Join Warren Ingram as he deep dives into the transformative world of ESG with Michelle Green, Credit Analyst and ESG Committee Chairman at Prescient Investment Management. Today we unpack the significance of environmental, social, and governance factors in reshaping investment strategies, emphasising its role in responsible investing and the shift from a shareholder-centric model to a holistic stakeholder approach.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
Join Warren Ingram as he deep dives into the transformative world of ESG with Michelle Green, Credit Analyst and ESG Committee Chairman at Prescient Investment Management. Today we unpack the significance of environmental, social, and governance factors in reshaping investment strategies, emphasising its role in responsible investing and the shift from a shareholder-centric model to a holistic stakeholder approach.
Questions/ Topics:
Have a question for Warren? Don't forget to voice note your questions through our WhatsApp chat on (+27)79 807 8162 and you could be featured in one of our episodes. Follow us on Twitter, LinkedIn and subscribe to our YouTube channel for more Financial Freedom content: @HonestMoneyPod
brought to you by Pressient Investment Management. Informed by science, guided by insight. Pressient Investment Management is an authorized FSP.
Speaker 2:Welcome to Honest Money. We're talking about a subject that's kind of close to my heart at the moment around environmental, social and governance factors and how that impacts the world of investing. And I think when I say it's close to my heart, we're kind of coming out of a time where South Africa, especially the Western Cape, is getting pummeled by really hectic weather at the moment. Some lives have been lost. We're in a world where there is a lot going on. There's a lot of fears about pollution.
Speaker 2:Is Europe now kind of backtracking on their green commitments Now that they're worried about getting gas? And what's happening in South Africa with coal? And I'm kind of coming out of a winter where Joburg was regularly the city with the worst air quality in the world, and it's kind of hitting close to home and we can do something about it with our money. So I'm bringing in Michelle Green and I'm going to read you her title because it's a long one she's the credit analyst at Pressient Investment Management and on its own, that's more than enough for her to talk to us today, but secondly, also the chair of their ESG committee, and I think it's something, therefore, that's close to your heart as well, michelle.
Speaker 3:Yeah, certainly Thank you, waraan, and I just want to say thank you for the opportunity. I hope the listeners will enjoy what we have to discuss today.
Speaker 2:So maybe let's just I don't like the phrase unpack, but let's just explain. When we talk about ESG and we hear it every now and then on the radio and we read about it in the media what is ESG?
Speaker 3:I mean very simplistically, if we break it down, the E is for the environmental pillar and we have social and governance.
Speaker 3:Ultimately, these are basically standards or metrics or factors that you need to look at that are non-financial, that a company can be basically a framework of, such, that a company can basically be scored upon. Environmental, like you mentioned earlier, this is where the companies have emissions, for example, how they're saving energy. I mean it's very relevant in the situation that we in South Africa now face. And then on the social front, that's more, you can think of it more of like the people factor. You know, is there diversity, for instance, on a workforce level, but also on a management level, you know, is it integrated throughout?
Speaker 3:What kind of policies does these companies have in place that look after the employees or they're actually training them, for example? And on a governance level that speaks to corporate governance, the structure, who are the decision makers? Do they have proper auditors? Or who are compensations? Do they have the appropriate skills to actually manage that or actually drive the strategy of companies to the success of where they want to go? Ultimately, that is how you think of ESG and, of course, the important part is how is it then applied from an investment point of view.
Speaker 2:So we're covering. I'm kind of, you know, we're listening to you now and I'm not giving you a hard time because, as I said at the start, it's something close to my heart. But listening to all of that, I've kind of sat down in front of some pretty hard-nosed investors in the past and spoken about kind of the ESG credentials of an investment and they kind of look at me and they go is it going to make my investment grow faster? Am I going to make more money? And if I can, I'm interested. If I can't, I'm not interested. And it's quite a tough one for me and I'm not sure how we quantify it. Is it something that we say comes at a cost or is it something that comes at a benefit or is it completely parallel?
Speaker 3:Yeah, I mean, what are these mixed views around? You know whether or not it is actually beneficial and should people actually care about ESG? And there's numerous studies that has taken place on a global level, but also on the South African level. But I think what's interesting is that we are starting to see the trend that investors are increasingly paying attention to ESG. Yes, there is some. Should I care? Shouldn't I care? But ultimately and I'll bring it back later when we do discuss it in a little bit more detail is that people are starting to actually care, and I know COVID has been talked to to death, but it has actually showcased that the inequalities that we do face, they are gaps. They are certain areas in the country that we need to focus a lot more on. That has showcased inequalities and that ultimately does also filter through gaps.
