into consistent measurement and reporting guidelines, which is gaining support in South Africa.

Despite the progress, challenges remain. Concerns about greenwashing and the lack of common ESG standards continue to pose obstacles. Greenwashing, where companies falsely claim to be environmentally friendly, undermines the credibility of ESG initiatives. Additionally, the complexity of global ESG challenges means that regulations must keep evolving to address new issues and ensure consistency. 

To further enhance ESG adoption in South Africa, the investment industry needs to focus on data-driven, systematic approaches to ESG. Sharing information among users, thought leadership, better data collection and analysis, and industry collaboration are all crucial for the future of ESG investing. By focusing on these areas, the investment industry can rescue the narrative on ESG investing and create a resilient investment environment for our clients and a better future for our communities.

At Prescient Investment Management, we have embraced a comprehensive strategy for Sustainable Investing. Our proactive ESG Committee promotes responsible investing across three key areas: investment process, product development, and corporate culture. We have developed our own ESG risk analysis tool that utilises systematic data analysis to evaluate and rate companies based on their ESG risks and opportunities. This tool is embedded in our investment process across all mandates, supporting both equity and debt investors.

Integrating ESG factors into our investment process is part of investment managers’ duty as guardians of clients' savings because it enhances risk assessment capabilities. From a bigger-picture perspective, doing so ultimately benefits the environment, the economy, and society as a whole. Prescient’s internally developed ESG scorecard is a systematic, data-driven tool grounded in best practices and aligning with the investment team’s quantitative investment philosophy. It incorporates valuable insights developed over many years in the industry and ensures that ESG factors are systematically embedded in all investment decisions. It allows an ongoing evaluation of a company’s ESG status and tracks changes over time. The scores are used as a risk assessment tool and give the investment team deeper insights into a company’s fundamental drivers by analysing the components of their scores in each ESG pillar.

Prescient’s responsible investment products, the Prescient Clean Energy and Infrastructure Debt Funds, were specifically designed to address the infrastructure gap and foster economic growth in South Africa. These funds provide investors with an alternative source of long-term returns, aligning with a sustainable investment philosophy and supporting at least six United Nations’ Sustainable Development Goals (SDGs).

In addition to a commitment to responsible investing, the diverse analytical team operates in an inclusive environment that supports growth, transformation, and career development. As an institutional investor, engagements are essential to improve the adoption of ESG in South Africa. Prescient has been a signatory of the UN Principles of Responsible Investing (UNPRI) since 2007 and abides by the Codes of Responsible Investing in South Africa (CRISA 2).

The future of ESG investing:

Research consistently shows that integrating ESG into investment processes assists with risk management and leads to superior long-term financial performance. Investors are becoming more aware of the advantages of understanding industry-wide ESG trends to support informed decision-making. 

ESG factors offer insightful knowledge on potential risks and opportunities, ensuring clients' portfolios remain resilient and well-positioned for sustainable long-term growth. Regulation 28 of the Pension Funds Act in South Africa also emphasises the need to consider quantitative and qualitative factors in investment analysis, further supporting the integration of ESG considerations into South African investment processes. DM

By: *Kelly Vlug, Quantitative Analyst at Prescient Investment Management

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