Evidence is mounting that ignoring environmental, social and governance (ESG) issues will expose investments to the kind of risk that will ultimately undermine their value, erode returns and possibly even lead to the collapse of the companies or other assets involved.
And as sustainable investing goes mainstream worldwide, institutions, fund managers, credit rating agencies and retail investors are demanding more careful scrutiny of the impact of climate change, the quality of corporate governance and the social consequences of investment decisions.
The shift in mindset is only partially driven by ethical considerations, although these are becoming more prevalent – particularly among young people, women, and high-net-worth individuals. There is growing recognition that a narrow focus on financial metrics for short-term gain against the backdrop of a rapidly changing world is simply careless, and ultimately damaging to returns.
There are spectacular recent examples of why the lack of focus on ESG issues has proved disastrous for corporate giants, both globally and in South Africa. US oil giant Exxon Mobil Corp was taken to court in New York in October, accused of deliberately misleading investors over the business risks caused by regulations aimed at addressing climate change.
Earlier this year, California’s biggest power utility went bankrupt after wildfires caused by a record-breaking drought exposed it to liabilities of $30 billion, and German car manufacturer Volkswagen has paid out more than €30 billion globally for cheating on emissions tests.
In South Africa, Sasol’s joint CEOs resigned on 28 October after an independent review into the company’s disastrous investment in the Lake Charles Chemicals Project in the US, which ended up costing almost double the original amount and wiped more than 40% off the value of its share price.
“What’s really been concerning for a lot of investors is the wasteful expenditure on offshore ambitions that have been impaired,” says Fatima Vawda, managing director of 27four Investment Managers. “We’ve calculated that in the past ten years close to R170 billion of failed investments have been made by JSE-listed companies in offshore investments.”