Speaker 3:But companies also have, whether it be the supply chain, for instance, being reliant on global infrastructure, whereas we should be building that here and ultimately it drives the economy. What it ultimately has is knock on the face. So, if you ask the question, should I care about ESG? Yes, I think it's very prominent that we should, because it has indirect impacts, if you think about companies that couldn't operate. During COVID period, a lot of jobs were implicated, right, but had they had the infrastructure here, we were able to then sustain those jobs. People were able to operate, for example, and not be cut out. And these are just some of the examples, but I think what is quite important is that it is you should be prioritized both at an investment level but also at a company level, and it needs to be central part of any investment strategy ultimately, and it should be given the weight that it actually deserves, because we have seen in the past that there have been breakdowns companies in the media, specifically, it's because of breakdowns in governance, not making the appropriate decisions at a board level or in the best interest of stakeholders.
Speaker 3:And I will mention this is that we are starting to see that this trend is growing, that there's a lot of spotlight on ESG. There's a lot of pressure coming through at a company level to do better, and not only from a profitability perspective. So I think there's like if I can just give you some stats around this, there was this actually very interesting article written in 21st century what is the fuss about ESG? That was literally the headline, and we see the world changing around this ESG spectrum and of that study, there was eight exchanges that were part of it and South Africa was the only emerging market part of the study and, interesting enough, we actually stood tall, showing that we, as South Africa, 75% of the companies in the exchange has actually adopted but only also applied ESG within their investment strategies. So this is very interesting.
Speaker 3:It actually showcases that we are moving in the right direction and people should be caring about this, because I think, as a world we are moving from, because we are becoming a lot more vocal about how businesses should be applying better practices, ultimately we're moving from a world known as shieldedism to more of a stakeholderism, meaning it's not only about shielded, it's not only about the bottom line, but it's also how companies are impacting the communities around them. For instance, it goes beyond profitability, it goes beyond giving back to the shareholders, and I think that's ultimately what's key. There's so much studies that I can talk about of how profitability can be improved. Esg is, in our view, it's a risk metric kind of tool assessment and ultimately it's about sustainability. It's about building businesses that are resilient and able to adapt, but also to be sustainable in the long run.
Speaker 2:So now, to me, maybe the last part is a very nice summary of actually that it does have a financial implication.
Speaker 2:It does actually have a financial benefit to a shareholder, because I think a lot of companies maybe less so in South Africa and more so in the US, where listed companies report quarter to quarter in America, so a CEO there is being judged as to how he or she is delivering in a three month period.
Speaker 2:You can't run a business like that In South Africa it's probably every six months and that's not a great way to deliver long term shareholder returns. And if you're talking now about companies that have a focus on sustainability in every aspect, we're not talking about environmental only. We're talking about community sustainability. We're talking about the governance of the business and how it operates and what it thinks about. All of a sudden, those are not three month, six month, 12 month metrics. We're talking about five, 10, 15 year metrics. And if companies are considering that, it tells me that they're looking at the long term. And all of a sudden, if they have a bad six month period and the profits aren't great for six or 12 months, but they've built a much more sustainable way of doing business, it suddenly sounds to me like an alignment of management shareholders, the broader community.
