By Fran Troskie, Manager Research Analyst

We’ve seen climate activists chaining themselves to the goalposts or taking to the pitch to disrupt major football fixtures in the English Premier League, throwing soup at Van Gogh’s “Sunflowers”. And the investment industry is not exempt – protestors occupied the New York offices of investment giant Blackrock recently due to its investments in fossil fuels.   

So, what now?

As investment professionals, what can we do? As stewards of the future, as dream protectors, can we make environmentally and socially responsible investment palatable, can we make it easier to promote good governance through the investment decisions we facilitate or make. Can we make ESG accessible, and can we at least start somewhere? 

The fight for climate justice, the fight for social development, and the fight for good governance is an intergenerational, intersectional, global struggle that transcends borders. It is also a seemingly overwhelming task. So let us start small. Let us bring it home to South Africa. Whether we view ourselves as privileged enough to have financial leverage, whether we view ourselves as advisors and asset allocators, or whether we view ourselves as consumers of financial products, we can do something.

Looking at the investment industry first – this includes institutional investors, the retirement industry, the public sector, and young professionals who are starting their investment journey. We can demand access to ESG-focused options. One well-known alternative is a class of investments commonly referred to as “alternatives”. These include private equity, mezzanine debt, and hybrid funding mechanisms and are best known for their ability to channel institutional funds to designated outcomes. We hope, that in the not-too-distant future, we can enable easier access to alternative investments, for an educated, professional pool of investors, but also for the person on the street who wants to put a bit of money into a greener piggybank.

We have seen that the changes to Regulation 28 of the Pension Funds Act are facilitating this process: The new regulation introduces a specific definition of infrastructure and sets a limit of 45% of exposure in infrastructure investment.

As an industry, we need to prioritize education about alternatives, for all asset allocators, including pension fund trustees, financial advisors, and those who access investment platforms. We also need to balance the desire for optionality with the phenomenon of analysis paralysis. Generally, people find it easier to make an informed choice between a more limited range of options.

We need to make options palatable and accessible to all. Historically and globally, we’ve seen that carrots and sticks don’t work, especially not from a developmental perspective (just look at the history of aid and aid dependence in developing nations). So why not try fish fingers? Just like getting youngsters (or the majority of the world in fact) to make the healthy choice, packaging it as something appropriately attractive and palatable does make progress toward the goal considerably easier. The South African investment community, retirement industry, and financial services providers do appear to be making progress in this regard, albeit limited at present.

We have seen a few offerings come to market locally, some more accessible to large institutional pools than to the average investor. These options, importantly, balance the need for progress in ESG initiatives with the need for investment returns. When it comes to private equity, mezzanine finance, and hybrids, there are a few hurdles: Required minimum investment amounts are somewhat steep; liquidity is sometimes limited; concentration (sector-specific) risks are sometimes perceived to be higher.

But as dream protectors, as responsible investors, we demand better options and better access. We are therefore demanding more from our asset managers and service providers. We question them as to their ESG initiatives, how they engage with portfolio companies, and as to how they balance ESG with investment returns in their portfolio construction. As a consequence of this type of active engagement, we are seeing some asset managers offer more liquid funds, with one-month termination periods (as an example). We are seeing Funds-of-funds come to market, where there is a single access point to a “basket” of exposures, representing a more balanced and less risky, managed solution.

As investment professionals, and professional private investors, we also look at new ways of assessing the impact of our investments. We look at the design of indices – can we make it attractive and easy for asset managers to track an ESG-focused index. We look at passive options – financial institutions can offer ESG-exchange traded notes (ETNs, which specifically fund clean energy companies, water-related companies, and companies with low carbon emissions). And we demand “better” from our asset managers… We question, we are curious, and we explore. From little acorns, big oaks grow.