Saving the planet while netting positive returns – the case for ESG

Written by Topco Staff Writer

10/02/2022

By Shaw Mabuto, Partner at Spear Capital

 

 

While consumers concerned about their impact on the planet are more likely to support companies with sustainable goals, investors are increasingly demanding that the companies they back meet environmental, social, and governance (ESG) standards too. In fact, ESG assets are on track to reach US$53-trillion by 2025. Notably, pension funds (which control vast amounts of capital in many jurisdictions) are increasingly demanding sustainability from their portfolio companies too.

The most investor-friendly companies going forward will be the ones that lead the way when it comes to ESG. A 2020 study found that 60% of sustainable funds outperformed the market over 10 years.

This is not because they are giving investors what they want. It’s because, fundamentally, ESG principles are what makes a good company. By serving the environment, looking after the social good, and exercising good governance, they’re setting themselves up for long-term success (so long as they’re producing products that consumers genuinely want).

With the right backing, innovative companies across the African continent can grow successfully while at the same time making the world a better place and providing returns to their investors. According to the 2019 Morningstar Sustainability Atlas, companies in South Africa have levels of ESG compliance on par with those in Italy, Belgium and Australia. 

This is not to say that every ESG-focused company is guaranteed to succeed. Even with all the right policies in place, a company can still make products that don’t resonate with changing consumer wants and needs. 

It’s therefore imperative that investors choose funds with experience and a strong record when it comes to backing fundamentally strong ESG companies. Additionally, they should steer clear of only relying on ESG funds that invest in listed companies.

Private Equity (PE) funds, for example, are often capable of identifying companies which have a potentially strong proposition and are more focused on taking a hands-on approach to their success. Without the vagaries of the stock market to deal with, they can take a long-term approach which benefits both the companies in their portfolio and their investors. PE firms are geared not only to generate returns for investors but also to contribute to the overall well-being of the companies they invest in. 

As Africa’s most developed economy, South Africa fares particularly well when it comes to carbon risk, carrying levels on par with those of Switzerland, the Netherlands, Denmark, Sweden, Belgium, France, and the US. While ratings will vary across African countries, many South African companies operate across the continent, indicating a widespread willingness to embrace sustainability. 

It’s also true, however, that as basic ESG standards become norms, companies will have to take additional steps when it comes to demonstrating their commitment to sustainability. Adopted in 2015, the Sustainable Development Goals (SDGs) are a universal call to action to end poverty, protect the planet, and ensure that by 2030 all people enjoy peace and prosperity. When it comes to achieving those goals, the UN calls on businesses to play their part too. 

While there are those in the business world who’ll argue that taking an SDG-focused approach presents unnecessary obstacles, Spear Capital believes that it can provide stronger businesses, economies and societies. Businesses can only gain by better serving and supporting the communities they operate in and by taking a long-term view informed by sustainability. 

As people, corporations, and countries look to improve their environmental and sustainability credentials, they will flock to the companies that allow them to do so. 

Shaw Mabuto is a partner at Spear Capital. He holds an MBA from the University of Pretoria’s GIBS Business School and a Bachelor of Commerce (Accounting) from Rhodes University. He has extensive international and regional financial services and private equity experience. 

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