Speaker 3:Yeah, I think that's definitely an interesting point because I'm totally on board with what you're saying. There should be an alignment of interest. I think we need to think broader, we need to go beyond and it's not just about a tick box approach to say, look, part of our profits are going towards community spend. Actually, we, as investors, we want to know how are you actually impacting these communities? Give us a number, show us what was the number of jobs that was actually created by investing here. How many schools have been funded? But also how many kids were able to go through school by getting the appropriate equipment or providing them with technology that they wouldn't have access to prior that investment? I think it goes beyond just tick boxing approach. Like I said earlier, it's not just about the bottom line anymore. As investors, we need to ask the tough questions to say look, as a company, how are you actually driving this? Do you have alignment of interest? Are you actually incentivized to actually push the agenda of ESG and go beyond just making sure that the company as a whole is growing? Yes, the company needs to grow, of course, so the economy can grow, but that knock on effects. I think we need to make sure that the governance structures, the people that are driving the strategy, is actually appropriately skilled but also competent enough. The alignment of interest is throughout, or driven, rather embedded within, a company. That is quite crucial because it speaks to not only the values but also about you know how is a company going to succeed and provide longevity, but also sustainable jobs and to grow the economy, because ultimately, I mean, we can talk full at length about you know where we are as a economy and why we're not growing. There's so many jobs that have been lost. But I think for me, when I think about sustainability, is that transfer of skills that might you might have been retrenched, but you know, have you actually been skillful, or rather trained up, to get that skills to carry it forward into another role, for instance? And I think that is that is quite key. When we think about ESG, think about don't think about ESG in isolation of sustainability. It's about making that responsible investment decisions and being equipped to do so.
Speaker 3:Now I think, just coming back to your point of earlier about the US reporting on a quarterly basis versus here on a six monthly yes, of course we all are with you know disadvantage to information, and then that is actually what.
Speaker 3:What we are trying to flesh out is that we need transparency, we need consistency across the board. We need more for rather transparent, consistent, reliable information from companies to actually give us the Information so that a financial institution or the financial market is able to be in such a good position to be able to make informed decisions, because, ultimately, our duty is to look after People savings there this is, their pensions, you know and and we have a huge responsibility we need to take care of and make sure that we have the correct, or rather informed, decisions, or rather information. So I think we we we need to really stress that the information and the drive of ESG needs to be at the forefront very much Around the board tables. When you're discussing, you know where we're going to be invest our Money as a company or where we're gonna be spending our capital expenditures. I mean it needs to be on the agenda and Table as much importance as any other matter, I think.
Speaker 2:So so what's interesting to me is the, the, the early days of ESG it felt to me like they were. They were kind of driven by kind of you know, fringe activists and and you know I've always got this kind of image in my head of a of kind of a flower child. We know we're wearing tie-died clothes and and, you know, with the placard outside, shouting at a CEO of an oil company. And I think we're long past that now. I mean, now we've we've got some pretty, we've got some pretty sophisticated Analytical people. I mean you're an example of that.
Speaker 2:You know people that it's not. It's, you know, you feel the the whole dynamic has changed. I feel the dynamic has changed where it's not easy now to do kind of a greenwashing or a tick box, a whitewashing of of a company's reputation. This is about kind of getting to detail and and actually holding companies to account. The thing that that kind of bothers me with this is how do we, how do we kind of make the first-eater company's care and and, secondly, investors care more? Where's the because? To me it can't be confrontational. We can't be sitting there and saying cancel, culture, you know, if a company is not moving in a direction. Just, you know, sell the share and destroy the jobs that are that company as well. I think there must be a better way, and so for me, it feels like we need to do. We need to do a bit more talking and a bit more reading. And and it's not just you know, michelle, talking to the CEO of a polluter, it's, it's. It's got to be much wider than that.
Speaker 3:Yeah, 100%. It's very difficult to actually to do that in isolation and I think it does take a good group of people and it does take a big voice in order to push the agenda. So me myself, I can be sitting there asking the question, but I think the rest of the investment community needs to go with pressure and I think there are bodies, stakeholder bodies, that assist in this regard. But, interestingly, in considering ESG, we have to just take a step back and actually look at the benefits of what it could potentially look like. There's so many studies where it's sure that ESG potentially can enhance returns, mitigate risks, for instance, and also alignments of like. We mentioned earlier alignment of values, but also to contribute positively to the environment, for instance, to the communities, to the social outcomes at a broader level. But by taking into account and considering ESG, that has a great prominence, it should be an integral part of your decision making, part of your responsible and prudent investment practices as a whole. So, having said that, I mean there's so many global trends going on right now and I think it's a trend towards sustainability, it's a trend towards responsible investment, there's a drive for net zero I mean we hear a lot of these joggers the drive towards net zero, and there's a lot of initiatives obviously being put in place to ensure that ESG aligns, in the South African context, with international standards and best practices. So the question why should you care? Look, I think there's so many studies and I just want to actually mention just two interesting facts. Is that one was reading an MSCI paper that basically spoke about how ESG affected the credit risk but also performance, and it was actually found that companies that had a higher ESG rating, ultimately they tended to have stronger cash flows, so leading to stronger performance, ultimately, bottom line. There was obviously also what that came lower levels of risk and less frequent severe incidences. Like I mentioned earlier, companies that were more equipped, or rather showed more resilience during the pandemic and this has actually been proven by MSCI through better rated issuers or companies, rather, and obviously this then embeds in a company strategy going forward, because you're always thinking about the long term, you're not just thinking about short-term returns, and there should be a balance between risk and reward right, building a business that is sustainable but also resilient and able to adapt should incidences occur. Another study of that these are non-financial factors is that these are two great rating agencies that have actually proven that across various sectors there's been a confirmed positive impact on ESG factors, on created ratings.
Speaker 3:So, not taking into account ESG investment decisions, it could potentially have actually financial implications. So think about a mining company, for instance, or not having the proper policies in place or structures in place, from our health safety maybe, thanks. Financial implications they could be fines, and that all is into the bottom line, but not only that. An indirect implication could be from a reputational point of view and to recover takes longer and that erodes value right Value of your investment. And so you're sitting there, you don't have control, but you need to ask these companies what are you putting in place to actually make sure that you are mitigating this risk? And ultimately, that is my responsibility as an analyst, but also, if you're sitting on the other side of the fence as a shell, that you need to be as invested in making sure that companies have the appropriate policies, but also the appropriate decision making and the strategy is aligned, making sure that we can mitigate risks to the extent that we are able to, of course, and this needs to be, like I said, embedded Factors like environmental regulations, climate change, social controversies there's a lot of these or even governance failures.
Speaker 3:Obviously, like I mentioned, financial and reputational risk and it can take years. I mean, we've seen companies in the property sector. We've seen, you know, african Bank, for instance. Also, what happened with African Bank. Part of that was actually a governance breakdown, not having the appropriate corporate governance in place, and I think people that were invested in African Bank had long-term implications. It took a long time to actually connect and I think this is real-life examples of it and it has many, many. I mean, like I said, we can chat about it for long, but I mean from a long-term performance perspective, there's also been a proven track record of strong ESG practices. Companies were actually embedding that and actually there's been studies that they performed well over the long run. If I can just jump in, I know I'm going on and on, but I feel very passionate.
Speaker 2:But your last point for sure.
Speaker 3:Sure, thank you. So I think, just to showcase that, or rather to reiterate that companies why should they also care? Is that it allows them access to capital to tap into markets and attract capital, and that ultimately leads to also the ability to grow. So us, as institutional investors or asset managers, you know we manage these people on the ground, their money right, grandma, grandpa, whoever. So we manage and it's our responsibility to make sure that we integrate these risks and actually try and mitigate that so that we can deliver on those returns and performance. Okay, I'll stop there.
Speaker 2:Michelle, it's amazing to listen because the passion is flying out of this through the microphone and into my ears and I think the people listening are going to hear that, and I think it's just important for me to summarize. You know it does matter. Esg is not just kind of a phrase by a bunch of fringe people. Now it's becoming part of the DNA of the investment markets and it is becoming mainstream, and it's not just a bunch of investment professionals that are raising issues. It's actually kind of from both sides. It's the investment professionals, it's the end investor that benefits over long periods of time, and that's really what this is all about is do we firstly have a world that we can actually live in, that's habitable? Do we have companies that are going to deliver returns that you know that we can kind of live off one day when we're retired? And on the other side of that is the entire kind of food chain of the system that we're in. Is it becoming more sustainable in the broader? It's not just talking about environmental, but are we looking after more and more people in the right way? And I think that that's what you know.
Speaker 2:If I'm not putting words in Michelle's mouth now, but if you ask me. That's what this is about. It's about making sure we're all kind of getting better. We're all. You know, the tide lifts all the ships and, yes, some people are going to benefit more than others, but we all need to be growing. It can't be a winner and a loser situation and, yes, those days are gone. You know, we're operating in an environment where we all need to kind of get better as we go. So, michelle Green, thank you so much for joining. We've blown through our time by many minutes already, but I think it was worthwhile to kind of have this conversation and I'm hoping that we'll get you back on the show again and I hope that it dries out there in the game. Thank you so much for your time.
Speaker 3:Thank you, and thank you to listeners as well, chatsy.